Question: Hi, I am currently finishing a Debt Management Program I have been in for the last 3.5 years. We currently own an FHA-financed home and have used the DMP to manage some out-of-control credit cards and reduce our debt ratio.
We are now looking to sell our current home and make a large profit, which would also help eliminate any other debts. We would be looking to purchase a newer home, which would be easier now with no credit debt and a 20 percent down payment.
Would it likely hurt our chances of securing a new loan once the DMP is finished? Our credit is back into the 700-plus range, and we have a large down payment for a conventional home loan. Thanks so much.
— Jeff in Texas
Howard Dvorkin CPA answers…
In the world of personal finance, the answers to even the most basic questions can be complicated. Happily, this isn’t one of those times…
No, Jeff, successfully completing a DMP will in no way hurt your chances of securing a good mortgage!
Now let me explain why.
First, let’s review just what a debt management program does. Called a DMP for short, it significantly lowers your monthly payments. How? Well, you work with a nonprofit credit counseling agency that negotiates with your creditors. Very often, you pay 35 to 50 percent less, and all late fees and penalties stop.
Whenever I tell people this, they look at me skeptically and say, “Yeah right! Why would my creditors give me a break? This sounds too good to be true.”
Actually, it’s both good and true.
Think about it from your creditors’ point of view. They trust the nonprofit credit counseling agency because they’ve worked with them for years — in some cases, decades. They know you’re in trouble and might declare bankruptcy, which means they not only lose money, they lose a customer.
So these creditors allow you to pay back a percentage of what you owe over time. As with anything in life, there are drawbacks. As you can read in the Debt.com report Debt Management Program Pros and Cons, you can’t open a new credit card while you’re paying back your old ones. Also, at the beginning of the DMP, some people notice a small dip in their credit scores.
However, once you complete a DMP, you have nothing but clear skies and green pastures ahead of you. DMPs aren’t automatically reported to the Big Three credit bureaus (Equifax, Experian, and TransUnion), and eliminating your credit card debt improves your credit utilization ratio, which is 30 percent of your credit score. You also improve your payment history, which is another 35 percent.
DMPs resemble gym memberships: In the beginning, you’re working out hard but not seeing any results. Later on, however, you see big results and want to work out even harder. You’re at that point, Jeff. You’ve paid your dues — literally. Now you can buy your home and enjoy what financial freedom really means.
Question:My husband is now part of a class-action lawsuit. It looks like he’ll win around $100,000. He wants to use it to buy a $92,000 condo near us and then spend $8,000 fixing it up so we can rent it.
He says this way, we can make much more than $100,000. I want to use the money to pay off our mortgage and maybe even our credit cards, since we have around $10,000, I think, on five or six cards.
My husband says this is short-sighted, and that every rich person has debt, and that wealth is simply juggling your debts. We’re at loggerheads. What do you think?
— Marilyn in Lousiana
Howard Dvorkin CPA answers…
If you really want to know what I think, Marilyn, here it is. You both need to take a deep breath and consider what you’re proposing.
Here are the troubling signs I see from your email…
Lawsuit settlements are often taxable. This being taxes, it get complicated. For instance, if the settlement includes money for “pain and suffering,” that’s not usually taxed because the IRS might consider it a reimbursement for your injuries. However, the point is: You need to ask before you count on the money.
Lawsuits are rarely slam dunks. Right up to the end, not only can the verdict change, but so can the terms. I’m concerned that you might be counting your settlement before it’s sealed.
Credit card debt is one figure you can know for sure. You say you “think” you’re carrying $10,000 on “five or six” credit cards. Before you decide what to do with new money, you need to be sure what’s happened to your old money — right down to the penny.
For the purposes of illustration and education, let’s assume you get a cool $100,000. If the condo costs $92,000, I’m assuming your husband hasn’t factored in closing costs, insurance, and other expenses. Just selling a home can add $15,000 in hidden fees. Even if buying this condo is half that, you’re already over budget if you need to make $8,000 in renovations.
Now let’s turn to paying down your existing mortgage. You don’t mention what your interest rate is, but let’s assume it’s 5 percent. You also don’t mention what the interest rates are on your credit cards, but the national average right now is hovering around 15 percent.
I’m sure you see where I’m going with this. Paying off your credit cards will save you around 10 percent more than paying off your mortgage. If you really want to know what I think, Marilyn, I suggest paying off your credit cards with whatever money you may be awarded.
Next, I’d make sure I had at least three months of living expenses in an emergency fund. If hurricanes Harvey and Irma have taught us anything, it’s that a natural disaster can cost a lot of money.
