HOW TO BUY A HOME WHEN YOU’RE IN DEBT

by: Remie Longbrake | published: November 17, 2020

Buying a home is the ultimate #lifegoals. If you’re in debt, however, you might think that it’s out of your reach. But in all our years of experience as real estate experts, we’ve found that less-than-stellar credit shouldn’t stop anyone from acquiring their dream house. Here are some steps you can take to make your purchase happen in no time. 

Know what you can afford. 

Your home purchase starts with an honest assessment of your finances and your capacity to pay. To determine what you can afford, you’ll need to calculate your household’s total monthly income first of all. Ideally, your monthly mortgage payments should be at 30 percent or less of this figure. When buying a home, you will likely also encounter things like closing costs—not to mention, inspection and appraisal fees, private mortgage insurance (PMI), and the myriad costs of home ownership. This means that you should also factor in your cash reserves, debt and expenses, credit profile, and your long term payment strategy. If you want to look at the bigger picture, NBC News recommends the 28-36 rule, which essentially means that out of your total gross income, home-related expenses should account for no more than 28 percent, while no more then 36 percent is for all debts owed, including your mortgage. An online home-affordability calculator can make the process easier. 

Address your debt. 

Although, it may seem like the opposite is true, you can still buy a house while in debt—with a few caveats, that is. The best way around this is to either make more money or reduce the amount owed and the payments. This will then lower your debt-to-income (DTI) ratio. At present, most mortgage lenders don’t approve applicants with a DTI ratio of over 43 percent, so this is a good benchmark to remember. If paying off your debt is not possible, you can also look into consolidating them. Essentially, this means getting a loan or line of credit to pay off your current debt (e.g., credit cards, student loans, etc.). In turn, this new will usually mean lower interest rates and fewer fees, so you have more manageable monthly payments. This is a step that you can either do on your own or through a debt consolidation company. 

Explore available assistance. 

It is definitely worth considering getting assistance when dealing with substantial debt, especially credit card debt. Coaching from Prosper Pathways can, in fact, help you understand your debt better and how to manage it more effectively so you can get out of debt sooner, build your credit, and ultimately your net worth so you can focus on life more on your terms. To start, such services will take into account the total debt that you owe, as well as your income, employment, savings strategy, and factors that might affect your ability to meet financial obligations. This is arguably an important part of the house buying process, too. As soon as your debt is manageable, you can then start saving for a down payment and improving your credit score, which can save you thousands over the life of the home loan.

 Consider low down payment options. 

Finally, it’s important to note that the down payment may not be the biggest of your worries as you buy a home. If the 20 percent threshold is too hefty for you, there are down payment assistance programs that you can look into to help you meet this requirement. There are also low or even no down payment options available, even for first-time homebuyers. It’s wise to look beyond conventional home loans and research options like USDA, FHA, and VA loans (to name a few) as your eligibility could mean better deals all around for you. Also check your local credit unions as they may be more open to work with you and provide a lending hand. In short, being in debt is generally not an ideal situation, but it doesn’t mean that doors will automatically close for you as you look into buying a home. Know that when you take control of your debt, you take control of the situation—taking you a step closer to your dream home. For powerful insight on how you can achieve clarity on your financial and wellness objectives, reach out to Prosper Pathways by calling 800-975-1145 or emailing remie@prosperpathways.com!

It is our recommendation to always consult with a licensed and reputable financial expert. This educational article is not specific advice. We strive to present quality, effective content. For specific references to our content please use our contact page.