Dealing with Debt

Dealing with Debt

You’ve done the research, you have a pretty good idea of what you can afford in terms of a monthly mortgage payment, and you even have some ideal neighborhoods in mind. There’s just one problem: your credit score isn’t quite what it could be due to some lingering debt. Since you’ve done your homework, you know that this is going to factor into the interest rate you can secure. But what are your options to quickly and efficiently pay down your debt?

Start with Your Credit Score

If you haven’t already, obtain copies of your credit scores from the major sources: Experian, Equifax, and TransUnion. Having reports from all three will ensure there are no surprises or errors that need to be corrected. Sites like freescoreonline.com and annualcreditreport.com offer free reports. You can also check with your credit card companies, as several of those offer some free reports as well. If you do find errors, you will need to start the process to have those corrected. From identity theft to incorrect reports of credit card balances, these mistakes can greatly hinder your ability to move forward with securing a mortgage. Check each reporting agency’s stated processes for making corrections.

Examine Your Finances

Like most hopeful homebuyers, you have likely set aside money for a down payment. While that’s important, so is not carrying excessive debt. Talk to a lending specialist or a financial planner to look at your specific numbers. If a portion of your down payment can completely wipe out credit card debt, it’s usually in your favor to do so—even though that means you have a smaller down payment. Without the debt weighing you down, you will look more attractive to lenders. This may not always be the case, though, so always discuss your options with an expert who can examine the specifics of your finances and your goals.

Make Some Quick Fixes

“Quick fixes” are rarely the answer, but if you are looking for some extra cash to pay down some debt, there are a few things you can do quickly to help:

• Examine your discretionary spending: Many people don’t realize how much money they are spending on going out to lunch instead of packing a lunch, for example. Even a few quick coffees can add up to a lot over the course of time. Perhaps you are spending a lot on cable, but you rarely watch TV. Maybe you don’t need quite so many clothes or shoes right now. Anything you can do to cut down on your monthly expenses will help pay down debt.
• Consider a part-time job: picking up some extra hours with a side gig can go a long way toward paying off debt, and it doesn’t have to be forever.
• Sell items you no longer need or want: We all tend to have “stuff” lying around that we could part with. If you have excess furniture or other items that are worth selling, you can put that money toward a credit card balance and make some progress that much faster.

What NOT to Do

When you are preparing to buy a home, it’s important to avoid any new credit checks. Most people realize they should not apply for new credit cards, but did you also know new cell phone plans and insurance policies also require a credit check?

Additionally, some may not realize it can damage your credit to close an account you are no longer using. This is because doing so decreases the amount of available credit, which alters your debt-to-credit ratio.  So while paying off that debt is great, you don’t want to cut off your access to that credit.

Ask the Hard Questions

Often, when people are on a quest toward homeownership, they can get tunnel vision and let emotions take over. However, if holding off on your purchase in favor of paying down debt will be a better option in the long run, you owe it to yourself to consider it. Buying a house is a big, long-term commitment. Timing is important, as the decisions you make now will impact your future. Take an honest assessment of where you are right now as opposed to where you feel you should be before buying a home. If the quick fixes are enough, great! If you would be better off waiting a bit longer, don’t be discouraged. The right house will be there when you are ready.