Finally, with whatever settlement money is left, I would look at other debts I have: an auto loan, student loans, personal loans. These I would pay off from highest interest rate to lowest. Finally, I might indeed pay down some of the mortgage.
Whatever you do, Marilyn, I urge you to gather facts and make dispassionate decisions with your husband. Facts like I’ve outlined here can help avoid a fight over this windfall — if it becomes a reality.
Even if it doesn’t, you can use this experience to still do the things I’ve outlined here.
Question: So Hurricane Harvey and Hurricane Irma trashed two of our biggest states. Wildfires are doing the same in California, which is our biggest state. Last winter, there were blizzards where I lived that killed people.
Every time there’s a big natural disaster, the news shows homes that are destroyed. I hope these people had insurance, but even if they did, the deductibles are sky-high. My homeowner’s insurance deductible is $10,000 because I can’t afford any less than that.
I’m a computer programmer who works remotely. So I can work anywhere. I want to live somewhere where I don’t have to spend a lot of money fixing up after Mother Nature gets mad. Any ideas?
— Mac in Vermont
Howard Dvorkin answers…
Natural disasters are one of the leading causes of catastrophic debt. The others are divorce, illness, and accidents. If they all have one thing in common, it’s this: They can happen to anyone at anytime.
As a financial counselor for more than two decades, I’ve spoken with Americans who have been wiped out in natural disasters all around the country. So I had the same question you did, Mac. I asked Debt.com researchers to answer it.
They came up with this animated map…
As you can see, there’s really no place safe from hurricanes, blizzards, tornadoes, wildfires, earthquakes, floods, avalanches, mud slides, and sinkholes. Any of these can destroy a home.
Even if you could find such a place, you might end up paying more to live there in other ways. Debt.com has written about the most expensive ZIP codes in every state in the nation, and if one of them should have no natural disasters, you may not come out ahead.
Better than trying to avoid natural disasters is preparing for them. While the federal government has helpful information on how to physically get ready for each type of disaster — see Prepare for Disasters and Emergencies — preparing financially is much simpler.
Basically, you need an emergency fund. Ideally, it should have three months of living expenses. Realistically, that’s not possible in a nation where the total credit debt is nearly $1 trillion. That’s $16,245 per cardholder.
Finally, let me talk you off the ledge. Financial counselors like me talk so seriously about all debt disasters because we want Americans to be prepared. Perhaps we’re trying to scare them into action. However, we don’t want to paralyze you, either.
The statistical odds of your home being wiped out by a natural disaster are slim. More likely is some damage at some point during your life. So don’t give up by telling yourself, “I’ll never save three months of living expenses, so why bother?”
Anything you sock away for later can help you ease a debt disaster. If you start now, by the time bad luck catches up to you, it won’t keep you down for long.
Question:My husband and I are looking for our first house. Of course, the prices are outrageous. Yet our rent is outrageous, too. So we’re seriously looking.
I don’t mind moving into a small “starter” home, but my husband wants us to “buy as much house as we can afford.” He says our money is better spent on a mortgage than sitting in a savings account earning less than 1 percent.
I’m nervous about sinking all our money into a house, but he says mortgages are considered “good” debt. We don’t have any “bad” to speak of, since our credit card balances are never more than a few hundred dollars and one of our cars is already paid off, with the other having just six months to go.
Is my husband right? I figure a place called Debt.com can tell me if mortgages are “good debt” and therefore a good investment.
— Anita in New Hampshire
Howard Dvorkin CPA answers…
Your question reminds of the sultry movie star Mae West. She famously said, “When I’m good, I’m good. But when I’m bad, I’m better.”
Mortgages are the opposite of Mae West.
Mortgages are often called “good” debt for three reasons…
Very few Americans can afford to plunk down $189,000 (the median price for an existing home) without getting a loan.
Unlike, say, running up your credit card to buy fancy dinners, you spend more time in your home than anywhere else.
Historically, home prices go up, making it the most profitable investment for average Americans.
None of those reasons matter, however, if you can’t afford the monthly payments. This was the very essence of the housing bubble that burst in 2007.
Let me hit you with something else that your husband probably isn’t considering: The cost of home ownership is more than just a mortgage.
Of course, everyone knows you have to maintain your house once you buy it, but now there’s a fresh new dollar figure provided by the real estate company Zillow…
Nationally, U.S. homeowners can expect to spend $9,080 a year on average in hidden costs related to owning and maintaining a home.
