For a home loan, it’s not medical debt. In fact, the Biden Administration is focusing on passing legislation through Congress that would eliminate it from being considered in your credit score for many types of financing and home loans. It also depends on what your credit report says (go to http://www.annualcreditreport.com) and a detailed report will show this if lenders can see it or not but it’s not typically a factor to worry about for approval. The biggest hindrance might be your student loans.
Make sure you’re getting as much loan forgiveness as you can and negotiating with your creditors to reduce fees and interest rates. This will help lower your payments and DTI which helps you get approved for more. If you don’t have student loans, your next biggest hurdle is probably your car.
Cars of all brands are absolutely ridiculous nowadays. We have clients paying almost a thousand dollars for Fords and Toyotas and I’m not talking their top of the line models with extra features. It’s insane right now so imagine for luxury cars how that can affect your approval! Add up your car payments and that amount will be how much less you’re approved for in underwriting because that’s all DTI and those numbers are subtracted from your total approval. We start with your front end DTI which is just how much the house will cost you per month to buy. Your back end DTI then starts reducing that amount because we have to factor in your cars, your credit cards, payment plans you’re on, etc. If it’s on http://www.annualcreditreport.com and you pay monthly on it, it’s probably going to reduce your approval amount. Car payments by far are the biggest killers of dreams and buying a house. Don’t buy brand new, and get them two years old at least, to save thousands on dealer mark ups and depreciation.
Next is credit cards 💳. People use these like free money and they’re NOT! Before you apply for a mortgage, make sure you are below 15% utilization and don’t be surprised you have to pay below 10% to get approved. Clients need to understand their current balances due are a major factor because it’s debt we have to account for. Pay it down tremendously before applying. It doesn’t matter if you always pay in full, pay before you apply!!
These are the top debts to pay down (or off if you can) so that your chance of a new house isn’t ruined by all these payments. You can have debt and buy a house but you can’t have a lot of debt. Lenders want to see fiscally responsible borrowers and big car payments and credit card balances are not a good candidate for rates around 7%. Sorry. 🤷♀️
We all know the complications of buying in a market with 7% average interest rates, inflation on gas and groceries, and home prices not coming down as much as expected. Millions of Americans feel they’ll never qualify for a home; or at least for the foreseeable future, because they can’t qualify at these rates and prices. If you feel this way too, maybe you need to open to other avenues to homeownership.
For example, you live in an expensive state like California, Florida, Texas, Idaho, Utah, etc, or an expensive city area elsewhere. Prices and rates near you might not be attainable because you don’t qualify based on income so you feel stuck and left out. For clients in this situation, I tell them there is hope but they need to be open-minded and creative with their solutions. I recommend a couple of things depending on what they can be approved for and their goals.
If you can afford something in your area but it’s not what you want, think about where you are and why you’re house hunting to begin with. Do you hate renting? Are you unhappy where you are? Are you being forced to move for any reason? Are you relocating and hoping to purchase? Do you want more for your kids or need more space? Understand your greatest pain points first and decide your top 3 non-negotiables. You will never get them all and probably not many more than that so make sacrifices to pick and choose your battles for the most important reasons you wanted to buy. Your reasons can be as simple and honest as wanting to build equity and wealth but it can also be you’re in a horrible situation or have the worst landlord and you want better for your future. The main reason for moving is the main factor in determining which creative strategy to consider and how to go about it.
For many though, I recommend looking within an hour of your desired neighborhood and just consider the next five years in a place you hadn’t wanted to even venture to. Does it mean living that far away? Not necessarily, but it’s an exploratory process to see what’s possible and what you might be willing to work with; or what might work FOR you. The difference is buying a residence to buy and hold for a couple of years or buying a property to use as some type of rental for 2-3 years while benefiting from the tax write-offs, the profits, and the equity building as time and maintenance keep it going. The other strategy is to be willing to sacrifice what you want for what can help you get what you want in 2-5 years. There are many cliches in life that people hate and it’s funny because they hate what’s true. For example:
Get comfortable being uncomfortable.
Most people aren’t comfortable getting a two-bedroom when they “need” a three. Most people won’t let their kids share a room these days, have a home office corner in their master, or work at the dining room table. Most people won’t accept not having a garage or a big yard. Most people won’t accept being uncomfortable for a short-term loss to experience the long-term gain; so what happens? Their current long-term becomes their long-haul or forever term because they weren’t willing to make sacrifices in life and weren’t willing to apply principles. Pride is not as prideful as people think. You rarely win with it and you rarely walk away with it.
To win in a market you otherwise wouldn’t be allowed to play in, you need to be willing to get in the game however you’re invited. The best way I find for most people who are willing to try, is to buy something not quite what they wanted but can make it work for them. I believe this is effective especially if they’re in an apartment currently, to build equity over time, get the tax benefits, and have a place to make their own better than they are as of now, allowed within their current rental. Maybe they buy a condo for a bit, a smaller home than they previously considered, or not get the amenities they greatly hoped for in exchange for the bigger picture of the near future. Can the home you settle for now help you settle into the home you wouldn’t otherwise be able to obtain in five years without the equity that would build in that time? Can you save or generate more income if you use it as a type of rental in the meantime?
For other hopeful buyers who are willing to do what it takes, I even suggest they buy out of area or out of state and start with a small rental property to build equity, make a profit every month, benefit from tax breaks, and save for themselves during this time so that in five years, their situation isn’t the same as it is where they stand today. It’s a fantastic plan for millions of people who don’t even know it, or want to believe it, but it also comes back to your goals and what I mentioned earlier–the pain points of why you wanted to buy and move in the first place. It matters when deciding if you can follow these ideas, however, your biggest hindrance why you CAN’T make it happen, might be the bigger reason why you should.
If those ideas are off the table regardless of the conversations we hold, then I can suggest my debt paydown and savings programs, free to anyone and everyone, and we go from there. The more you’re willing to think out of the box though, the more likely you are to get what you want in life.
If you’re interested in those debt and savings plans like my Road to 800 then email jenniferlarsonent@yahoo.com with “800” in the subject line.
Jennifer Larson 