How To Buy A Home Even With Significant Debt

Buying a home in a higher price point than most can be complicated. That’s why the tips and strategies you’ll find in our 8-week series will set you on the right path. It’s our own unique approach and a “behind the scenes” glimpse of what you should look out for and consider when starting your own search for a home.

Is debt holding you back from being a homeowner?

You’re not alone.

Some buyers are worried that their large debt takes them out of the game when buying a home. But, most of the time, it doesn’t! 

So, don’t automatically assume you’re facing a roadblock to homeownership if you have loan debt, most everyone does, even people who own luxury homes.

There are ways to work with lenders and assistance programs to make your Laguna Beach home purchase a reality — and even more affordable despite your loans.  If you found a new hobbby or passion during COVID and went back to shcool to learn a new trade or start a new career and consequently have related debt, then look into the PSLF Loan Forgiveness program in California.

We understand that you may be grappling about whether you should pay off your loan debt first before you even purchase a home. That could be an option but don’t make it your only one.

We’ve got some other options for you to consider so you don’t have to delay years until becoming a luxury homeowner, especially if you have substantial loans.

And always remember to please consult with your own financial advisor to determine what is best for your situation.

How Lenders Look at Debt

Let’s get to the basics first. When you buy a home, a lender will look at your debt-to-income ratio or DTI.

It’s the amount of recurring debt you have monthly (the total amount of your montly payment amounts, not your total loan amounts) compared to your gross monthly income.  In a lender’s eyes, your DTI is more important than your credit score or how much money you have for a down payment.

Why?

A lender needs to consider your recurring debt — such as a car loan, credit card payments, your personal loan(s) — in order to determine if you can afford more debt with a monthly mortgage payment. 

However, most lenders like to stick to the 28/36 rule. And that’s where the 36% DTI from above comes into play.

• The 36% is the back-end ratio is on the conservative side of what lender need. It should equal your entire monthly housing costs expenses (principal, interest, mortgage insurance, property taxes) plus other debts (personal loan, other mortgages, car loan, credit cards, etc) divided by your gross monthly income. It’s the DTI we explained above, and you should try not to be above 36%.
• The 28% is part of the front-end ratio equals your monthly housing expenses (principal, interest, mortgage insurance, property taxes) divided by your gross monthly income. Your other recurring debt is not included. Again, a lender doesn’t like to see it above 28%.

Keep in mind, your DIT and the 28/36 rule has nothing to do with your credit score or how well you pay back your debt. It’s looking at the amount of debt obligation you currently have when compared to your income. Not whether you’ve been good at paying your loans and other debt each month. (But keep doing that too!)

And that’s why it can be frustrating for many buyers with loan debt who have good credit scores.

How to Lower Your DTI

If you need to lower your monthly debt and obligations, start with your loans not related to collateral. Here are some options to consider. Remember to always consult with your own financial advisor before pursuing.

• Graduated repayment plan – payments start low and rise every two years as your income should rise.
• Loan consolidation – if you have more than one personal loan or student loan, combine them into one with a lower interest rate.
• Lengthen your payback term – spread out your loan repayment over more years to lower your monthly obligation. This will increase you long-term interest payments so carefully way the pros and cons of this strategy.

Examine all of your financial obligations and find other ways to lower you DTI:

• Consider bumping up your monthly income with a side job … every little bit could help your cash flow and savings. 
• Don’t buy a car and use public transit to eliminate a recurring car loan debt.
• See if you can negotiate a lower minimum monthly repayment requirement on your credit cards, especially one that is on the higher side. Some credit card companies are willing to work with you if you have a good credit score and payment history.

Shop Around for Lender

When you have loan debt, you need to find a mortgage lender who is willing to work with you and offer programs that may be geared toward borrowers just like you.

Steer clear of lenders whose underwriters just look at your entire balance of loan debt and not your current monthly payments compared to your income.  You will likely not qualify for a mortgage loan with them.

