It is every American’s dream to have a nice roof over their head. Everyone wants to have one of those homes with a cozy above-ground swimming pool, lush gardens, a fantastic interior, and a scenic landscape. However, what people fail to realize is that purchasing a home outright, without help, is difficult. For this reason, most people seek mortgage loans to buy the homes of their dreams. A mortgage loan, like some other common loans, is enmeshed in a little controversy. Some people believe that to get this loan; you need to be debt-free. Is this true?
You can buy a home via mortgage even while in debt. However, for this to be possible, you must ensure that your debt-income ratio (DIR) isn’t more than 50%. Anything more than that would put most lenders off, being a clear indication that you may lack the capacity to repay what you owe.
Of the five basic necessities or needs that exist, shelter remains one of the most difficult to get. Indeed, everyone wants to live in a penthouse or one of those luxurious utopia-Esque houses that only the super-rich can afford. However, one of the hurdles people face in achieving such a dream is buying a house. Most individuals in the U.S. seek mortgage loans to finance the purchase of their dream home. If you intend on joining this group of people, it’s important you find out if buying a house with debt is possible. That is where this article will be useful!
Do You Need to Be Debt-Free to Get a Mortgage?
In the year 2020, the average sales price of a new home was $389,400, more than what an average American earns in a year ($48,516). In the following year, 2021, the price of houses rose to $408,800. Undoubtedly, in the next two to three years, the average sales price of a new home in the United States might reach half a million dollars or more if inflation rises and the coronavirus pandemic sticks around.
What does the little analysis provided above mean? In a nutshell, it means that an average American cannot afford to buy a home. In fact, if an average American decides to buy a home outrightly without financial aid whatsoever, he will have to save for about 10 years to achieve that. Mindboggling, right?!
Mortgage Loan: The Perfect Way to Own a Home
Today, many Americans apply for a loan to finance the purchase of a home. In California, only 34% can afford a home without any financial assistance, with San Francisco and San Jose the least affordable, at just 11% and 18 %, respectively.
While applying for a mortgage is one of the best ways to own a home, qualifying for this loan can be difficult. Before granting your loan request, lenders will want to ensure that you are responsible. Put differently; lenders will want to ensure that you can pay them back in due time. Therefore, they will scrutinize your financial background. Your credit history will be reviewed, income, and past debts, and so on.
Since the debt profile of potential mortgage loan applicants will be reviewed, what does it mean for you who has a cache of debts lined up? Should you pay off all credit card debt before getting this loan? How much debt is too much to buy a house? As we progress, you’ll find out.
What Is a Mortgage Loan?
A mortgage loan is a type of loan used to buy or refinance a home. This loan must be paid back over time, and the home bought usually acts as collateral on the money an individual is lent to buy the home.
The common types of this type of loan are:
After taking out this loan, the borrower is expected to make payments every month. Failure to make payments at the right time could lead to severe consequences. In addition, a delay in payment could also lead to some penalties or, worse, wage garnishment. Thus, before you apply for this loan, ensure you have a plan to repay it. Contact a financial adviser for advice.
Do You Need to Pay off Debt Before Buying a House?
Like other loans, qualifying for a mortgage isn’t easy. You can’t simply tender an application and expect it to be approved immediately without any background check. As money is involved, whoever is lending you the money will want to ensure that you can pay it back in time.
Since the debt profile of the borrower is key in determining the outcome of the loan application, many people often ask if one needs to settle all their debts to obtain this loan.
The answer is a big no. However, you need to understand that you will only get this loan if your debt-to-income ratio is below 50%. Some lenders usually hold out for 43%, specifically.
While it is possible to get this loan even while in debt, you must ensure that whatever you owe is not more than your income. The debt-to-income ratio compares what you owe each month to how much income you make.
If you are struggling to cut down your debt, don’t hesitate to seek help. You can contact a financial adviser to start with.
What You Need to Do to Get a Mortgage?
Most people who purchase homes do so with a mortgage. A mortgage is important if you cannot finance the full cost of a home from your own pocket. And because good things don’t come easily, don’t expect the journey of getting this loan to be smooth. First, you’ll need to qualify to get the loan. In addition, there are some things you need to do to ensure that your application is approved.
To get a mortgage, you need to ensure that your debt-to-income ratio is below 50%. In addition, you need a stable income and a decent credit score of at least 580 for FHA loans and 620 for conventional loans.
If you are one of those individuals who usually ask the question: “Should I pay off debt before buying a house?” My answer for you is a “no.” If the debt isn’t much, you don’t have to. However, if the debt isn’t much and you have the money to, don’t hesitate. Being debt-free should raise your chances of getting a loan.