We all know how debt problems can keep you from improving your finances. It can keep you from investing your money so you can grow your personal net worth. Well this particular fact can be proven by the recent statistics from Credit.
According to an article published on the site, 52% of Millennials admitted that their debts are keeping them from buying their first house. This data came from a survey conducted by TD Bank. Their debt obligations are keeping them from saving up for a down payment – or at least, 70% of them are saying this. It makes a lot of sense because there are several news reports that say how Millennials are so deep in student loan debt.
But despite this obvious difficulty, 5 out of 10 Millennials think that they can buy their own house in 5 years. In fact, majority of them believe they can buy a home in the next 2 years.
Although your debt problems will make it difficult to buy a new home, it is not impossible to do it. If all the Americans treat their debts as a hindrance to buy a home, then nobody will become a homeowner. The consumer debt problem in the country seems like something that will never be solved – or at least, eliminated. We will always have some form of debt to our name. The key is to learn how to manage your debt situation so it can never keep you from reaching financial goals like buying your own house.
How to buy a home despite your debt situation
Truth be told, majority of homeowners were probably in debt before they bought a house. Some of them probably had student loans like the MIllennials. Others have credit card debts. There are homebuyers who have existing personal loans before they applied for a mortgage.
This is a certainty because mortgage lenders look at the credit score of buyers before granting approval for the home loan. A credit score is a number that indicates how creditworthy a person is. This is computed based on their credit report – which is a record of their credit behavior. If you do not use credit before buying a home, it will be very difficult for you to get approval for a home loan. After all, this is a huge amount to borrow. Lenders will not easily trust a person with a low credit score because they are considered to be high risk borrowers. That being said, being in debt before buying a new home is the best way for you to do it.
Of course, there are certain rules that you need to follow because debt problems can be a tricky financial situation to be in. Too much debt amount will get you disapproved of your home loan too – thus keeping you from buying a house. So what should you do in order to keep your debt situation from ruining your chances of living in your dream house? Here are a few tips that you can use.
- Fix your credit score first. If you consider your credit situation as a problem, it means you have more debts than you can handle. It may be because you are having a hard time paying it off. In case this is true and you have already missed a couple of payments, that would mean your credit score is quite low. According to the statistics provided through CreditCards.com, Millennials have the lowest Vantage Score average at 628. If this is your score, you need to take your time before you buy a house. Get your credit score up first so you can be approved of a low interest rate home loan. That should help make your debt payments easier to commit to.
- Save as much as you can for a down payment. While you are fixing your credit score, you can also work on saving for your down payment. The higher you can pay upfront, the less amount you need to borrow. This strategy will save you a lot of money in the long run. So be patient and set aside an amount each month so you can pay at least 20% of the sale price as your down payment.
- Know how much you can afford. It is also very important that you be honest with how much you can afford to buy. If your finances can only afford to buy a 2 bedroom apartment, do not try to buy a bigger 3 bedroom home if it will cost more. You can forego having that extra room if it will give you bigger debt problems in the long run. Do not try to buy a home in posh neighborhoods if you cannot afford it. As long as the community is safe and secure, you can go for the cheaper properties.
- Choose the right home to buy. There are a lot of questions that you need to ask yourself before buying a house. One of them is about what you are looking for in a home. Do not force a 4 bedroom house if you only have one child and you do not have plans of having another. The more bedrooms there are, the higher you have to pay for it. Find a house that will also compliment the lifestyle that you wish to lead.
- Time when you will buy your home. It is very important to time when you intend to buy your house. Look at the housing market to get tips from there. Most experts would say that you should buy a house when the market is down so you can purchase the property at a lower amount. However, there is one real estate investor who claims that you can buy a home anytime you wish – as long as you have the plan and strategy in place to make it worth your while. Here is a video that explains how you can know when it is the best time to buy a property. In the video is Kris Krohn, a real estate investor with hundreds of real estate property investments in the country.
Two ways you can own a home without making debt a burden
The truth is, there are two ways that you can be a homeowner without adding to your debt problems.
Own a tiny house
Tiny homes started to gain momentum when the housing market crashed during the Great Recession. A lot of consumers lost their homes to foreclosure when they failed to pay off their mortgage because of job loss. Some of them could not profit from their homes because of the lower value at that time. But that did not erase the dream of Americans to live in their own homes. The answer to that was building tiny homes. These houses are literally small – a cross between a cottage and an RV. It is actually like a small cottage on wheels and the designs are quite attractive. If you are living solo or as a couple, you can live in these for a couple of years. There are even designs that small families can live in. These tiny homes are inexpensive (some as low as $22,000) and you can build one on your own. A news article even featured a high school student building his own tiny house to void the problem of mortgages. If you want your own place but you do not have at least a hundred thousand dollars (and you cannot qualify for a home loan), then tiny homes should be good enough for you. At least, for the meantime.
Buy a home that you can rent out.
Another option to keep homeownership from adding to your debt problems is to buy a home with a garage or basement that you can rent out. In REInvestorTV.com, real estate investor Kris Krohn mentions how he started building his empire of properties all over the country. He said that his mentor taught him to do a couple of things: have at least 2 years of work experience, build up his credit score and save up for his down payment. He waited for 14 months to save $3,000 – something that he will use as the down payment for the first house he will buy. During that waiting period, he established a good credit reputation and together with his work history, he was able to get a loan to finance a $110,000 house in the market. Now this house was then worth $150,000 – which gave him an immediate $40,000 equity. So how did this strategy keep him from debt problems? This first house had a basement that he could rent out. So he lived in the main house and found a tenant that paid him enough to cover his monthly amortizations. If you think about it, he owned the house that he lived in and he only spent $3,000 in cash.
These two strategies can help you own your house without putting additional strain in your debt problems. Think about your options and analyze how you can benefit from it.