6 Steps to Buying a House When You’re In Debt

Source: Photo by cottonbro from Pexels

Guest Author:  Alice Robertson

You’re saddled with debt. You’re paying off student loans, medical bills, credit cards, and who knows what else. Your credit history isn’t exactly stellar. There’s no way you could buy a house, right?

Well, don’t make that assumption just yet. Depending on how much debt you have under your name, your job security, and several other factors, you may be able to purchase a house before you become debt-free. You may even be able to do it in the next six months to a year! Real Estate professional Kathy Koops shares six steps to take if you determine that you want to buy a home while you’re still in debt:

1 Consolidate your debt

Your debt-to-income ratio is very important to lenders. Most won’t even consider approving a loan for someone with a DTI over 43%. One way to lower your monthly payments is to consolidate all of your credit card debt and student loans into one payment. This not only improves your prospects of securing a home loan but also makes managing your debt easier overall.

2 Research your loan options

There are several types of home loans designed for aspiring homeowners who are either in the low-income bracket or straddled with debt. Visit PennyMac.com to research government-backed loans from the Federal Housing Administration (FHA), US Department of Agriculture (USDA), and Department of Veterans Affairs (VA). Depending on your situation, you may be approved for a low-interest loan with little to no down payment.

3 Consider paying for points

Another option for securing a low-interest home alone is to pay for points on your mortgage. Simply put, this means that you pay the lender a direct fee when you close on a home, which results in a lower interest rate and monthly mortgage payment.

This is not the best course of action for everyone; your specific home loan, general financial health, and other factors play a critical role.

4 Scrutinize your credit report

Your credit report and credit score are critical factors in determining whether or not you will qualify for financing. Make sure you receive a free copy of your credit report from Equifax, Experian, and TransUnion. Then, evaluate your report and have any errors or inaccuracies corrected.

5 Pay more than you need to

When possible, pay above the minimum payments on your credit card debts and other debts. This will help you to tackle your debt much faster than if you were simply going along with the status quo. In short, you’re likely paying high-interest rates on your current debt. The less debt you have, the less money you’re pouring into interest and the more money you’re using to free yourself of debt.

6 Create a realistic budget

Finally, building a workable budget is essential when you’re trying to secure a home loan. Not only is it easier to pay off debt quickly when you’re abiding by a realistic budget, but you have to remember that your finances are under review during the loan application process. And lenders will see big expenses and payouts as a major red flag. During this time, do your best to buy only what you need and stick to a budget that will benefit you in the long term.

So, can you buy a house within the next year if you have a substantial amount of debt? It’s possible. Consider the tips above for managing your debt and securing a home loan. But remember that just because you can buy a home doesn’t necessarily mean that you should. Assess your overall financial health and prospects to ensure it’s the right move before going forward. Contact Kathy Koops

About the Author:  Alice Robertson has years of experience in home organization, and an impressive client list to boot. She has helped make spaces in homes and businesses more functional, organized, and clutter-free, all with an emphasis on being eco-friendly.