It won’t matter to them if you have lowered your monthly payments with a graduated repayment plan – they will calculate your DTI by using the percentage of your total loan balance.

Many lenders work with state and federal assistance programs, and may have a better track record when dealing with luxury buyers with loan debt.  Your loan was worth something and it should continue to advance your life and hopefully your earnings.

These programs below will help jump start your ability to make luxury home ownership a reality.

Tapping into Federal Loan Programs

There are several government programs that offer home mortgages to borrowers with loans. Each has different requirements and may not be a good option for you. However, one may make your homeownership dreams comes true.

• Fannie Mae HomeReady Mortgage  — allows up to a 50% DTI and 3% down payment.
• VA Loan Guaranty – Buyers who have served in the military can qualify for a loan with 41% DTI. That can be overridden if some of your income tax free.
• FHA Loan – Usually allows a 43% DTI but will sometime allow a higher DTI on case-by-case basis.

Are You Ready?

Evaluate if you’re truly ready to be a homeowner, possibly again, even though you have loans to pay back. Continued homeownership is both a big financial and lifestyle commitment.

You may already be handling sizeable monthly housing costs because of the higher home prices over last few years, with homeowners taking advantage of the high prices with getitng some cash out with your current home with a HELOC or with a Cash Out Refinance. out a HELOC. You may be ready to invest that money in your Laaguna Beach home and not a home close the ocean.

Honestly answer questions about yourself. Do you have a good job with steady income with expectations of more earning power? Do you plan to remain in the area for the next 5 years minimum? Have you been paying back your loans each month and have some money saved? Is your DTI not too high and you’re willing to find an assistance program that could help?

As a luxury buyer with lots of debt, you may need to lower your expectations for your next home, or maybe change locations or buy a condo instead of a single-family house, or wait to make your next home purchase until you’ve paid down more debt. 

Focus on getting your next home and clear that hurdle. If you do it right and aren’t house poor, you’ll be able to move up to your next home in later years.

You likely invested in your education and it took time to get your degree and start your career. It’s almost the same with becoming a homeowner. It takes time but your home can lead to your next and so on as you continue to be more financially secure.

Questions and Planning Ahead

We are here to help you determine if Laguna Beach homeownership is right for you now or in the near future. It does take some planning even if you don’t have loans, so give us a call and we can come up with a plan based on your timeframe.

So, don’t let loans slow your home buying dreams from coming true. 

In fact, we’ve had many clients end up paying off their loans in FULL with the equity they received from their home purchase. Buying a home could possibly help you pay off your loans even more quickly!  No guarantees, but we’ve known many people to have that experience, including our own debt!

Up next week is our final article in Our Dirty Little Secrets to Buying a Home series. You’ll find out why Buying a Home Is Like Falling In Love! It’s a topic you don’t want to miss.

 That’s why the tips and strategies you’ll find in our 8-week series will set you on the right path. It’s our own unique approach and a “behind the scenes” glimpse of what you should look out for and consider when starting your own search for a home.

 

Is debt holding you back from being a homeowner?

 

You’re not alone.

 

Some buyers are worried that their large debt takes them out of the game when buying a home. But, most of the time, it doesn’t!

 

So, don’t automatically assume you’re facing a roadblock to homeownership if you have loan debt, most everyone does, even people who own luxury homes.

 

There are ways to work with lenders and assistance programs to make your Laguna Beach home purchase a reality — and even more affordable despite your loans.  If you found a new hobbby or passion during COVID and went back to shcool to learn a new trade or start a new career and consequently have related debt, then look into the PSLF Loan Forgiveness program in California.

 

We understand that you may be grappling about whether you should pay off your loan debt first before you even purchase a home. That could be an option but don’t make it your only one.

 

We’ve got some other options for you to consider so you don’t have to delay years until becoming a luxury homeowner, especially if you have substantial loans.

 

And always remember to please consult with your own financial advisor to determine what is best for your situation.

