Written by: Kaydene Green
Sooner than later, one may find themself facing the inevitable reality of pursuing the possibility of owning a home. It is an achievement and one that is the hallmark of hard work, dedication and success. Whether a home is purchased by one or multiple individuals, big or small, it is yours and there is no better feeling. For some, renting is paying someone else’s mortgage and a complete waste of your hard earned money. In some cases this may be true. What they are unaware of is the unique financial situation of the individual renting. It is easy to encourage the purchase of a home, but it is hard to steer people in the right direction who have already acquired quite a bit of debt.
The problem is, owning a home only becomes a thought, for many like myself, well after there has been an accumulation of debt. The average American has $90, 460 in debt (Source). The average cost of a home according to zillow is $308,220. and the average monthly mortgage payment for US homeowners is $1487 (Source). This is not common knowledge nor explained ahead of time and while making those thoughtless financial mistakes.
There are many people who have not considered buying a home because of debt and have not thought it necessary to even find out how. It is said that ignorance is expensive and I am definitely paying the price to say the least. I’ve done some homework to learn a few things to start looking into before attempting to apply for a home loan.
Debt-to-Income ratio (DTI) is the primary consideration in the qualification of a home loan. A low DTI demonstrates a good balance between debt and income. Simply put. If you can keep your debt low or nonexistent it will become a home buying dream, if you plan on purchasing a home in the future of course
I took some time to stop by my local Credit Unions to speak with the home loans officers to gain an understanding of things to consider, while having debt, before buying a home. May I add these bank associates were extremely helpful. As I already knew for my own personal situation, I had to rearrange a few things on my financial record in order to maximize my home buying experience. I wanted to go in a bit more detail to find out exactly what areas to target and how were the best ways in doing so. If you are in debt and would like to be able to afford a home, eventually, here were a few things to consider in advance.
1. Get a free (detailed) credit check with AnnualCreditReport.com
If you are like me you may receive monthly credit score updates from credit check apps like mint. Unfortunately, according to CD Thornton, one of my credit union’s mortgage advisors, there may be hidden occurrences on your credit that you may be unaware of that could poke it’s ugly head out once you are ready to buy a home. Things like unknown outstanding medical bills or even something as simple as not returning your cable box can be seen on your credit history and may be used against you. I guess it may be time for me to return my cable box 🙂
2. Student Loans
1% of your student loan balance is counted towards your debt when buying a home (TD Thornton). If you are not actively paying the income driven repayment plan. It is a good idea to make sure that you are actively paying off the balance with an Income Driven Repayment Plan to provide a set monthly student loan expense. This can be calculated as much less of an expense as opposed to the 1% consideration. This makes a tremendous difference when qualifying for a mortgage. Remember, the less you have to pay in bills monthly, the more mortgage you will be qualified for.
3. Move Credit Cards to Personal Loan
D. Pullara, relationship officer at my local credit union suggests one way to improve my credit just before applying for a home loan is to move my credit card balances to a personal loan. This should boost my credit score and allow me to pay a smaller interest rate and make smaller monthly payments. The goal is to keep my monthly expenses low. Personally, I am not quite comfortable with debt consolidation and would prefer to continue applying the snowball effect to my credit card debts but this was an honorable mention in the event you need to know how credit score can be boosted just before applying for a home loan.
4. Refinance Car for Longest Term
The goal is to receive lowest payment. A car loan can be refinanced, just like a personal loan on credit cards, to provide a lower monthly payment. When the loan is in the home stretch of ten months, the car loan does not count towards debt (D Pullara).
4. Save for Down Payment and Closing Cost
Though many may be quailified for a grant to aide in the down payment of a loan, many will not be able to be qualified and will have to find the money otherwise. Down payments can be 6-8% of purchase price. Dey, a member relationship officer from another of my Credit Unions says one mistake many people make when considering buying a home is forgetting about all the additional fees.
5. Consider The Climate of the Home Buying Market
It is November 2021 and we are in a sellers market. In my interpretation of this, it is harder for the buyer to negotiate and will more than likely have to be ready to make an impressive offer. My deduction, take a little more time to get ready than to force the situation when funds are low.
Full disclosure: This is not financial advise but merely things to consider based on my own personal situation. Please consult your bank to get an evaluation based on your unique financial situation.
Before we see other’s inability in pursuing the purchase of a home as pointless, it may be good to understand that many people are correcting some of the mistakes that have been made in the past and will need time to rearrange their priorities. Rushing someone into purchasing a home can be a vulnerable situation and instead, encouraging persons to address their financial woes first would be a more pleasant experience.
Last Updated: November 19, 2021