When it comes to buying a house and improving your financial health, another must-do is debt reduction. Your debt-to-income ratio (DTI) compares your monthly debt payments to your total income.
Mortgage lenders evaluate your DTI, which is expressed as a percentage, to determine whether you will be able to make your monthly mortgage payment. A low DTI is beneficial since it indicates a solid balance of debt and income.
If this percentage is high, though, it may suggest that you have an unhealthy level of debt. If your debt-to-income ratio (DTI) is more than 43%, most lenders will deny your loan application.
Keep reading to find ways to manage your debt before you consider buying a new house.
12 Tips For Managing Your Debt
1. Look at Your Whole Financial Situation
Just because you have debt (such as student loans) does not mean you have bad credit, which is another important consideration when purchasing a home. Consider all of your debt, available credit, and job security when you’re ready to buy a home.
However, if you’re constantly spending more than you earn every month, it’s a sign you need to do some financial soul-searching. It’s a good start to keep track of your spending and stick to a budget.
2. Set a Reasonable Budget
Stop spending more than you have. That is the only way to get out of debt. Keep a spending journal and document your purchases and receipts if you’re having problems cutting back on your spending.
If you’re buying a property while still in debt, you’ll need to balance your priorities carefully.
3. Make a Debt-Reduction Strategy
Calculate how long it will take you to pay off your debt and what order you want to do so by looking at your income and budget. Then, despite paying more than the minimum on your other bills, aim to pay off the loans with the highest interest rates first.
4. Consolidate Your Debts
If you have a large debt, such as high-interest credit cards or payday loan debt, transfer it to a line of credit. Interest rates on lines of credit are substantially lower, making them much easier to repay.
Keep an eye on your credit card balance to ensure it doesn’t get too high. If you’re having trouble maintaining a low balance on your own, contact your lender and request a reduced credit limit.
5. Make the Most of Your Down Payment
If you’re in debt, you’ll want to save as much as you can for a down payment. Your debt will limit the size of your mortgage pre-approval. However, a more significant down payment will assist in offsetting this limitation.
Get your budget in order before applying for a mortgage by lowering your monthly payments as much as possible, especially if you still owe money on your credit cards.
6. Sign Up for Automatic Payments
Setting up automatic payments for your bills and obligations is a simple way to ensure that you don’t miss a payment. This will help prevent late payments from showing on your credit report, typically impacting your overall score.
7. Invest in a Hot Market
In competitive real estate cities like Sacramento, property prices are continuously rising. If you live in one of these locations, you may only have a limited opportunity to purchase a home before it becomes prohibitively expensive.
If you have the chance to make a wise purchase, such as seeing a property at a fantastic price or receiving an inheritance with a time constraint, buying a home today, even if you have debt, could be well worth it.
8. Strengthen Your Savings Plan
Make a ‘savings’ category in your budget if it doesn’t already exist. Then start putting money aside for a down payment. It’s better to do a bit at a time than nothing at all. Consider the size of your loan, the percentage you want to put down, closing costs, and moving costs.
Lower mortgage payments can put more money in your pocket each month if you put down a more significant down payment. So, the more you save upfront, the more you’ll have to put down on your dream home.
9. Obtain a Pre-Approval Mortgage Loan
Your lender will consider your minimum debt payments in a metric called your debt-to-income ratio when you apply for mortgage pre-approval. This computation compares the total amount of debt you have to your gross income.
As a result, the more debt you have, the lower your chances are of getting a pre-approved mortgage.
10. Set Aside Money for Certain Objectives
It’s necessary to keep your eye on the prize when budgeting. Setting aside money for specific goals will help you stay on track and avoid overspending. For example, you might be saving for a home while also arranging a vacation.
In that case, create savings accounts to assist you in achieving your objectives. Simply set up a vacation fund for your trip, and consider starting another for future home repair projects.
11. Consider All Your Expenses
Purchasing a home entails more than obtaining a mortgage and a down payment. There will also be closing fees that can add up to 5% of the home’s purchase price to the overall cost of ownership.
Remember that, aside from the mortgage, buying a home comes with a slew of other expenses. Utilities, insurance, property taxes, and annual maintenance should all be factored into your budget.
Take the time to run the calculations alongside your minimum debt payments to ensure you can afford everything that comes with homeownership.
12. Increase Your Payments
You will be in debt for a very long time if you only pay the minimum amount due on your credit cards or loans. You will also end up paying more money in interest for the products you have purchased.
Instead, try to put as much money as you can toward your debt each month if you can’t pay off the total balance at once on all of your credit cards. The best way to do this is to focus on one card at a time and get it paid off first before moving on to the next debt.
It can take a long time to get your finances in order, but when you apply some or all of these tips above to your strategy, you will see a difference in your debt to income ratio. Try to make healthy financial decisions in the future and save as much as you can each month.