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How Does Debt Affect Your Ability to Buy a Home?

Naomi Cook | March 20, 2023

Summary: Do you feel that your debt is getting in the way of you buying your dream home? Your credit score, debt-to-income ratio, debt payments, and FICO score are all ways that debt can have an impact on your ability to buy a home. If you’re dealing with debt and have dreams of purchasing a home, SoloSettle can help you settle your debts for good and start over.

If you’re burdened by student debt or faced with difficulties in saving enough money to buy a house, you may be in the same situation as 49% of homebuyers aged 23 to 31. This statistic isn’t too far from the 44% of homebuyers aged 32 to 41 hounded by the same challenge.

This article explains how debt can affect you as a homebuyer and lists tips on handling debt in a way that’ll show lenders you can afford a new house.

So before you take out any loans, know that doing so can affect your credit rating and capacity to request future loans. Managing your debts and credit score can positively impact your future financial needs and help you avoid severe financial distress.

If you’ve been sued for a debt, you can settle it and avoid going to court. Keep reading to learn more.

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Existing loans can affect homebuyers—here’s how

Your credit score represents your likelihood and capacity to pay back loans. You can check out these scores by looking at the information in your credit report. Basically, the better your score, the more likely lenders will see you as a low-risk borrower.

How you handle credit card debt can affect your chances of getting mortgage approval. Here are some factors critical to qualifying for a home loan:

Credit history

Your credit history, which includes your payment habits and the overall health of your accounts over time, affects your qualification for different types of credit. Your credit report lists all the times you borrowed money and how well you repaid them. While the information may vary from one credit reporting agency to another, they all provide similar data.

Debt-to-income ratio (DTI)

If you have a low DTI ratio, your debt and income levels are likely to be manageable.

For example, a 15% DTI ratio means spending around 15% of your monthly income paying debts.

But if you have a high DTI ratio, you may need to reassess your finances. You’re probably taking on more debt than you can reasonably pay. Lenders generally prefer ratios that don’t exceed 36%.

Debt payment

You can reduce your DTI ratio by increasing your income sources or paying off your loans and credit card accounts. You can also use bonus pay or cash windfall to reduce debt.

And if your lender doesn’t want to include your second job income as part of your monthly earnings, you can still use the extra money to pay more debt.

Lenders also consider student loan debt when calculating your DTI. So whether your debt will count against you depends on what type of loan you took and whether or not your payments are up-to-date.

Find out how debt settlement can also affect your credit score.

Down payment

A down payment is what you pay upfront when closing your home loan. Lenders often consider the down payment a reflection of your financial commitment to purchase a property.

FICO credit score

Lenders use the FICO (Fair Isaac Corporation) score to determine your creditworthiness. They rely on these scores and credit reports to assess your credit risks and determine whether to extend your loans.

You can calculate your FICO score using the following components:

  • Payment history: 35%
  • Accounts owed: 30%
  • Length of credit history: 15%
  • New credit: 10%
  • Credit mix: 10%

Debt management tips for homebuyers

The following tips may help you in your home search:

Work on improving your credit score

A good credit score means that you’re consistently paying your bills on time. Wait until you have a better credit rating before applying for a loan.

So if your credit score isn’t that good, try holding off on applying for a mortgage until your score improves. Lenders will be more likely to approve the loan if you manage to improve your score.

Commitment shows in how much you pay

When you pay more than the minimum owed on your credit card each month, you can shorten the time it takes to repay your debt. Your mortgage lender can check your credit report and see how much you pay toward other monthly loans.

Paying more than you owe shows that you’re committed to managing your debt.

Find a cosigner for your home loan

If you can find someone—a friend or relative, perhaps—with a good credit score and who is willing to cosign your mortgage application, your chances of getting approved can increase.

Do not take on more debt than you already have

When moving into your new home, don’t get carried away and start buying big-ticket furniture or a brand-new car. Remember that taking on more debt can cause your DTI ratio to rise and delay closing.

Check out your loan options

Choosing the correct type of loan can help you buy a home while you make other smart financial decisions. Knowing which type of loan is most appropriate can help you negotiate with lenders and get the best deal.

Work with a budget

Refrain from allowing your desire for a perfect house to cause you to spend more than you can afford. Make sure to set aside enough money for repairs and renovations.

Debt can affect your ability to get approved for a house loan, especially if it is near your credit limit. Fluctuating debt levels may also make prospective lenders suspicious about approving your loan application.

And if you find yourself in a debt collection lawsuit, consider getting legal help from SoloSuit. This free web app provides a convenient way to create an Answer that you need as a response in court.

A reasonable amount of debt is still manageable, even if you plan to buy a home. You only need to be more careful with your spending habits. As long as you’re financially responsible, there’s no reason you can’t own a home, even when you have debts.

What is SoloSuit?

SoloSuit makes it easy to fight debt collectors.

You can use SoloSuit to respond to a debt lawsuit, to send letters to collectors, and even to settle a debt.

SoloSuit's Answer service is a step-by-step web-app that asks you all the necessary questions to complete your Answer. Upon completion, we'll have an attorney review your document and we'll file it for you.

>>Read the FastCompany article: Debt Lawsuits Are Complicated: This Website Makes Them Simpler To Navigate

>>Read the NPR story on SoloSuit. (We can help you in all 50 states.)

Negotiate debt settlement on your own

If you’re struggling with debt and have big goals to buy a house, don’t lose hope. There are ways to settle your debt, once and for all, even if you’ve been sued for it.

The debt settlement process is simple — the consumer makes an offer, the creditor accepts or counteroffers, the consumer pays once both parties agree on an amount, and the debt is settled. But there are a few other hoops to jump through to avoid any blunders.

To settle a debt, follow these three steps:

  1. Respond to pending debt lawsuits.
  2. Determine how much you can afford, then send an offer.
  3. Get the debt settlement terms in writing.

SoloSettle makes it easy to negotiate a debt settlement on your own and move on with life.

As a tech-based approach to debt settlement, SoloSettle’s software sends and receives settlement offers so you don’t have to deal with debt collectors directly. Once you reach an agreement, SoloSettle helps you get it in writing and manages the documentation for you. Finally, SoloSettle helps you protect your financial information and sends your settlement payment to the collectors for you.

Check out this video to learn more about the three steps to settle your debts, as listed above:

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