In the modern world, debt is everywhere—the devil that sits on nearly everyone's shoulder and prevents them from living the life they want to live.
Between car loans, credit cards, and even student loans, debt can pile up and become an overwhelming burden - especially when you're looking to own your own home. But it doesn't have to be this way.
You can still qualify and pay a mortgage while handling other types of debt. This article will explore how you too can become a homeowner in spite of the other debt you may have.
Reduce Your Overall Debt
How much of your monthly income goes towards paying down recurring debt like credit card bills or car loans? The first step in qualifying for a mortgage and reducing your overall debt burden is to consolidate the loans you can.
Consolidating a loan is the process of combining multiple payments into a single payment. Not only does this make it easier to keep track of your payments (after all, one payment is easier to remember than several), but consolidating can also result in a lower interest rate.
A lower interest rate means you spend more time paying down the principal amount and less time throwing away money on interest charges. You can actually be on the faster path to paying off a mortgage if you take this approach.
Improve Your Debt-to-Income Ratio
Your debt-to-income ratio is the overall amount of debt you have versus the amount of money you make. You calculate this by dividing your total monthly payments buy your gross monthly income.
For example, if you earn $4,000 per month and make $2,500 worth of debt payment per month, you divide $2,500/$4,000 and receive a debt to income ratio of 62.5%. Ideally, your debt to income ratio should be below 43% in order to qualify for most mortgages.
Make a Small Down Payment
You may believe you need a lot of money in order to qualify for a mortgage, but how much is really needed for a down payment ? Twenty years ago you might have needed 20%, but that just isn't the case anymore.
The minimum you need today is 5% for a conventional loan. This is much more affordable and easily within reach for the majority of buyers. Keep in mind, however, a down payment less than 20% requires you to pay for mortgage insurance. The more you make on your down payment, the less you have to pay in insurance each month.
Make a Plan to Eliminate Your Debt
Many people lean toward the snowball method of debt repayment. This method involves paying off your highest debt first. Once you eliminate this debt, you can take the money you had devoted to making that payment each month and put it towards the next largest debt amount. By sticking to this payment schedule, you will steadily reduce the overall amount of debt you owe.
Another method is the snowflake method of debt repayment. Like a snowball method, this involves paying off the highest amount first, but not the highest balance—the highest interest rate. The balance for the highest interest rate will ultimately cost you more money over time, so paying it down first and then focusing on the next highest interest-rate is what some people prefer to do.
Both of these methods are recommended by financial gurus and are frequently cited as ways for people to get out of debt. If you plan to purchase a home in the future, begin reducing your overall debt now so, when it comes time to qualify for a mortgage, you have a much better chance.
Our free monthly budget worksheet can help get you on the right track!
Start Now (and Don't Stop!)
When it comes to your financial health, the sooner you begin making improvements, the sooner you'll see a difference. Homeownership is no longer just for people over 40 with established jobs. It is extremely important though, to make this happen, to stick to a budget and try not to take on any more debt. As long as you can make smart financial decisions and stick to a plan, you too can be a homeowner.
Look over these tips and figure out which ones you can apply today. With finances, it's a marathon, not a race. Start making changes one step at a time and watch how your life changes. Soon you'll be debt free.