How to Reduce Debt to Save on Your Home Loan
Some people don't recognize the impact that a high debt level can have on buying a home. When reviewing mortgage applications, lenders check your balances on credit cards and other loan payments. Owing excessive debt and having huge minimum payments each month can reduce your buying power because lenders prefer monthly debt payments to be less than 36 percent of your income. If approved, owing a higher amount of debt can also result in a higher interest rate on the loan, and higher rates increase your mortgage payment. Reducing debt is key to saving on your mortgage.
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Instructions
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Dip into your savings account to pay off debt. You may not like the idea of dipping into your personal funds, but if you want to pay off debt prior to buying a home, use money from a savings account to wipe your balances and save on mortgage interest.
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Set a goal for paying off debt. Set aside a certain amount of money for debt repayment each month. For example, if you have $400 after paying your bills each month, use this entire amount to reduce your debt. If you owe $3,000 in credit card debt, plan to pay off this debt in seven to eight months.
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Pull out cash instead of credit. Cut your credit cards and prioritize spending. Only buy items you absolutely need, and do not use a credit card.
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Increase take-home pay to help reduce debt and save on a home loan. Add a part-time job to your current workload and use income from your second job to pay off your debts and help you qualify for a better interest rate on your home loan.
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