Zillow divides “hidden costs” into two categories: “unavoidable” ones such as homeowners insurance and property taxes, and “maintenance expenses” that aren’t just fixing squeaky doors. It includes five-figure expenses like a new HVAC unit.
Interestingly, those hidden expenses fluctuate wildly depending where you live. Check out this map…
For argument’s sake, let’s suppose your husband factored in these surprising costs. My other concern is tying up all your disposable income in one place. Debt.com has previously reported that Americans are stressing out about their retirement savings, and other countries are doing even worse. The scariest headline I saw in some time was this: The World Is Running out of Retirement Money.
I haven’t even mentioned what happens if you don’t have an emergency fund. I’ve been a financial counselor for more than two decades, and I’ve seen bad things happen to good people with “good” debt. How will you afford to recover from an accident or an illness if every penny is paying your “good” mortgage?
I agree with you, Anita. Dream big, but buy small. Live frugally, and your next home may be the home of your dreams.
Question:My husband and I got married two years ago next month, and we’d like to buy a house. We’re not ready to start a family just yet, but it seems like home prices are just going to go higher. My husband thinks now is the time to strike. Plus, we’ve seen ads for some really low mortgage rates.
The problem is this: We have, between us, about $14,000 on eight credit, store, and gas cards. I’m wondering if we should use some of the money we’re saving for a house and pay off some of those cards. But then, home prices might go even higher, and we’ll have missed our chance.
Is there a math formula for figuring this out?
— Hope in Pennsylvania
Howard Dvorkin CPA answers…
Here’s the only math formula that matters: Do you earn enough money to pay both your debts, closing costs, and a monthly mortgage?
The reason this country faced a housing bubble and a terrible recession a decade ago was simple: For many Americans, the answer was “no.”
Four years ago, I wrote a book calledPower Up. This part speaks directly to your situation, Hope…
In the past, millions of Americans got themselves into some nasty predicaments because they bought homes they couldn’t afford. They took out exotic mortgages and decided not to analyze the downside to these mortgages, which were costly and have a negative impact on cash flow.They were so enamored of what they thought they could buy (note, I said buy, not afford) that they decided to ignore the fatal risks.
The real question here is, “Do you need a house right now?” Interestingly, Hope, I was just recently reading about a study by the Pennsylvania Association of Realtors that shows, “One in 3 new homeowners are categorized as want to buy customers, while more than 1 in 4 are need to buy customers.”
What’s the difference? Well, think of it like buying a car. When you need a car right now because yours finally died, you’ll overpay. You certainly don’t want to do that with a house.
Bottom, line: Pay off your debts first.
You mentioned math, Hope, so let’s do some. You have around $14,000 in credit card debt. The average credit card interest rate is about 15 percent a month. So you’re being charged nearly $600 a month just in interest.
Imagine that $600 going to toward a monthly mortgage payment!
If you and your husband can pay off your credit cards, you can then take the money that formerly went to debt and put into a savings account for your house.
As for worrying about “missing the market,” let me reassure you: Buying a house before you’re ready, even if it’s for a great price, is likely to end in disaster. You might save $10,000 if you rush into things, but you’ll spend far more than that trying to catch up to a purchase you weren’t prepared to make.
Let me quote myself one more time. In my book, I concluded, “Just use common sense when purchasing anything from a home to a lawnmower.”
I doubt you’d buy a lawnmower you didn’t need just because it was on sale.
Question:My mortgage is almost $1,800 a month, my car lease is just under $1,000 a month, and just to keep my credit card balances from growing means another $700 a month. I got laid off last month but luckily found a new job right away.
What stinks is, the new job doesn’t pay as much, and I have zero savings. It’ll take me a couple months for my income to catch up to my expenses, so which bills do I NOT pay for a few months? If I can blow off the mortgage or car loan, I can really get back on my feet.
— Alfred in California
Howard Dvorkin CPA answers…
Questions like these upset and depress me. I’ll explain why as soon as I give you a definitive answer:
Pay your mortgage. Even though it takes awhile, depending on your state, to foreclose, you don’t want to mess with your largest investment — not to mention the only roof over your head.
Pay your car lease. First, call the finance company and politely explain your situation. Sometimes, you can get an extension, but that usually happens only if you’ve already made a half-dozen payments already. Cars can be repossessed very quickly, and I’ve heard horror stories from clients who have had their vehicles towed away after missing a single payment.
