Reduce Your Debt to Boost Your Qualifying Power
One large factor in being approved for a home loan is your debt relative to your income. For many people, it may not be an easy task to boost income, and you’ve got to demonstrate an increase in income over time to have it count for mortgage qualification. Reducing your debt is a faster solution; you can achieve results within months instead of years, and the effects are positive and far-reaching.
Pay Down Debt
Paying down debt is a good way to boost your borrowing power. One factor that lenders evaluate is how much debt you have relative to your income, and also how much debt you have relative to your potential credit limits. Carrying a little debt on a credit card isn’t such a bad thing, but having your credit cards maxed doesn’t look good. Make it a point to pay down revolving debt to less than 30 percent of your available credit limit, and consider paying installment debt a few months ahead to look good to your lender.
Pay Off Debt
When possible, pay off debt. The less debt you have, the more breathing room you have between your debt and income levels. With more space between your debt and income, it’s easier to qualify for a home loan. If you’ve got three credit cards and you can afford to pay one off, pay it off. That’s one less minimum payment you have to make, and less overall debt in your big-picture finances.
Be careful What Debt You Eliminate
Not all debt is bad debt. Installment debt, such as a car loan or student loan, is self-eliminating. As long as you make the payments on time, that debt can help you build a positive credit history. Likewise, revolving debt that is low relative to your potential credit limits is also good for your credit. By paying off revolving debt entirely, you lose the opportunity to demonstrate a positive payment history and can actually hurt your credit. Know what you’re eliminating before you pay it off, and calculate how it will affect your credit score and your overall borrowing power.
