Instead of saving for a large down payment on my first home purchase, I paid off debt so I could more easily get approved for a mortgage. Not only did paying off my crushing debt improve my debt-to-income ratio, but it made me feel more confident about my ability to pay my mortgage. I was able to buy a $107,000 townhome with just 3 percent down. It may sound like an inexpensive townhome, but I had to be able to show that I could afford not only the mortgage payment, but the private mortgage insurance, the home owner's insurance, the community development or CDD fee as well as maintenance fees. My mortgage payment was estimated to be about $1,300 a month for a 30-year fixed at almost 6 percent.
Chipping away at my real income
According to a recent article by Fox Business, lenders place a lot of emphasis on a prospective buyer's "real income." Lenders often look for a debt-to-income ratio of less than 45 percent. The ratio is based on the total financial obligations including credit-card debt and mortgage divided into monthly income. Since I was only making $3,000 a month, I could qualify for a mortgage payment or debt of $1,350 a month. Having debt would have chipped away at my real income, which had to be high enough to support a mortgage payment.
Buying a car with cash
I have always heard that it's better to take out a mortgage before getting a car loan. It's easier to get approved for a car loan, but a mortgage lender will count the car loan as a debt that reduces real income. I bought a car with cash in my 20s, which ended up being a smart move. After moving into my townhome, my income gradually increased.
Paying off student loan debt
I paid off my student loan and credit-card debt by the age of 30 so I wouldn't have anything holding me back from my first home purchase. I know that my student loan debt would have prevented me from getting a mortgage because I tried to buy a home in my 20s. It was worth it to take more than half of my paycheck every month in my 20s to get rid of my student loan and credit-card debt totaling more than $50,000.
It never hurts to save money, but in my case it was a higher priority to pay off debt in order to meet my goal of qualifying for a mortgage. It was difficult to afford my townhome when I first purchased it, especially as a single woman. With each pay raise, I could afford to save more for retirement and other savings goals. Fortunately, I made a profit when I sold two years later. With a large chunk of change in my pocket, I was able to become a move-up buyer. I followed the same strategy with my second home purchase in that I had zero debt. The only difference was I had greater buying power with the help of my new husband.
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- Financials Industry
- private mortgage insurance