Pointers for Buying a House While in Debt

Despite the challenges that the world has gone through thanks to the COVID-19 crisis, there are plenty of things to be hopeful about this year. For one, vaccines are being rolled out across the globe—an unprecedented feat, considering how much time vaccine development usually requires. For another, the economy is on a sure, even if slow, upturn.

While the prospect of buying a house during these turbulent financial times may seem scary, especially if you still have debts to pay in the next few years, it’s still entirely possible, and perhaps even beneficial. Here are some tips and pointers to help you buy a home this year even while paying off your debt.

Go over your debt-to-income ratio.

Your debt-to-income ratio is simply your monthly debt divided by your gross monthly salary or income. Having a thorough grasp of your current debt-to-income ratio and how it may change in the next few months and even years is key because lenders need this information to check if you would have the capability to repay the amount you will borrow, and thus decide if you’re a reliable and responsible borrower. ;

If your debt-to-income ratio is currently below 40 percent, you’re in a good place since that’s usually the ratio that lenders prefer. On the other hand, if your ratio is more than 40 percent, consider paying off as much debt as you can before you make moves to buy your own home. Having a high ratio is not good for optics, and your financial situation may not be able to manage the additional strain.

Save for a down payment.

The oft-quoted rule when it comes to saving for a down payment when it comes to buying a house is saving at least 20 percent. While that may be a wise route to take, it’s not a requirement, especially since most mortgage lenders are willing to work with potential buyers to find a down payment amount that they can handle and that works for them.

In fact, conventional mortgages only usually require a 5 percent down payment, and even the Federal Housing Administration (FHA) loans only require a 3.5 percent down payment. So don’t let the worry that you won’t be able to afford a 20 percent down payment deter you from looking into buying a house. Alternatively, you can talk to your local mortgage loan officer to get a better idea about how much down payment you would need, depending on your financial situation. ;

Cut back where you can.

Buying a home means adding more debt on top of your current debt, so creating a new budget is a must. Take the time to sit down and go through your bills and where you spend the most money. Look into the expenses that you can cut back on, and your non-negotiable expenses. Some examples of costs you can cut back on include entertainment expenses like dining out, streaming services, and other non-essential expenses.

Once you’ve created a new budget, consider if buying a home is something you can realistically afford it right now. Buying a house means your financial life will change drastically, so your budget should reflect that dramatic change.

Stay within, and even below, your price range.

If you’ve decided that buying a home right now is feasible, and if your home loan application is approved, don’t go for the highest loan amount. This is because if your credit is good, lenders tend to offer a huge loan amount that you don’t exactly need. It’s easy to get ahead of ourselves and take off with the highest approved amount, but it’s a wiser option to be frugal with the offer. Look for homes that are within, and even below, your budget so that your home loan will be easier to manage in the coming years.

Additional Tips

The last thing you want is to be “house poor,” or the state of being able to afford your home at the expense of not being able to afford anything else. Here are some ways to manage all your debts after you acquire your new house:

  • Consider renting out an area of your new home, perhaps the basement or other spare rooms, to help you cover your other expenses.
  • Don’t take on other debts. For example, if you’re starting a business, set up a merchant account and apply for financial assistance instead of borrowing money for capital.
  • Find other streams of income like starting an online store or trying out index funds.

 Don’t make these decisions on your own—there’s a reason why financial experts and mortgage loan specialists exist. Consult with these professionals about the reality of your current financial situation and allow them to help you go through your options.

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