Here are 8 ways to maximize your chance of buying your dream home — even if you have debt.
Focus on your credit score
The FICO credit score is among the most frequently used credit scores, and range from 350-800 (the higher, the better). A consumer with a credit score of 750 or higher is considered to have excellent credit, while a consumer with a credit score below 600 is considered to have poor credit.
To qualify for a mortgage and get a low mortgage rate, your credit score matters.
Each credit bureau collects information on your credit history and develops a credit score that lenders use to assess your riskiness as a borrower. If you find an error, you should report it to the credit bureau immediately so that it can be corrected.
Manage your debt-to-income ratio
Many lenders evaluate your debt-to-income ratio when making credit decisions, which could impact the interest rate you receive.
A debt-to-income ratio is your monthly debt payments as a percentage of your monthly income. Lenders focus on this ratio to determine whether you have enough excess cash to cover your living expenses plus your debt obligations.
Since a debt-to-income ratio has two components (debt and income), the best way to lower your debt-to-income ratio is to:
- repay existing debt;
- earn more income; or
- do both
Pay attention to your payments
Simply put, lenders want to lend to financially responsible borrowers.
Your payment history is one of the largest components of your credit score. To ensure on-time payments, set up autopay for all your accounts so the funds are directly debited each month.
FICO scores are weighted more heavily by recent payments so your future matters more than your past.
In particular, make sure to:
- Pay off the balance if you have a delinquent payment
- Don’t skip any payments
- Make all payments on time
Get pre-approved for a mortgage
Too many people find their home and then get a mortgage.
Get pre-approved with a lender first. Then, you’ll know how much home you can afford.
To get pre-approved, lenders will look at your income, assets, credit profile and employment, among other documents.
Keep credit utilization low
Lenders also evaluate your credit card utilization, or your monthly credit card spending as a percentage of your credit limit.
Ideally, your credit utilization should be less than 30%. If you can keep it less than 10%, even better.
For example, if you have a $10,000 credit limit on your credit card and spent $3,000 this month, your credit utilization is 30%.
Here are some ways to manage your credit card utilization:
- set up automatic balance alerts to monitor credit utilization
- ask your lender to raise your credit limit (this may involve a hard credit pull so check with your lender first)
- pay off your balance multiple times a month to reduce your credit utilization
Look for down payment assistance
There are various types of down payment assistance, even if you have student loans.
Here are a few:
- FHA loans – federal loan through the Federal Housing Authority
- USDA loans – zero down mortgages for rural and suburban homeowners
- VA loans – if military service
There are federal, state and local assistance programs as well so be on the look out.
Consolidate credit card debt with a personal loan
Option 1: pay off your credit card balance before applying for a mortgage.
Option 2: if that’s not possible, consolidate your credit card debt into a single personal loan at a lower interest rate than your current credit card interest rate.
A personal loan therefore can save you interest expense over the repayment term, which is typically 3-7 years depending on your lender.
A personal loan also can improve your credit score because a personal loan is an installment loan, carries a fixed repayment term. Credit cards, however, are revolving loans and have no fixed repayment term. Therefore, when you swap credit card debt for a personal loan, you can lower your credit utilization and also diversify your debt types.
Refinance your loans
When lenders look at your debt-to-income ratio, they are also looking at your monthly loan payments.
The most effective way to lower your monthly payments is through loan refinancing. With a lower interest rate, you can signal to lenders that you are on track to pay off loans faster.
Each lender has its own eligibility requirements and underwriting criteria, which may include your credit profile, minimum income, debt-to-income and monthly free cash flow.
If you make these 8 moves, you’ll be better positioned to manage your loans and still buy your dream home.