Buying a house can feel like a near-impossible feat in this economic climate, especially now that the student debt crisis continues to saddle 12.9% of Americans and just around 30% of 2020’s college attendees taking on debt. And not only is student debt to blame. There is also the rising cost of living with wages not following suit.
As a result, millions of Americans find it hard to manage their finances, let alone buy a house. Nevertheless, becoming a homeowner is not as impossible as you think. For some people, avoiding these financial mistakes can make it easier to buy a home—even at a young age:
Not minimizing payments
When you apply for home loans, one of the first things lenders look at is your debt-to-income (DTI) ratio. Basically, this tells them how much debt you owe relative to how much you earn, which paints a picture of how reliable you are as a borrower. In general, the less debt you have, the more likely you are to secure a mortgage.
If you have student debt, minimizing your payments can decrease your DTI and generally make it easier to survive on your current income. There are many ways you can reduce your student loan payment, such as:
- Signing up for an extended repayment plan
- Asking your employer for repayment help
- Applying for an income-sensitive repayment plan
- Consolidating your federal loans
- Refinancing your student loans
- Applying for repayment assistance
Taking on more debt than necessary
Even if you don’t have student loans, there are plenty of other ways you can fall into debt, such as taking out a car loan, swiping your credit cards, taking out personal loans, and more. Whatever type of debt it may be, taking on more debt than necessary will probably make it harder for you to secure a mortgage.
For one, taking on more debt increases your DTI ratio, making you look like a risky borrower to lenders. Furthermore, it is often more difficult to save for a down payment (which is a big chunk of your expenses when you’re trying to buy a house) when you’re stuck paying off other debts.
Racking up credit card debt
Excessive credit card debt is a part of the previous mistake, but it deserves its separate section as it is one of the most common reasons Americans fall too deeply into debt.
Having credit card debt is not necessarily a bad thing. Charging things on your credit card and paying your bills on time can help increase your credit score, which will make it easier for you to apply for a mortgage. However, irresponsible credit card usage is another story. If you often find yourself having trouble paying off your credit cards or not being able to pay them, you are in for a serious budget reevaluation.
Not checking your credit score
Keeping track of your credit score can help you manage your finances more responsibly. Apart from that, mortgage lenders will pull up your credit score when you apply for a home loan, which means you must know what that score is before you apply. The main reason for this is that you need to know that you have a good chance of securing a mortgage before actually applying, and since lenders will perform a hard inquiry on your credit, you would want to apply if you aren’t entirely sure.
Hard inquiries or pulls can lower your credit score by a few points. The effect is often insignificant, but if there are too many hard pulls on your account over a short span of time, it could lead lenders to believe that you are a high-risk borrower as it suggests you are getting ready to take on a lot of debt or are short on cash.
Living beyond your means
If you want to buy a house any time soon, living beyond your means will not put you on the right path. For one, spending more than you earn will likely lead to debt, which increases your DTI, hurts your credit score, and—as a result—makes it difficult for you to apply for a mortgage, let alone save up for a significant down payment (around or more than 10% to 20%).
As you can see, buying a home can be easier if you avoid certain financial mistakes. And if you’re trying to buy a home before your 30s or 40s, it’s best to start acting now and get your finances in order as soon as possible.