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If you’re hoping to buy a house in the next year but have debt, reducing that debt is an important step in preparing for home buying. Even if you don’t have much spare money you can use to pay it down, there are strategies you can follow to help manage your debt to make you more appealing to potential lenders.
Having your finances in order is the first step towards buying the home you’re dreaming about, so read on for valuable information on how to get control over your debt.
1. Take Account of All Debt
From credit cards to student loans, all your debt will be reviewed by lenders when you apply for a home loan, so you need to have a solid understanding of your debts before you decide what to tackle first. Write down every loan or debt you hold and how much you have left to pay off.
2. Check Your Rates
Some loans, like student loans, are bigger and are likely impossible to tackle in less than a year, but many debts can be wiped out relatively quickly if they’re approached the right way. As Robinhood explains, you’ll want to study the terms of each debt, including the fee structure and APR. There is a big difference between a credit card that has a 25% APR and a personal loan that has an APR of 14%. One of those is costing you a lot more money long-term.
Focus your effort on eliminating your debts with higher rates quickly and save yourself the extra interest costs. Then use the money that you would’ve spent paying the monthly minimum on that debt to pay toward the debt with the next higher rate.
3. Generate Easy Cash
Even if you don’t have time for another job, there are many apps available now that will give you gift cards and cash for completing everyday tasks, such as walking or grocery shopping. Apps like Flipp help you plan your meals, budget your grocery list and even notify you when items are on sale. Even though you won’t get rich using these, any extra money you can put toward paying down your debt will help increase your chances of getting a good rate for your home loan.
4. Make a Plan
Saving for a home requires some sacrifices, and a budget will help you stick to your goals. Assess your ongoing subscriptions and eliminate those you use infrequently. Look at your grocery spending and see if you can purchase generic brands or try less expensive recipes. Reduce fast food and restaurant spending and opt for eating in when possible. Remember that your priority is to reduce debt quickly, so changes you make don’t have to be permanent.
5. Get the Best Rate
With debt reduced, you’re nearly ready to apply for your loan. Before you do, though, research ways to lower your interest rate. There are different ways to do this that depend upon factors such as your credit history and how much available money you have.
One way is to purchase mortgage points to reduce your home loan’s interest rate. For extra money upfront, you can essentially buy back percentages of your rate. By paying for points upon closing, you reduce your monthly mortgage payment, but whether this is worthwhile or not depends on certain factors, including the loan itself and how long you intend to stay in your new home. Using a mortgage points calculator can help you see if this option is a good fit for you.
Debt doesn’t have to stop you from achieving your homeownership dreams. By understanding your debt and tackling it effectively, you can improve your chances of getting approved for the home loan you want. With the right research and actions, you can be confident you are getting the best rate possible, and you will be settling into your dream home in no time.
Homeownership is a big part of the American dream, and the professionals at Upper Delaware Real Estate can help you achieve that goal. Call them at 607-637-5588 for assistance with finding the home to meet your needs.
