If you are thinking about purchasing a home, there is plenty to do to prepare. From finding a realtor and mortgage broker, to writing your wish list, to preparing your finances, you will want to make sure everything is in place before you take the leap and make an offer. A good first step to take before buying a home is to reduce your debt and work to increase your credit score as much as possible. Below we will talk about why it’s important to do this, as well as share some strategies that you can use to achieve those two important goals before you buy.
When you are buying a home, you’ll want to make sure that your financial situation is as healthy and stable as possible. A key part of this is working to reduce your debt. Before granting you a loan, your lenders will look at both your credit score and your debt-to-income ratio (DTI), which is used to calculate your personal finances. Your DTI is usually expressed as a percentage that compares your monthly debt payments to your overall income. This percentage tells mortgage lenders if you are able to manage a monthly mortgage payment. If your DTI is low, this means that you have a good balance between debt payments and income. If the number is high, this indicates that you could have an unhealthy amount of debt.
Another key element of financial health is a good credit score. Having a good credit rating will allow you to access better mortgages at better rates, which means you will be paying less interest on your mortgage over time. Potential lenders will always take a look at your credit report, which outlines your credit score and any information used to calculate it. Your credit score is a 3 digit number between 300 and 850 that is used to represent how much of a risk you are as a borrower. A “good” credit score is anywhere above 675-700.
Here are some tips on how you can reduce debt and improve your credit score:
Set a Budget
If you want to get serious about reducing your debt, you need to cut your spending in incidental areas such as retail, restaurants, and entertainment. Try using a budget app, a budget chart, or a spending journal to track your purchases and set limits for your spending.
Create Buckets for Savings Goals
If you have multiple things to save for, set aside funds every month in a spot designated for that goal. Whether you are using a bank account, piggy bank, or a tracking journal, make sure to stick to your budget and don’t touch money once it’s been put away.
Start a Plan
Paying off debt takes strategy and planning. It’s best to pay off debts with high interest rates first while still maintaining minimum payments on other debts. The highest interest rates are typically found in credit card debt, while student loans and mortgages generally have lower rates and can be paid off later. If you aren’t sure where to start, set up a meeting with a professional at your banking institution who can help you create a plan.
Nobody can pay off their debt overnight, but with smart decisions and proper budgeting it is perfectly doable. Be patient with yourself as you navigate paying off your debts.
Read More: How Much Debt Is Too Much Debt?
Pay More than the Minimum
If you are currently only paying the minimum amount on your credit card or loan, this is a quick way to say goodbye to even more money in the form of interest payments. Aim to pay off the entire balance on your cards each month, but if that isn’t possible, pay off as much as you can on those high interest loans.
Look at Your Credit Report
If you are looking to improve your credit rating and DTI, you’ll need to first check in with your financial health to see where you are starting from. Get to know your credit score and review your credit report on a yearly basis to check for inaccuracies or potential for improvement.
Choose Credit Cards Wisely
Did you know that not all credit cards are equal? Some department store credit cards may be viewed negatively by lenders, and also have higher interest rates. To be safe, have at least one credit card from a trusted financial institution.
Use Landlords as a Reference
If you have previously rented a home or apartment and have always paid rent on time, you can use a landlord or corporation as a credit reference when you apply for a mortgage. It’s also a good idea to avoid moving often, and pay rent by cheque or direct deposit if possible. This shows consistency to lenders, and can make an impact on their assessment.
As simple as it sounds, setting up auto payments for your bills will stop you from missing a payment, and may help you stick to your budget. Missed payments may also negatively impact your credit score, so it’s important to pay your bills on time.
Keep Credit Card Balances Low
Try not to max out your credit cards as this could impact your credit rating – even if you make all payments on time. It’s a good rule of thumb to keep your balance at or under one third of your credit limit if you plan on carrying a balance.
The world of loans, lenders, and mortgage brokers can be daunting, but you don’t have to navigate it alone. If you’re ready to work towards reducing your debt and buying your own home, contact a mortgage broker today to speak to about the best mortgage options for you.