Owning a home is a goal for many Americans. However, many feel like they are unable to achieve this dream due to debt. Debt is extremely common with 8 in 10 Americans carrying some form it. Student loans, personal loans, credit cards, and auto loans are common forms of debt. While being debt free is a worthy goal, home ownership does not have to be out of reach for those who are carrying around some debt. Here are three tips for purchasing a home while in debt.
Understand Debt to Income Ratios
Before going through with purchasing a home, potential home buyers should consider their budgets carefully. One thing that is important to consider is the ratio between debt and income. The debt to income ratio is calculated by adding up monthly debt payments and dividing them by monthly gross income. The higher the ratio, the more difficult it may be to make monthly payments on both debt and a mortgage.
Many lenders will not approve loans if the debt to income ratio is greater than 43 percent. Potential homeowners should know what their debt to income ratio is and consider paying down debt to reduce it before applying for a home loan.
Understand Debt Consolidation
Another thing to consider before purchasing a home is whether or not it makes sense to consolidate other debts. Consolidating credit cards or student loans can lead to lower monthly payments. This in turn can improve the debt to income ratio and make it easier to qualify for a home loan. Consolidating debt can also save a lot of money in interest, especially for credit cards. The average interest rate for a credit card is just over 15 percent. Loans and balance transfers often allow for the repayment of debt at a much lower interest rate.
Understand that Small Down Payments Are Possible
One of the biggest hurdles for many homeowners is the down payment required to purchase a home. However, while it may be recommended to save 20 percent for a down payment, it's certainly possible to buy a home with a much smaller down payment.
Federal Housing Administration backed FHA loans can require as little as 3 percent down. The downside is that it may be necessary to pay an upfront fee and mortgage insurance. For those who have trouble saving up for a larger down payment due to debt, loans that require lower down payments may be the way to go.
Purchasing a home is a big step both financially and personally. Many who have credit card debt or student loans may think that owning a home is out of reach. However, it may be a possibility. Before buying a home it's important to consider debt to income ratio and whether or not consolidating debt is a good option. It's also possible to buy a home with a down payment of less than 20 percent.
To learn more about your options, contact services like Fairway Independent Mortgage Corporation.Share