Reducing Your Debt before Purchasing a Home

One of the best decisions you can make when you begin thinking about purchasing a home is to reduce any debt you may have.  Debt reduction has many benefits.  Reducing debt will provide access to more cash as debt is eliminated through reduction.  It can help to improve your credit score by lowering your debt-to-income ratio which will help you obtain a loan and a better interest rate. 

Each individual will need to create their own personalized debt reduction plan.  There are a few simple steps everyone can take that will start that plan in motion.

The first step is figuring out your level of debt by making a list of all your debts.  For this step you will need either a piece of paper and a writing utensil or a clean document on your computer.  This list should include to who the debt is owed, the balances, the monthly payments due, the interest rates associated, and if loans when the loan ends.

The next step in the process is to either review or create a budget.  If you do not already have a budget you will want to use a new piece of paper or document to create one.  You will want to start your budget by writing down how much cash you bring in each month called your monthly income.  You will then need to subtract from this amount all your monthly expenses including your mortgage or rent, utilities, insurance, groceries, gas, and any others.  Once you have both numbers, your monthly income and your monthly expenses total, you will want to subtract your monthly expenses from your monthly income.  The amount you get is what you have left to put towards your debt.  Always remember that while debt reduction is important so is saving.  While you want to reduce as much debt as you can you want to be sure to put some money aside for savings in case of any unexpected expenses.

Now that you have completed your list of debts and budget it is time to prioritize how you will reduce your debts.  The usual rule of thumb is to pay down the debts with the highest interest rates first.  An exception to this might be if you have a debt that you can eliminate quickly in one or two payments based on your budget. 

If after taking these steps your debt seems insurmountable you may want to look into professional debt counseling for further assistance.

Debt reduction can be a slow process but one that is vital to buying a home.  Your credit score will start to improve as your debt is reduced so you should not have to wait until all debt is eliminated to see results.