Mortgage lenders don’t expect you to be completely clear of debt. However, the bigger your debt, the more your cash flow is impeded – which will make it harder for you to make consistent mortgage repayments. Which, of course, those lenders won’t like at all! Here’s a quick guide to reducing debt before buying a home.
There are three things that you should be doing in order to ascertain where you are financially before you start shopping for a mortgage. The first thing to do is get a credit report so you know precisely how you’ll look in the eyes of potential lenders. Next, you need to go through your bank statements manually to get an accurate fix on your income and outgoings. Armed with this information, you should then use a mortgage affordability calculator to ascertain what price range you can start shopping for.
Check for errors
Debt affects your credit score, which is the primary reason people want to reduce their debt as much as possible before searching for a mortgage. But there may be errors in your credit report – debts that have been paid off may not be reported as such, or there may be reports of higher debts than you actually owe. Make sure you get the report checked thoroughly for errors. Otherwise, you may end up spending more time and money on one problem than its worth, while ignoring other debts that will actually have more overall impact.
Your credit card debt is one of the key factors lenders will consider. They want to make sure that your credit card debts – which, ultimately, disrupt your cash flow – won’t prevent you from being able to make consistent mortgage repayments. You should aim to whittle your credit card debt to 30% or less of the credit limits. Put a focus on cards with high interest rates and larger balances. Because you can achieve this with smaller payments than with low-balance cards, your cash flow will actually look much healthier – more will be leftover to make mortgage repayments, which, of course, is the most appealing outcome to mortgage lenders!
Beating debt has much to do with budgeting – something you’ve probably heard many times, but it’s true! Getting a better understanding of your debts will help you take other approaches that will help, but in the end, you’re going to need to keep a very close eye on what you’re spending going forward. This is a great habit to get into now, because even when this is all finished, budgeting is a great way to help you save and live comfortably in the long term.
Negotiate and consolidate
Negotiating with debtors is actually a lot more realistic than a lot of people think. Sure, they’re not going to erase your debt just because you asked them nicely and baked them a cake, but if you arrange to make certain payments now in exchange for some write-offs, you may have more success than you expect. The other option is to consolidate your debts if you have several debtors. This can help improve your credit score, landing you a better deal on a mortgage.