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5 Things To Do To Reduce Debt To Get A Mortgage
5 Actionable Steps to Reduce Debt and Get a Mortgage
by Kevin Graham January 12, 2018 Home Buying/Selling Bad Credit Debt Home Buying
Have you been thinking about getting a mortgage but need to reduce your debt and get your financial life in order first? You’re not alone.
According to thelatest numbers from the Federal Reserve, in 2017 alone, Americans have taken on $246.2 billion of credit card debt and other revolving debt and $99.6 billion of non-revolving debt like car payments, personal loans and student loans. If you take a look at the numbers, they seem to grow every year.
There’s nothing wrong with applying for credit and taking on debt. In fact, with the rising costs of higher education as just one factor, it may well be necessary. The key is to just keep making the monthly payments.
This is easier said than done when the realities of life get in the way. Whether through youthful indiscretion or perhaps a financial hardship due to a lost job or high medical bill, it’s understandable that you might sometimes get off track.
You don’t have to get stuck with that debt forever, though. This post aims to give you five actionable steps you can take to bring your debt down to a more manageable level so you canget yourself a homesooner rather than later. Let’s get started.
Before you work to pay down any debt, it may be helpful to really take a look at where you stand financially. That starts with really keeping track of your budget. If you want to do a color-coded Excel doc, that’s great. It doesn’t have to be anything that complex, though.
One budgeting strategy you might find effective is to take one week and write down everything you spend money on (e.g., $200 on groceries, $100 gas bill, $20 at the movies, $50 eating out, etc.).
Merely the act of writing things down creates awareness. If you’re not aware, it’s easy to spend $5 here or $20 there. It doesn’t seem like much at the time, but after a while, it all begins to add up. The increased attention to it may in and of itself help your budget.
Do Some Trimming
It’s close to the holidays, and many of us have recently done some tree trimming. We’ve all heard money doesn’t grow on trees, but it’s definitely made from trees. If we find ways to prune the rotting parts of our budget tree (areas in which we might be overspending), we can pay down debt so that our money tree gets healthier and grows to new heights.
A few obvious places to trim the budget include eating out and other public entertainment. You don’t have to serve mac ’n’ cheese and make shadow puppets every night, but cutting your spending in half could go a long way.
Another place to look at cutting back is unnecessary subscriptions. I finally canceled a subscription for a meditation service just recently. I have a subscription to a magazine that I never have time to read and another to a digital comic book service. It’s been long enough that I couldn’t tell you the last comic book I read.
Cable subscriptions are another big one. In my home, we pay around $200 per month for 500 channels. Of those 500, I probably watch 10. Breaking it down even further, five of those 10 channels are broadcast TV that I could get for free in high definition with a digital antenna.
If you have a set-top box like the Apple TV, Roku, Amazon Fire TV or Google Chromecast, you can combine that with your internet connection and a Sling, YouTube TV or Sony PlayStation TV subscription to get access to a bunch of entertainment options in the form of Hulu, Netflix and Amazon. High-speed internet isn’t cheap by any means, but using it in combination with one or two of these services is likely to be less than your cable bill in a lot of cases.
Dealing with Negative Credit Items
Now that you’ve gone over your budget and determined areas where you can tighten your belt in order to make your money go further in paying off your debt, what do you pay off first?
In order to answer that question, you first need to determine what you’re up against. I highly recommend checking outa site like QLCreditwhere you can get your credit report and score for free without impacting your score. This and other sites like it will let you see your credit report, but they’ll also give you tips on how to increase your score and your creditworthiness.
The effects of a bankruptcy vary depending on the type of loan you’re trying to get, but in most cases,there’s a waiting periodafter the bankruptcy is discharged or dismissed. It’s possible to get a loan in as little as a year after dismissal or discharge, but you’ll have more options after two or three years.
The good news is you can take care of other negative credit items over a shorter period of time with a little advance planning.
Judgments and Liens
If you have judgments or liens on your credit report, it’s important to work toward paying these off. In many cases, they’ll need to be paid off before you can close on your loan.
The FHA and USDA will allow you to have judgments and tax liens remain open in certain cases. You should talk to a lender about requirements.
Collections and Charge-Offs
Another item that should be dealt with are collections and charge-offs. Before we get into why, let’s talk about what these things are.
If you get behind on your payments by more than a few months, a creditor may choose to sell your debt to a collection agency. Once your debt goes into collections, it can remain on yourcredit reportfor seven years.
In some cases, a creditor may simply give up on trying to collect the debt. Unfortunately, this doesn’t mean you’re out of the woods. It goes on your credit report and stays there for seven years as well.
Both collections and charge-offs have a major negative effect on your credit score. So you want to make sure you take care of them.
One thing to note about paying off collections and charge-offs is that they don’t disappear just because you paid them off. When you call the creditor to pay off the account, you want to make the full payment as they’ll be more open to negotiation. Tell them you’ll make the payment and you’d like them to remove any record of the collection or charge-off. Some may not be willing to do this, but if you’re making the payment, most should be willing to work with you. This will have a big boosting effect on your score.
Depending on the type of loan you get, it may be required that you have no late payments or a limited number in the last year or two. So it’s very important to keep up with your payments.
Not only will it help your eligibility, but the more on-time payments you make, the better your credit score will get over time. You’ll also save money in late fees.
When talking about this, it’s worth noting that your late payments typically aren’t reported to the credit bureaus until you’re 30 days late. If you make a payment after the due date and any applicable grace period but before 30 days late, you may be charged a late fee, but it won’t count as a late payment in the eyes of the credit bureaus.
Deciding Which Balances to Pay Off First
The next important thing to do when deciding which debts to pay down or pay off and in what order is to come up with your criteria.
Some people recommend paying off the highest balance, while others suggest paying off the loan with the highest interest so you’re not throwing as much money away. If you’re looking to get a mortgage (or really any other kind of loan) soon, you should pay off the loan with the highest monthly payment.
The reason for this is that approvals for a mortgage or any other type of loan have a lot to do with yourdebt-to-income (DTI) ratio. This ratio is what lenders use to determine how much of your monthly income goes toward debt payments. The lower the number the better, but for the best chance of mortgage approval, you can qualify for most mortgage options with a DTI under 45% depending on other qualification factors.
Melissa knows South MS well since was born and raised on the coast. She attended Ole Miss then graduated from Southern Miss. This young lady has been in advertising/marketing, hospitality and sales si....