If you're looking to buy a home, there's a good chance you can't afford to purchase it outright. Rather, you'll need to do what most prospective buyers do -- apply for a mortgage and pay off that property over time.
But how can you make sure you get approved for a mortgage? There are a number of factors that lenders evaluate when determining whether you're a viable candidate for a home loan, but if you really want to improve your odds, it pays to focus on one key thing: paying off debt.
How paying off debt could land you a mortgage
What does outstanding debt have to do with getting a mortgage? A lot, actually. There are several factors that mortgage lenders look at when assessing you as a loan candidate. These include your:
Now, paying off your existing debt won't change the amount of money your employer pays you, nor will it put more money in your savings account for a down payment since you're applying that money toward your outstanding obligations. But it will help improve both your credit score and your debt-to-income ratio.
Boosting your credit score
Your credit score is based on a number of factors, and credit utilization is one of them. Credit utilization speaks to the amount of revolving credit you're using at once, and the lower that rate, the better. Therefore, if you have a gigantic credit card balance you've been carrying for months and you manage to whittle it down, you'll improve your utilization rate and your credit score will quickly increase.
Lowering your debt-to-income ratio
Meanwhile, your debt-to-income ratio measures the monthly debt payments you're liable for compared to your earnings. The higher that ratio is, the more overextended you are, making you a less desirable loan candidate. But if you manage to pay off a chunk of your existing debt, your debt-to-income ratio will drop, thereby increasing your chances of getting the mortgage you need and helping you throw away less money on interest month after month.
Paying off debt quickly
Of course, most people can't just snap their fingers and magically make their debt disappear. But one thing you can do is put yourself on a tight monthly budget and cut back on nonessential spending -- things like restaurant meals, leisure activities, and entertainment -- until your debt level is lower.
Another option? Get yourself a second job temporarily. The gig economy makes it easy to find work on the side, and you can use your earnings from that job to chip away at your debt.
If you're carrying a lot of debt, you should know that it could hurt your chances of getting a mortgage. As such, it pays to wait until your debt load is lower before applying for a home loan. Not only will that increase your likelihood of getting approved, but it will also make your mortgage payments much easier to manage once you're required to start making them.
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