How to Pay off Debt to Buy a House

Planning to buy a house soon? If so, take a good look at your finances and clear some of your debt. Being in debt isn’t necessarily a bad thing. Debt allows many Americans to buy assets, take care of expenses, and pay for education. In fact, according to research by the National Association of Realtors, most new homebuyers are young people who have student debt.

At the close of 2019, American consumer debt was estimated at $13.95 trillion, according to data published by the New York Federal Reserve. That said, debt obligations affect your credit rating as well as limit your options.

Paying off your debt before buying a home is recommended for a number of reasons:

You are likely to get a better mortgage package from your preferred lender. During an appraisal, the lender will check your debt-to-income-ratio (DTI) to determine whether you are a good candidate for a loan. If you have a high DTI, your mortgage is likely to attract high interest.

You won’t be bogged down by excess debt after taking the mortgage. The debt can come from costs related to purchasing the house, which include closing costs, amortization costs, repairs, utility bills, taxes, and other expenditures. These expenses may seriously impact your financial muscle when you buy a home.

It helps to improve your overall credit utilization ratio. Therefore, you can take more loans in the future to take care of expenses and emergencies.

Here are some tips to help you manage debt as you look to buy your home:

1. Credit Card Debt Consolidation

If you are like most consumers, credit card debt takes a big chunk of your total debt. Having multiple credit card debts is not good in terms of debt management, credit utilization ratio, and credit score/rating. You might want to consider consolidating all your credit card debt into a single personal loan. This means taking a single personal loan to pay off multiple credit card debts.

Consolidating debt helps to reduce the interest and charges you have to pay to multiple lenders. At the same time, having a single debt obligation will improve your prospects when you are applying for a mortgage.

2. Pay Off High-Interest Debt

You may need to prioritize your debts to reduce your burden. These include credit card debts, unsecured loans, and some personal loans. Interest rates on credit cards are quite high and not tax-deductible. On the other hand, mortgage interest, student loan interest, and margin interests on investments are tax-deductible.

Consider paying off the loans that hurt your income the most, and hold off on long-term tax-deductible ones. If you must use a credit card, choose one with a cashback reward program. Such a card can help to reduce your repayments and expenses in the long run.

3. Renegotiate the Loan Terms with Lenders

This isn’t exactly paying off debt. However, sometimes you can find it easier to finance your first mortgage by renegotiating the terms with your lender.

Some personal and business loans with tight repayment terms can be restructured to accommodate your house deposit as well as interests. For instance, your lender could reduce your monthly interest and stretch the loan over a longer period to leave you with money for the mortgage and other expenses.

Create a Budget

Saving to pay off debt requires careful planning and a lot of discipline. The only way to monitor your expenses and pay off loans is by creating a strict budget and sticking to it. Kudos if you already have a budget and follow it religiously. Many financial experts will ask you to write your expenses down when they are advising you about money and savings. The same rules apply when managing debt.

Pay-Off Debt Early

Let’s say you have some private student loans, earning $60,000 a year, and are thinking about starting a family. Here is what you can do to manage your debt and get that house you’ve been dreaming about:

Challenge yourself to pay off the debt within a certain period

Create a challenge of putting at least $1000 in an emergency fund

Create a debt pay off plan and follow it

Avoid taking new debt or minimize it

Only carry a single credit card every day for the whole period. That credit card must have a cashback plan on every purchase and a limit

Cut down on unnecessary expenditures

Save your bonuses, allowances, and other funds that may come his way

Sell some assets

Take a second, third job, or start freelancing

These, and other saving techniques, can help you to clear your debt or reduce it. Paying off debt is more about saving than giving cash to your lenders. All you need is the will and discipline to do it.

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