Run up your credit cards even more by making the minimum payments. This pains me to say, because I’ve written books urging Americans to pay off — then cut up — their credit cards. However, after a follow-up conversation with you, Alfred, I learned you had none of the usual options.
You have no retirement account to borrow against, you have no equity in your home because you took that out and spent it on a European vacation, and you never even had a savings account.
Your family won’t lend you any money because you already owe them for the down payment on the house, and you didn’t even mention the $20,000 in student loans you’ve deferred but will come back in a big way very soon.
Most people reading this will empathize with being in debt but may doubt some of your choices. Their sympathy might disappear when they learn your previous job paid you more than six figures, yet you not only managed to spend it all, you actually had to borrow to get your house — which is much bigger than you need.
As for the car, you leased an expensive BMW because, and I’m quoting you here, “The women are impressed by it.”
Here’s the bottom line, Alfred: You need help more than you need cash.
In more than two decades counseling people about their debt, I’ve seen your case many times: Otherwise smart individuals who have a blind spot when it comes to managing their money. If you were to win the lottery tomorrow, Alfred, you’d be broke in a few years — because the problem is all in your head, not in your wallet.
So I urge you — and anyone who recognizes themselves in this description — to call a Debt.com counselor today at 1-800-810-0989 for a free consultation. The best way out of this mess is a holistic approach, encompassing not only your credit card debt but also your student loans. At the very least, please read the Debt.com Money Management section to get some idea of where you stand.
Question:I’m freaking out. I’m 30 years old and saved money even during the recession because I want to buy a small town home and stop paying a landlord. Sadly, my parents are both gone and I got no one to ask for advice.
Of course, the Internet is full of suggestions, but I don’t even know where to start. What are the basics, Howard? How can I figure out if I can afford a place and at what price? And what about hidden costs? I know about homeowners insurance, but what else?
Sorry, I’m losing it over here.
— Wesley in Pennsylvania
Howard Dvorkin CPA answers…
You know more than you think you do, Wesley. Your instincts are correct: Don’t just look at the mortgage payments.
Too many first-time homeowners stretch and buy bigger homes than they need right now because they think they can afford it, it’ll be a good investment, and their family will eventually grow into it. Meanwhile, they haven’t calculated what it costs to heat and cool the place, how much maintenance will be each year (especially if it’s not a new home), and other fees like a homeowner association, insurance, even lawn care.
You, on the other hand, are aiming at a modest townhouse, and you’re deeply concerned (“freaking out”) about cost. That’s actually a good thing, because it also means you have very little debt. In your letter, which I edited for length, you indicated you have $12,000 in student loans, a $1,000 balance on your credit cards, and a car payment of $324 a month.
How does that affect your ability to buy a townhouse at a good price with a reasonable mortgage? The best way to find out for sure isn’t online. I suggest you call Debt.com at 1-800-810-0989 for a free debt analysis from one of our trained counselors. Then you’ll know if those debts are hurting you, how to get rid of them, and how much you can comfortably spend. Good luck, Wesley.
Question:My mother is 78 years old. My father just died, so she will have to live off of $1,100 a month. She owns her house that’s worth around $130,000, but she was turned down for a home equity loan, maybe because her credit card debt is around $37,000. If she sells the house to me — her son — for a dollar, can they come after the house if she stops paying them?
— Gus in Pennsylvania
Howard Dvorkin CPA answers…
This short question is deceptively complex. There’s actually a lot going on here — and that probably means you need to get an attorney involved.
To sum it up before we break it down: We need to address the massive credit card debt, the origins of the monthly income, and the consequences of selling a house for a dollar.
Credit card debt
Given your mother’s income and the balances she’s carrying on her credit cards, I know of no trick in the book that will secure her a home equity loan. While Debt.com offers a do-it-yourself guide to getting out of debt, $37,000 is insurmountable for most folks to go it alone.
When numbers get this high, credit counseling is the best solution. Credit counseling agencies are all nonprofit, and the ones that partner with Debt.com are staffed by certified counselors who have had extensive training and been tested. On the phone, they’ll review not only your mother’s credit card debt, but her overall financial picture. That includes…
Monthly income
You don’t say if your mother’s income is from Social Security, some other source, or a mix of sources. Here’s why that’s important: Your mother may be judgment proof.
Simply put, this means your creditors can sue and win a judgment against you, but there’s nothing to really collect. Garnish your wages? You don’t have any. Place a levy on your bank account? It’s empty.
