While getting out of debt will leave you with more money to buy the house you want, big dreams call for common sense and sacrifice. Owning a home takes money, but if you make paying off your bills a top priority, you will find yourself in a better financial position to make the purchase.
Create a visual picture of your bills. It can be a real eye opener to have your finances glaring back at you. Write a list of every debt you owe, no matter how small. Note the outstanding balances, minimum monthly payments due and the amount of monthly interest each accrues. Include your monthly housing costs and other living expenses.
Stay current with all your debts even if it means paying only the minimum due. Lenders look at your payment history when considering you for a mortgage loan and they don’t like to see late payments, delinquent accounts or collections on your credit report. Paying your bills on time accounts for about 35 percent of your credit score — a good reason to keep your credit profile squeaky clean.
Cut out as many unnecessary expenses as you can and then take the extra money to pay down on debt. Be realistic when determining which expenses are absolute necessities and which are luxuries you can avoid. One way to get out of debt is to live below your means. Mary Hunt, editor of “Debt-Proof Living" newsletter, says the key to living below your means is to buy what you need and want the things you already own.
Hack away at your existing debt by starting with one debt and paying more than the minimum payment each month. Personal finance author Dave Ramsey recommends following the "debt snowball" plan. Paying off your smallest debts first can be a great motivator because you see results quicker. Once you pay off one debt, add that payment to paying off the next. Continue this method as you work your way closer to paying off your heavy debts.
Save money by consolidating your student loans. If you have several student loans, each with a monthly payment and different interest rate, consolidating loans can reduce your monthly expenses and boost your budget. By combining what you owe into a single loan, you have only one monthly payment and pay one interest rate. Most times, you can lower how much money you pay out on student loan debt each month. Lowering your debt-to-income ratio can put you in a position to borrow more money to buy a house.
Put the money you save by paying off a higher rate credit card into a high-yield savings account. Socking the money away in savings for a couple years will help get you closer to your goal of having a downpayment for a house. You can earn a better return on your money by investing in low-risk, short-term securities, such as treasury bills, certificates of deposit, money market accounts and money market funds.
Resist the temptation to take on new debt. If you can’t afford to pay cash, don’t buy it. Paying cash will keep the amount of your unused credit high and the debts you owe low. A mortgage loan may be out of your reach if the lender thinks you have too many monthly bills to pay and can’t afford a monthly mortgage payment on top of your other debts. Generally, lenders are more likely to give your mortgage application favorable considerable if you use less than 25 to 30 percent of your available credit each month.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.