More than half of American adults carry credit card debt from month to month, and most can’t handle their overall debt load.
Rising consumer debt can lower credit scores and damage creditworthiness. In most cases, taking on a mortgage and buying a home is not something they’d want to consider till their financial situation is under control. Check out our article on the impact of credit card debt.
If you’re working out your money management problems through debt settlement, congratulations! Settling debt gives you a clean slate to start new.
Can You Buy a Home After Debt Settlement?
Lowering your debt can make a huge difference when you’re ready to apply for a mortgage.
It’s probably been a difficult journey getting debt relief, and like any time after you’ve completed a challenge, you want to reward yourself. If that means venturing into homeownership, go for it! Becoming a homeowner is part of the American Dream.
However, there will be certain restrictions on what you can get regarding the loan amount and terms (repayment period and the interest rate).
The good news is that there are things you can do to increase your chances of getting a mortgage with favorable terms after debt settlement.
Chances are you already did some of these things while undergoing debt settlement, but here are our top tips:
1. Start Putting Down A Sizeable Down Payment
Exactly how long you need to wait to get a mortgage and be a homeowner will largely depend on how long it takes you to save a down payment.
Don’t rush into saving for a down payment. Remember, you just overcame a difficult hurdle in your financial life, and your bank balance reflects that.
After a difficult financial struggle, you need to tread cautiously and prepare diligently for what comes next. Instead of rushing back into anything, take a moment, smell the roses and savor what it’s like not to be burdened by debt.
Next, do some house price research to help you set a goal to work towards.
You probably got well into the habit of socking away money during your debt settlement period. Use the same practices to put down an adequate down payment (5-20 percent).
2. Spend Wisely
This step involves cutting down unnecessary expenses, so you don’t start building up new debt once you’ve finally gotten free from it.
If you stop and look around, there are plenty of places you can trim your budget that will result in a little-to-no effect on your standard of living.
Reflect on spending habits that might have contributed to your prior financial challenges, write them down, and then see to it that you never repeat them.
Remember only to get rid of wasteful and unnecessary items. Canceling things that you really need or enjoy makes the whole process painful and harder to sustain.
Also, make it a habit to leave your credit card at home and only buy stuff if you have the cash in your pocket. There’s a tendency to overspend when paying with a credit card.
3. Build Your Credit
Take actionable steps to build your credit rating.
So, what’s considered a good credit score? Well, each of the three major credit reporting bureaus (Experian, TransUnion, and Equifax) has its own credit scoring formula. But typically, credit scores range from 300 to 850, and anything above 670 is considered a good score.
Your credit will take some time to fix. But that does not mean you sit idle and do nothing.
Requesting a free copy of your credit report from www.annualcreditreport.com is the first step in attempting to improve your credit. Check your credit report for any errors and dispute them.
Payment history accounts for 35 percent of your credit score. Use a credit card to build a history of making timely payments each month. A good strategy is using your card for small purchases and paying it off in full each month to avoid incurring any interest charges.
If you reduce your account balances and start making payments on time, that should improve your credit score and put you in a better position to get approved for a mortgage.
Another way to build your credit is to maintain appropriate credit utilization (below 30 percent).
4. Raise Your DTI (Debt-to-Income) Ratio
If you’re following the first three tips, you should be reducing your debt. Once your debt is managed, you will have a better debt-to-income ratio.
To get your debt to income ratio, simply add up all your monthly debt payments (what is escrow?) and divide them by your gross monthly income. Your debt-to-income ratio is expressed as a percentage.
Typically, the lower your debt-to-income ratio, the higher the loan-to-value ratio a mortgage lender will approve you for. Most lenders want this ratio to be no greater than 43 percent. 20 percent is considered excellent.
To make your debt-to-income ratio more attractive to a lender, consider diversifying your income and decreasing your debt further and paying off debt.
5. Check into FHA Home Loans
FHA (Federal Housing Authority) backed loans are government-backed mortgages.
These loans have less stringent credit requirements. They offer good interest rates and allow lower down payments.
An FHA mortgage is available for borrowers with a FICO score as low as 580. You can also save up as little as 3.5 percent for a down payment, compared to the usual 20 percent.
6. Consider All Expenses
While the cost of purchasing a home is typically the most significant, it’s not the only expense you’ll face.
Ensure to budget for extra costs such as home inspection, moving expenses, maintenance, and insurance.
Do It Now!
The stability and security of homeownership are so satisfying, so it pays to begin adjusting and creating new financial habits today.
The sooner you cut unnecessary expenses, get your credit scores up, raise your DTI ratio, save for a down payment, and plan for additional expenses, the sooner you will be ready to become a homeowner.
What is a home equity loan? Are you ready to settle your debt and move forward with financial freedom? Americor is here to help. Our goal is to help you tackle your debt so you can move towards a brighter financial future, especially if that future includes a home that you will cherish for years to come.
Get started with our debt settlement program today!
Click here to apply: https://apply.americor.com/new