If you feel you’ve put off your dreams of owning a home long enough or want to explore purchasing one as an investment home to rent out or “flip” for a profit later, it’s time to take concrete steps to make that happen. Timing and luck can only go so far — you’ll find that the stars more easily align in your favor if you give them some assistance!
To start, take a hard look at your current and future finances, including the debt load you are carrying, and assess how much home you can afford so you can get a down payment figure. It’s important that you research home prices in your area for the average selling price, as well as how quickly they are selling. This will also give you a glimpse into how successful you might be in your renting efforts, if that’s a goal of yours.
And it doesn’t end there. Whether you simply want to own your own home within the next six months to a year or go down the real estate investment path, you’ll find it a much more enjoyable experience with your debt under control. Take a look at this vital advice from Arizona Real Estate News & Views.
Credit card challenges
Credit card debt can easily become the monster that eats away at your chances of homeownership. They are easy to use — and just as easy to abuse. The high interest rates credit card companies charge can also keep that debt lingering around for far too long, leaving you paying far more for the purchases you bought with them!
Because of this, credit cards are often good first targets to tackle as part of a good debt management program. To look good in the eyes of your potential mortgage lender, try to get the balance of your cards down to no more than 30% of your credit limit. This is called your credit utilization rate (CUR) — essentially how much credit you are using versus how much credit you have available to you.
For example, let’s say you have 3 credit cards with these credit limits:
- 1 card with a limit of $6,000
- 1 card with a limit of $2,500
- 1 card with a limit of $15,000
For a 30% CUR on each card, the card with the $6,000 limit should have a balance of no more than $2,000. The card with a $2,500 limit should have a balance of around $800, and you should get the balance down to around $5,000 on the card with the $15,000 limit. Once you achieve the 30% CUR target, you can work on paying off a few cards completely.
You can consider a few approaches in accomplishing this: The first is to focus your efforts on the card with the highest interest rate since you’ll save money by paying that off more quickly. The alternative strategy is to focus on paying off the one with the lowest balance as that will give you a quick sense of accomplishment while freeing up even more available credit (a plus in your lender’s eyes). And remember: 30% CUR is just your initial goal — the lower, the better.
It’s okay to keep using your credit cards once they are paid off — just make the purchases small so you can pay them off in full or close to it. This demonstrates responsible usage while still building your credit before you apply for that home mortgage. You can apply this payoff strategy to other types of debt as well, including personal loans and student loans.
Down payment determination
Once you’ve done your research on home prices in your area, you can estimate how much down payment you will need. One important factor in this is the type of mortgage you plan on getting. PennyMac Loans explains that FHA, VA, and USDA loans all offer a low down payment option, which may be a favorable choice for those who don’t have a huge nest egg set aside.
But whichever loan you decide on, in general, the more you can put down, the better your mortgage terms will be. One obvious strategy is to take the money that you were applying to your debt and tuck that away in a savings mechanism — look for ones that will earn you a higher interest rate than a typical savings account, like a money market account. You can also look at taking on a side hustle or find ways to reduce your current household expenses.
The mortgage mission is a go!
Getting debt under control takes discipline, but it’s not only doable — it’s good practice before you take on the financial responsibility of a mortgage. You will also feel much better equipped to take control of your financial future as a real estate investor.
For up-to-date info on the Grand Canyon State’s housing market, check out the other great content on the Arizona Real Estate News & Views blog.