Ideally, you want to buy a home without any substantial debt following you around. But for many people, that’s not a reality. Consumer debt, student loans, car loans, and other types of debt can easily add up to a big number.
But don’t worry—you don’t have to be totally debt-free to purchase a house. If you start taking practical steps toward debt management today, you can begin to put yourself on the path to homeownership. You may even be able to close on your home within the next year! Sana Finance has some ideas for how you can get started:
Buying an “As-Is” Property
First of all, figure out how you can land the home of your dreams while also saving money. One strategy is to buy a property “as-is”. Essentially, this means that you agree to purchase a home regardless of any repairs or improvements necessary. This strategy can get you an incredible deal on the purchase price, but it is critical that you consult a lawyer, have the property inspected, and look over the land records for any concerns that could come to haunt you down the road.
Reducing Your DTI Ratio
Lenders will care a great deal about your debt-to-income (DTI) ratio. Your DTI refers to how much debt is already eating into your income. So, if you have a high DTI, lenders might assume that throwing a home loan into the mix could become unmanageable for you.
Your goal should be to maintain a DTI ratio below 40% of your total gross income. For instance, say you make $4,000 per month—you should be paying less than $1,600 towards debt each month. The best way to lower your DTI ratio is to pay as much debt off as possible. Create a budget that helps you to aggressively tackle your debt and manage your money more efficiently in general.
Also, look into refinancing one or more of your long-term loans. For example, if you’re currently paying your student loan payments via a 10-year plan, changing it to a 20-year will reduce your monthly payment as well as your DTI. Moreover, be sure to thoroughly inspect your credit report for errors. Mistakes are common, and they can make your credit score appear worse than it really is. If you find errors, be sure to contact the agency to have them corrected.
Choosing an Affordable Home
Just because a lender prequalifies you for a particular loan amount doesn’t mean that it is best for your long-term interests. Evaluate your overall operating budget when determining how much house you can afford. You don’t want your housing costs to exceed 34% of your monthly income, and those costs include maintenance, utilities, insurance, taxes, and more.
Setting a Realistic Down Payment Goal
You might already know that your down payments will need to be at least 20% of the purchase price, especially if you are going through a conventional loan. This increases your chances of securing a favorable interest rate as well as avoiding the costs of mortgage insurance. However, depending on your debt status, 20% may not be a realistic option for you. Fortunately, there are various types of home loans designed for first-time homebuyers that require a lower down payment.
That said, the more you can pay down, the better. So set a goal that will be both challenging and attainable. Remember that purchasing a home will have a major impact—positive or negative—on your life for many years to come.
It may be harder to buy a home when you’re saddled with debt. But it certainly isn’t impossible, or even impractical. The key is to implement effective debt management strategies and to show lenders that you can consistently maintain a stable income. And make sure that you don’t buy a house that you will have trouble paying on down the road. Lastly, keep researching other ways that you can position yourself and your family to improve your overall financial health as you pursue the home of your dreams.
Would you like to read more helpful content or learn about how we help young people secure good home loans? Contact sanafin.com today!