Whether you’re just starting your debt resolution program or are only a few payments away from completion, you’ll soon experience more freedom to do what you want with your money. After working hard to pay off your enrolled debts and building new financial habits, it might feel like the right time to invest in a bigger purchase. However, your credit might not be where you need it to be right now — can you really buy a new house after completing your program?
Although it may take extra thought and preparation, it is possible to be both a proud debt resolution graduate and a new homeowner. We’ve outlined some of the top things to prepare for the best chance of success:
Start Saving For a Healthy Down Payment
Ultimately, if you’re able to pay more for your house upfront, you won’t have to borrow as much money. You’ll also have a head start by owning more of your property’s equity. Depending on your credit score, you may need to make a larger down payment in order to qualify for a loan, so it’s good to think ahead and have enough money set aside.
Cut Unnecessary Spending
When working through a debt resolution program, many individuals take a hard look at their spending habits and make cuts in order to save more money. Continue your momentum and avoid unnecessary subscriptions, impulse shopping trips and nights out, and put those funds towards your down payment.
Perfect Your Credit
You might be able to secure a loan for your new home with less than perfect credit, but lower credit scores can lead to much higher interest rates. For conventional mortgages, you may need a credit score of 620 or higher, but there are still options for those with lower scores, such as FHA, VA and USDA loans.
Improve Your DTI
Lenders will factor in your debt to income ratio to help determine whether you qualify for a mortgage or loan, so it’s a good idea to take a look at where your DTI currently stands. Lower DTIs are better, with 20% considered “excellent,” and 43% is usually the highest DTI that mortgage lenders will accept for a qualified mortgage (a mortgage that meets certain requirements for lender protection and secondary market trading under the Dodd-Frank Wall Street Reform and Consumer Protection Act). You can improve your DTI by increasing your income, paying off any other existing debts, and not taking on additional debt.
Look Into FHA Loans
Popular among first-time home buyers and designed with lower credit scores and lower incomes in mind, FHA loans are mortgages that are insured by the Federal Housing Administration. These mortgages have a few requirements to consider, but if you qualify with a credit score of 580 or higher, you may only be required to pay a 3.5% down payment on your home.
Budget for Related Expenses
You might have the funds, DTI and credit score needed to cover the cost of your new home, but have you considered the extra costs? Be sure to set aside extra room in your budget for things like insurance, repairs and maintenance.
While bigger purchases will require more research and a strategic approach, you may still be able to buy a new home after completing your debt resolution program. By continuing to rebuild your credit, lower your DTI ratio and save up for your down payment, you can set yourself up for success and make your home buying process easier.