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Want to Buy a House? Here’s How to Manage Your Debt to Make It Possible

Want to Buy a House? Here’s How to Manage Your Debt to Make It Possible

September 23, 2021
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Buying a house is one of the most exciting moments in a person’s life. However, it’s also one of the most challenging experiences imaginable. The simple act of securing a mortgage is surprisingly tricky, particularly if you’re dealing with debt.

When you apply for a mortgage, lenders examine several things. Along with reviewing your credit report and credit score, they’ll calculate your debt-to-income ratio. In most cases, the highest debt-to-income ratio you can have and still buy a home is 43 percent. However, some lenders set lower limits, favoring ratios closer to 36 percent. Additionally, they want to keep your mortgage cost at or below 28 percent of your pre-tax income.

If you want to buy a house in the next six to 12 months, using the right debt management strategy is a must. DRC Financial Services can help in more ways than one so give them a call. Here’s how to get started.

 

Revamp Your Budget

One of the first steps you should take if you want to buy a house within the next 12 months is to revamp your budget. Look for every opportunity to reduce your expenses. That way, you can redirect as much money as possible toward debt repayment.

While living without cable, extra streaming services, dining out, name-brand groceries, or similar items may be a hardship, it can be worthwhile. It puts you closer to owning a home. Plus, you may discover that you don’t miss some of these items as much as you thought, allowing you to continue to keep them out of your budget.

 

Target the Right Debts

Traditional debt repayment strategies usually tell people to focus on their highest interest debt first. Mainly, that’s because it results in the biggest overall savings, reducing the total amount of interest you pay across all of your debts.

However, reducing your monthly obligations needs to be your main goal when you're trying to buy a house. By getting rid of a monthly payment, you improve your debt-to-income ratio. As a result, you may be better off focusing on the debt with the lowest balance first. That way, you remove a monthly payment, leading to a better ratio.

 

Consider Consolidation

Debt consolidation is another option that may lead to a better debt-to-income ratio. Plus, it could allow you to transition high-interest debts into one that’s more reasonable. That can result in overall savings and may make it easier to pay down your total balance faster.

Just be aware that this approach does mean you’ll have a new hard inquiry on your credit report. That can cause a temporary drop in your credit score.

If you don’t have many hard inquiries on your credit report and are financially responsible for your debts, the dip may only last a few months. However, if you have many recent hard pulls or other adverse items on your report, the harm can be more significant in terms of the size of the drop and the length of impact.

 

Balance Debt Repayment with Saving

While paying off your debt is an excellent move, you also need to set some money aside for your home purchase. For example, you’ll need earnest money for any offers you place. Earnest money deposits can get as high as 5 percent of the purchase price. While that money does go to the purchase, it’s cash you have to pay upfront, which many first-time homebuyers don’t expect.

Additionally, you need to handle the cost of a home inspection and home appraisal. On average, home inspections cost between $300 and$450, while home appraisals usually come in between $200 and $600.

Finally, you’ll also need a down payment. If you want to prepare for that, research home prices in your target area, like Skippack where homes have a median price of just over $300K. That way, you can identify a savings goal, ensuring you have enough money set aside to cover the down payment.

 

Securities and advisory services offered through Independent Financial Group, LLC (IFG), a registered investment adviser. Member FINRA/SIPC. DRC Financial and IFG are unaffiliated entities.

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