Debt Solutions for Home Buyers
Did you know that having too much debt can hurt your chances of getting approved for a mortgage loan? It’s true. In fact, this is one of the most common reasons why people get rejected by lenders in the first place. Borrowers with a relatively high amount of debt would be wise to reduce it before applying for a home loan, because such a reduction will likely improve the likelihood of approval. It could also affect how much you can be approved for. If you’re looking to buy a home of a certain size or price range, it would be smart to mitigate your debt first.
There are some legitimate debt solutions available to consumers these days. Unfortunately, there are also plenty of scams to avoid along the way. This blog post will help you understand the difference.
How Your Debt Affects You
We’ll get to the solutions a little later. First, I want to explain the different ways your debt can affect you during the home buying process.
The first concept you should understand is the debt-to-income ratio, or DTI. When you apply for a mortgage loan, the lender will compare your income to the amount of debt you are currently carrying. They do this to make sure you’ll have enough money to put toward your mortgage payment each month. They want to make sure you’re not getting in over your head. The bottom line is this: If your combined debts eat up too much of your income, you’ll probably have a harder time getting approved for a loan.
Different lenders have different DTI standards. There is no single cutoff point for DTI ratios that applies across the board. But it’s safe to say that if your total recurring debts are less than 45% of your gross monthly income, you shouldn’t have any trouble getting approved for some type of home loan. However, there are loan programs that will approve DTIs up to 50% or more.
The debt solution in this scenario is to pay down your balances. This will give you a more favorable DTI ratio, and improve your chances of qualifying for a mortgage. Put a budget on paper to find out where your money goes each month, and try to find ways to reduce your monthly outlay.
Your debt can also affect your credit score, which is another thing lenders use when considering you for a loan. This is especially true of credit card debt. I have to introduce another “ratio” at this point. Your credit utilization ratio is a comparison between your available limit and your current balance. It counts heavily toward your overall credit score.
If you are using a high percentage of your available credit limit (or if you’ve already maxed out some cards), then your utilization ratio will be high. This will have a negative effect on your overall credit score, which could create yet another obstacle to mortgage financing. The debt solution in this situation is (once again) to reduce your debt balances — starting with those cards.
Solutions Versus Scams
In most cases, the best debt solution is also the easiest to pursue. You should create a budget that allows you to put a certain amount of money toward your outstanding debt each month, in order to reduce it gradually over time. For this strategy to work quickly, you will have to pay more than the minimum amount due each month, and that’s where the budget comes into play.
Sometimes the self-help approach just doesn’t work. In such cases, you would need some guidance from a professional debt counselor. This is where you need to exercise caution. Most of the so-called “debt relief” companies are actually scams. It’s sad that some companies would prey on people in financial distress, but it’s also a reality. That is why you’re better off using a non-profit debt-counseling organization, one that’s not trying to make money off of you.
Debt solutions take time and patience. There is no quick fix to the problem, despite what some companies will promise you. But the rewards justify the effort. If you can reduce the amount of debt you’re carrying before applying for a mortgage loan, you’ll have a much better chance of getting approved for the loan you want.
Are you in the planning stages of buying a home and need guidance? Give me a call and let’s talk about it!