By Katie Conroy
Being a first-time homebuyer is both exciting and scary. The financial commitment can be overwhelming, but the benefits of owning a home are many. If you’re considering buying a house in the next six to 12 months but have debt that you need to get rid of first, here are some tips to implement into your financial life.
Lower Your Debt-to-Income Ratio
The amount of money that you’re bringing in monthly compared to the amount you’re paying out on debts each month is your debt-to-income ratio. Lenders want to see a low debt-to-income ratio in their borrowers because it shows that there is more money available to make monthly mortgage payments. If you have a high ratio, now is the time to start lowering it. You can do this by either making more money or spending less.
Consolidate Your Debt
Those who have multiple debt payments, such as student loans, credit card payments, medical bills, and car loans, can consolidate them into one lump payment to get them paid off sooner. There are a few methods for debt consolidation, including a loan, a balance transfer credit card, a debt management plan, or a debt settlement, among others.
You’ll want to research each option and decide which one will work best for your specific needs. You may want to choose the method that will be the quickest since you’re looking to purchase a house within a short time frame.
Consider Down Payment Assistance
If you have tried decreasing your debt without much luck, you may benefit from down payment assistance. Since a down payment for a home requires a lot of money, especially if you want to avoid huge monthly mortgage payments, getting a grant, loan, or tax credit from an assistance program can help you get into a home without spending all of your hard-earned savings.
According to personal finance experts, usually, only first-time homebuyers qualify for down payment assistance. However, there are also programs for those in certain careers, such as law enforcement or education, or for those who are low-income earners.
Try Credit Counseling
Those deep in debt but looking to buy a house soon may benefit from working with a qualified credit counselor. These professionals can help potential homebuyers get their finances in shape, and they may even offer online financial coaching to encourage smart spending and saving. It isn’t always easy to work through financial hardship on your own, so having someone give you guidance and education can go a long way.
Obtain Loan Preapproval
While it’s best to have your debts reduced as much as possible to get a loan, you can get preapproval from a bank even while paying off existing debts. You may not get approved for a large loan, but just having proof of preapproval can help you when you start looking for a new house. Once you’ve paid off your debt, you’ll likely be able to get approved for a larger loan.
Getting a mortgage while you’re in debt is not impossible, but it is a challenge. With good debt management, you can be prepared to purchase a home within the year. It takes dedication and sacrifice, but you’ll be better off in the long run, and you’ll understand just how important it is to manage your money well in the future.