 

Let’s get to the basics first. When you buy a home, a lender will look at your debt-to-income ratio or DTI.

 

It’s the amount of recurring debt you have monthly (the total amount of your montly payment amounts, not your total loan amounts) compared to your gross monthly income.  In a lender’s eyes, your DTI is more important than your credit score or how much money you have for a down payment.

 

Why?

 

A lender needs to consider your recurring debt — such as a car loan, credit card payments, your personal loan(s) — in order to determine if you can afford more debt with a monthly mortgage payment.

 

However, most lenders like to stick to the 28/36 rule. And that’s where the 36% DTI from above comes into play.

 

Keep in mind, your DIT and the 28/36 rule has nothing to do with your credit score or how well you pay back your debt. It’s looking at the amount of debt obligation you currently have when compared to your income. Not whether you’ve been good at paying your loans and other debt each month. (But keep doing that too!)

 

And that’s why it can be frustrating for many buyers with loan debt who have good credit scores.

 

If you need to lower your monthly debt and obligations, start with your loans not related to collateral. Here are some options to consider. Remember to always consult with your own financial advisor before pursuing.

 

 

Examine all of your financial obligations and find other ways to lower you DTI:

 

When you have loan debt, you need to find a mortgage lender who is willing to work with you and offer programs that may be geared toward borrowers just like you.

 

Steer clear of lenders whose underwriters just look at your entire balance of loan debt and not your current monthly payments compared to your income.  You will likely not qualify for a mortgage loan with them.

 

It won’t matter to them if you have lowered your monthly payments with a graduated repayment plan – they will calculate your DTI by using the percentage of your total loan balance.

 

Many lenders work with state and federal assistance programs, and may have a better track record when dealing with luxury buyers with loan debt.  Your loan was worth something and it should continue to advance your life and hopefully your earnings.

 

These programs below will help jump start your ability to make luxury home ownership a reality.

 

There are several government programs that offer home mortgages to borrowers with loans. Each has different requirements and may not be a good option for you. However, one may make your homeownership dreams comes true.

 

Evaluate if you’re truly ready to be a homeowner, possibly again, even though you have loans to pay back. Continued homeownership is both a big financial and lifestyle commitment.

 

You may already be handling sizeable monthly housing costs because of the higher home prices over last few years, with homeowners taking advantage of the high prices with getitng some cash out with your current home with a HELOC or with a Cash Out Refinance. out a HELOC. You may be ready to invest that money in your Laaguna Beach home and not a home close the ocean.

 

Honestly answer questions about yourself. Do you have a good job with steady income with expectations of more earning power? Do you plan to remain in the area for the next 5 years minimum? Have you been paying back your loans each month and have some money saved? Is your DTI not too high and you’re willing to find an assistance program that could help?

 

As a luxury buyer with lots of debt, you may need to lower your expectations for your next home, or maybe change locations or buy a condo instead of a single-family house, or wait to make your next home purchase until you’ve paid down more debt.

Focus on getting your next home and clear that hurdle. If you do it right and aren’t house-poor, you’ll be able to move up to your next home in later years.

 

You likely invested in your education and it took time to get your degree and start your career. It’s almost the same with becoming a homeowner. It takes time but your home can lead to your next and so on as you continue to be more financially secure.

 

We are here to help you determine if Laguna Beach homeownership is right for you now or in the near future. It does take some planning even if you don’t have loans, so give us a call and we can come up with a plan based on your timeframe.

 

So, don’t let loans slow your home-buying dreams from coming true.

 

In fact, we’ve had many clients end up paying off their loans in FULL with the equity they received from their home purchase. Buying a home could possibly help you pay off your loans even more quickly!  No guarantees, but we’ve known many people to have that experience, including our own debt!

 

Up next week is our final article in Our Dirty Little Secrets to Buying a Home series. You’ll find out why Buying a Home Is Like Falling In Love! It’s a topic you don’t want to miss.