It turns out Social Security and other retirement earnings are protected from collections. It also turns out debt collectors can get permission to lien your house. However, your mother will sell hers to you, Gus. Here’s the problem…
Selling the house
The IRS doesn’t like it when family members sell houses to each other for a dollar. The agency doesn’t consider it a sale as much as a gift. So your mother will get hit with a gift tax — and when you sell the house, you’ll be hit with thousands of dollars in capital gains taxes. That’s because your mother did’t sell the house in an arm’s length transaction to a disinterested third party.
As you can tell from these complicated terms, consulting an attorney is important. Thankfully, Debt.com’s certified credit counselors can help you find one who will represent your best interests. Simply call 1-800-810-0989.
Question:Hi Howard! I’m in a dilemma. I’m 55 years old, have $107,000 saved between two retirement accounts and make net $14,000 a month. I work the oil and gas industry and am very blessed to have a great job!
I have no deductions other than my daughter’s college education expenses for 2015. I am putting $6,500 into a Roth IRA for 2015, but that’s it for now. My employer does not have a 401K plan. I have a SUV debt of $17,000, a motorcycle payment of $525 a month, no credit card debt, and a rental payment for a townhouse of $2,750 a month. My daughter’s education will cost me approximately $25,000 a year.
I’m afraid I don’t have enough deductions and will get hit very hard on taxes this year (25-28 percent tax bracket?). Should I be looking at some real estate (property and mortgage deductions) to offset the amount of taxes I’m going to have to pay?
– Dawn in New Mexico
Howard Dvorkin CPA answers…
The short answer is easy, both for you in this particular case and for any others reading this: Never buy real estate just to save on your taxes.
As a real estate investor myself, I can tell you: It’s a serious commitment of not only money but also mind power. While you need to monitor any investment you make, real estate can be much more time-consuming for reasons I won’t delve into here.
That said, I asked you some followup questions, and after reviewing your answers, it’s crystal clear; If you want to buy a house to live in and enjoy, buy it now.
You don’t need a CPA like myself to crunch the numbers, because you’re doing so many things right. For starters — and this is the big one — you have no credit card debt. I applaud you for the accomplishment. For others who are reading this, Dawn is one example of what paying off credit card debt can mean. It can mean a new house.
I didn’t work up your complete financial picture, but I urge you to check you debt-to-income ratio with our free DTI ratio calculator. Based on what you’ve told me, I’m guessing yours is well below 41 percent. Anything above that, and mortgage companies will hesitate to work with you — and if they do, you’ll pay for the privilege in higher rates.
You’ve made some mistakes along the way — who hasn’t? — but you seem to have learned from them. If you don’t mind, I’m going to touch on those, because others can learn from what you did wrong and what you’re now doing right…
1. Bad car, good payments
You told me…
“I bought the SUV when my credit wasn’t too good — at a 12 percent rate for six years. I know, stupid, but I’ve been paying an additional $50 a month on it and can step up the payments anytime. On the motorcycles, I pay $527 a month but have started paying twice a month and should pay off the balance of $17,000 in a little over a year.”
You’ve learned the value of a good credit score the hard way — it’s not just a number, it saves you money on interest rates. Paying higher interest rates might not mean higher monthly payments, but those rates can mean many more months of payments. It’s a trap many fall into.
What you’ve done right: You’re digging your way out by saving money and paying off those loans quicker. Keep up those twice-monthly payments, then use that money toward your mortgage.
2. Seeking the right house at the right price
You told me…
“I would love to own a home on what they call The Western Slope in Colorado. I know taxes are high in Colorado and have even considered a home back in Wyoming, where I’m originally from. A state with no state income tax would be ideal. I don’t need anything more than 1,750 square feet (3 bed, 2 bath with a view!) Cost anywhere between $150,000 and $250,000.”
Since you’re renting a townhouse for $2,750 a month, it’s very likely you can negotiate a monthly mortgage payment for less than that, even with taxes, insurance, and any homeowner fees included.
What you’ve done right: You’re being logical about your first home purchase instead of emotional. You’re reasonable about how many square feet you need rather than want. You’re even willing to relocate to save money.
What to do now
As you start the house-hunting process, be sure to use our Mortgage Repayment Calculator before signing on the dotted line. However, you’re in a good place, Dawn. Soon, you should be in your own place!
The negative credit impact of bankruptcy stays with you for years after the date of final discharge – up to ten years, to be specific. But that doesn’t mean that you have to put your life on hold for the next decade.
In fact, with the right strategy you can even qualify for one of the toughest types of financing to get approved for… a mortgage. So you can get a new home that meets your needs and works for your budget, too.
