Home Buyers and Debt

Preparing for a home purchase involves a web of consequential factors. If you wish to buy a home within the next six to 12 months, use the following debt-management suggestions to smooth out your course. Here are some great steps for home buyers to prepare for trying to buy a house and qualify for a mortgage. 

Create a Workable Budget

A reasonable budget is the heart of any successful financial plan. Give every dollar a purpose. Record what you spend in a week to understand where your money goes. Review the previous month's bank and credit statements and categorize each item. Use the data to create a practical spending plan. If spreadsheets or notebooks are too much to manage, search for an app to help you organize and track your expenditures.

Build Your Credit

Since a solid credit history and score qualify you for the best mortgage rates, strategically pay down loans so your debt-to-income ratio is not too high. Some people try to save money by first paying off the highest interest loans. It may be more motivating to tackle debts from smallest to largest since you can count each obligation you eliminate as a measurable victory. Be wary of debt consolidation or credit repair scams that make unrealistic promises about fixing poor credit.

Also, remember that closing credit cards may harm your report. If the cards are your oldest lines of credit, removing them shortens your credit history, and closing a revolving credit line also raises your credit utilization. Both can lower your score. Vigilantly check your credit score and contact agencies to remove erroneous items.

Start Saving for a Down Payment and Closing Costs

Though some programs may allow you to put down a 3% down payment, such a financing plan is typically not the most cost-effective solution. Lenders require private mortgage insurance (PMI) when a borrower owes more than 80% of a home's value.

Remember that thousands of dollars are usually necessary for closing costs. It may not be possible to roll these expenses into your mortgage, so you may have to pay cash or secure another loan to cover the fees.

Make Appropriate Business Decisions

A small business owner confronts unique challenges when buying a home. If your business is the only source of income and you receive no W-2 pay stubs, lending institutions require two years of steady self-employment verified by tax returns.

Now is not the time to take big risks in business. A partnership, merger, or the sale of a firm could add stability and improve the odds of mortgage approval. If you have been working as a sole proprietor or partnership, it may be wise to form a limited liability corporation. LLCs avoid the double taxation that affects other incorporation types and protect your personal assets from a legal threat if the business is sued. Check Massachusetts requirements for forming an LLC since each state has different regulations.

Study the Market

Since the real estate market can quickly shift, time your purchase for when conditions are best for buyers. Study the trends for specific home types and safe neighborhoods. Detail the priorities of what you want in a home so you don't eventually compromise. Prepare to stay in the dwelling for at least five years after purchase, as moving too soon can cause you a loss.

Turn to Professionals for Help

If you struggle with fiscal self-discipline, hiring a financial counselor may be worth the expense. Such an advisor can aid you in implementing the tips above. 

Plot a path to make sure your debt is under control. Doing so will help to ensure your home purchase is a satisfying decision.

This article is brought to you by Peoples Choice Mortgage, where we value our family. In turn, we treat all of our clients like family. We know that the home buying process isn’t always a straight path. That’s why we work to develop and educate all of our clients throughout the entire loan process. Our focus is empowering you to make a financial choice that fits your needs and your finances. We want you to close your deal with dignity and not simply because that’s your only option. For more information, please visit our website or contact us today!