Buying a House in 6-12 Months? Here’s Debt Management Advice
Are you carrying debt and would you like to buy a home in the next 6 to 12 months? Your debt won’t necessarily disqualify you from securing a mortgage. However, solid debt management may be necessary to qualify for one. Lenders will look at your debt when determining your “risk factor” and whether they can offer you a loan.
In this mini-guide, Express Real Estate Loan offers debt-management advice to maximize your chances of securing a mortgage for your future dream home:
You’ll need a good debt-to-income ratio
All lenders evaluate a mortgage applicant’s debt-to-income ratio (DTI) when assessing their suitability for a loan. The debt-to-income ratio shows how your debts relate to your income – the lender wants to know if you have enough income left over, after you make your debt payments, to meet mortgage payments.
According to Wells Fargo, a DTI of 35 percent or less is considered good (they also offer a DTI calculator). When your DTI is 50 percent or more, it is unlikely you’ll qualify for a mortgage. You have to take action, in this case, to reduce your debt before applying for a mortgage.
You’ll also need a good credit score
You need a credit score of a minimum of 580 to 620 to qualify for a mortgage. Your credit score will determine not just your suitability for the mortgage, but also your credit terms. With a good score, you will have to make lower payments (with less interest) over time. If your credit score is poor, you can build it up quickly. R&R Insurance notes that you can add 100 points a month or more.
You will still need some cash
When paying off your debt, be sure to set aside some cash for various house-related purchases and payments. Not everything is covered by your mortgage. You’ll need cash for down payments (2-5% of the house price), closing costs, moving fees, remodeling, furniture, and professional fees.
Check house prices and trends before making a decision
The housing market, current interest rates, and future trends should factor in when you’re making a decision on whether you should pay off debt – and how much. Depending on how much demand there is for housing, you may be better off waiting and building up your credit score.
You can easily use the internet to do your research on available properties. Simply do a Google search for homes in your desired area and use home sites to find out how hot the market is and what homes are going for. For instance, homes are still selling at a good pace in Sacramento, the average property being on the market only nine days after being listed. Also, the median sale price ($510,000) has risen more than 7 percent year over year.
Some debt types are better to carry than others
Debt experts will tell you that some debts are “good” to have and others are “bad”. For example, student debt is usually considered better than credit card debt – it shows you are responsible and have good earning potential. While there are some caveats, as CNBC explains, you may want to prioritize paying off “bad” debt to make a better impression on lenders.
Considerations and specific steps for business owners buying a home
When you’re a business owner, as opposed to someone drawing a salary, you have some extra considerations to make. You’ll need an accurate income, a separate business and personal income, knowledge of your ownership percentage, good credit, and preferably business ownership for 2 years. Forming an LLC before the purchase can be financially beneficial and smart – it offers tax advantages, limited financial liability, and less paperwork. States have different regulations around LLC formation, so learn how to start an LLC in California before moving ahead.
Keep in mind that any mortgage you do acquire isn’t set in stone. Refinancing will always be an option down the road. So keep that in mind when managing your debt and figuring out what kind of mortgage you would like to apply for. Preparation is the key to success when securing mortgages – be sure to do your homework and get your documents in order for the best results. If you’re confused or stuck, you can always consult with debt professionals. And when you’re ready to get a mortgage for your California dream home, Express Real Estate Loan offers personalized, exceptional service and assistance.
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