The information below can help you craft the right strategy to get your credit and outlook ready for mortgage approval. If you have questions or need to connect with the credit services described, we can help. Call us or complete the form to the right to tell us what kind of assistance you need.
Step 1: Set a date
The first step to get ready for a mortgage after bankruptcy is to determine exactly how soon you want to buy. Ideally, you need about one to two years to build credit and prepare your finances for loan approval. Given new lending standards required following the real estate market collapse in 2009, you may find it downright impossible to qualify if you don’t give yourself that time and do the work described below.
That being said, you may have a need to move sooner. If the bankruptcy filing put an automatic stay on the foreclosure of your home, you may need to sell the property quickly and downsize. In this case, instead of immediately pursuing a new mortgage, the best option may be to find a rental property for a few years so you can really get ready to buy.
Step 2: Review & repair your credit
Following severe financial distress that leads to bankruptcy, your credit profile may contain a large number of negative items – both correct and incorrect. Completing a bankruptcy should discharge the remaining balances on your debts, balances should be zeroed out and collection accounts should be closed.
With that in mind, you need to review your credit report to make sure everything has been updated correctly following the completion of your filing. If you find items that you think are outdated or need to be removed, then you should consider going through the credit repair process.
Step 3: Take steps to build credit
You can offset negative information in your credit report that can drag down your credit score by taking positive actions for your credit. This means that following bankruptcy, you can take steps to rebuild your credit long before the bankruptcy penalty expires and the item gets removed from your profile.
The first step to rebuilding credit is usually to get a secured credit card. This allows you to get credit with a deposit, so your credit score isn’t really a factor to qualify. Then you make charges strategically and manage the debt closely. Every positive payment you make helps you build credit. You should also make an effort to maintain the balance at no more than 20% of the total credit line you have available.
Pop Quiz
If you have a $500 credit limit, what’s the maximum balance you should have to maintain the ideal 20% credit utilization ratio?
Credit utilization is the second biggest factor in determining your credit score. Maintaining 20% of your total available credit line maximizes your score.
In addition, make sure to keep up with payments on any other debts that you have. This includes student loan debt that doesn’t get discharged during bankruptcy, as well as the payment for any small personal loans you may wish to take out to help you rebuild your credit. Then you can move on to the steps that follow while you work to build your credit
Step 4: Set a budget & start saving
Financial stability will be key to getting from bankruptcy completion to mortgage approval, so you need to build a formalized budget if you want to be successful. And luckily, budgeting isn’t as much of a hassle as you might think.
Find a budgeting platform that makes it as easy as possible to build a budget. Once you have your accounts entered and expenses categorized – which should take less than an hour even if you get really detailed – you can see how much free cash flow you have available to save. Remember that you need as much money as possible for a down payment, so the more you can save each month for the next 12-24 months, the better.
Step 5: Maximize your down payment
Speaking of down payment, the more money you have for a down payment, the easier it usually is to qualify for the mortgage you want. Ideally, you want at least 20% of the purchase price of the home. This will allow you to qualify for a traditional mortgage, instead of depending on riskier options like ARMs.
Of course, bear in mind that you may be able to qualify for an FHA-loan for as little as 3% down. But your goal should be to hit the 20% mark in order to make it easier to qualify.
Step 6: The right home, the right price
Allow Steps 1-5 to work. You should be building credit by making strategic purchases and managing your debt closely. You should also be moving all free cash flow into savings to maximize your down payment. The more aggressive you are at doing these two things, the faster you can usually get to where you need to be.
After about 12 months of hard work, you can start the process of buying a home. But that doesn’t mean you get an agent as start making offers. You need to take a lot of time to define what you need in a home, where you want to live, and how much home your can afford. And make sure the amenities and home features you think you need are really things you can’t do without.
Use a mortgage calculator to figure out the size of mortgage you can get without struggling to make the monthly payments. This will help you set the right target price range.
Step 7: Check your credit score
The last step you should take before you start actively looking and making offers. Check your credit score. You can purchase one of your credit scores through a credit bureau or you can enroll in a credit monitoring service to get your scores from one or three bureaus.
Fact: In most cases your credit score needs to be around 650 at minimum to qualify for mortgage approval.
Remember, you usually won’t need this service forever (unless you want to keep it for your own peace of mind) so typically only need this for a few months while you make sure your score is as high as possible before you go to apply for a loan. Using this strategy, you can make sure your credit score is maximized, then go to a lender to get the mortgage pre-approval you need to make the search for your new home easier.
