Aiming for Zero: How to Manage Debt in Preparation for a Home Purchase

Aiming for Zero: How to Manage Debt in Preparation for a Home Purchase

When it comes to buying a property, debt can often hold you back. Depending on how much and for how long you have payments outstanding, you may struggle to navigate credit inquiries or prove your reliability to lenders. So, if you want to maximize your chances of a smooth and efficient purchase, it’s important to reduce your debt or clear it out entirely. Here’s how to get started.

Budgeting

The first step towards reaching net zero is to lay out your finances and identify what needs to change. Aim to collate your bank statements, mortgage/auto loan statements, credit card bills, and any recurring payments (utility bills, contracts, etc). If you haven’t already, it’s in your interest to convert this data into a digital format - this will make finances easier to track over time. Quick and Dirty Tips notes that there are plenty of software designed specifically to help you do this. Once you have everything organized in one space, you can begin to assess how to reduce expenses.

Often, the trick for lowering your monthly outgoings is to renegotiate or spend time researching alternatives. Are all of your current subscriptions 100% necessary or are there other providers offering better rates? Taking the time to labor over details now will result in a more manageable spending outlook in the long term. As you lay out your new financial plan, it’s a good idea to observe the 50-30-20 rule. This equates to 50% of the budget for need, 30% for wants, and 20% for savings.

Building Credit

Building a strong credit score while in major debt isn’t easy, but it is possible. It’s also necessary if you’re hoping to become a homeowner within the next 12 months. Having a good credit score is one of the main factors that come into play when lenders assess your ability to pay your monthly mortgage payments, and how much of a down payment will be required.

KTL Performance Mortgage explains that one of the best ways to improve your rating is with an actual credit card - although most Americans have over 3 credit cards, it’s more important how you’re using them, rather than how many. Credit utilization ratio refers to the amount you owe on all your credit cards, divided by the sum of all your credit limits. After your payment history, this is the second most important factor in deciding your rating (after ‘payment history’). You want to try and keep your ratio low, so as to have a positive impact on your overall score.

While you’re trying to maximize your income and pay off debt quickly, don’t forget the basics in the process. Paying off bills (which comes under the umbrella of ‘payment history’) remains crucial, as late payments have the potential to trim off 100 points or more - a massive setback as you strive for net-zero.

Business Benefits

If you’re a business owner, your established business credit can help protect your personal credit. It’s important, first of all, to draw a clear dividing line between your business and your personal accounts. If you haven’t already, consider forming a limited liability company (LLC) - this will reduce your personal liability, as well as providing tax advantages. Different states have unique regulations, so be sure to check what’s required to start an LLC in Washington.

Many who fund their business ventures with personal funds experience a knock-on effect in their own finances as a result. This is why it’s important to move your business into self-sustainability - if you have a strong business credit score, you may be eligible for loans. A cash injection can take the strain off your personal account and help widen the berth, allowing you more freedom in both areas of your life.

Right now, it’s a competitive property market and, for the right to a home of your own, you’ll have to work off or show that you can substantially reduce your debt. The good news is, once you have the income and a clear-cut plan, there’s no reason you can’t work this out in a short timeframe.

Once you’ve managed your debt and are ready to purchase a new home, Menees Realty Group can help with all your real estate needs. Call (360) 731-8393 to schedule an appointment!

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This blog was created by

Rob Woods