Merit Real Estate

Debt Management for Homeowner Hopefuls

Debt to Income Ratio

Many people across the country dream of homeownership. But often, realizing that dream first means finding financial stability. If you’re looking to buy a house within the next year, you’ll need to manage your debt carefully. Additionally, balancing your saving will be key.

Determine Your Debt-to-Income Ratio

Knowing and understanding your debt-to-income ratio is one of the most important steps in debt management. This powerful tool will help you identify how much of your income is used for debt payments. To calculate your debt-to-income ratio, you need to add up all of your monthly debts and divide them by your gross monthly income. More specifically, if you take your total monthly debts and divide them by gross monthly receipts — such as wages, investments, or alimony — the resulting figure is called your debt-to-income (DTI) ratio.

Managing Debt Ratio

With this figure in hand, individuals can evaluate whether their debts are manageable. This will also identify if they need help to adjust their budget and lifestyle decisions to bring down the amount of money they owe relative to what they make. Taking a few minutes to calculate this number before attempting to pay off debt can help provide perspective. The final step is to set realistic expectations going forward.


Develop a Budget

The first and most important step toward relieving yourself of debt is to create a budget and assess your expenses. Writing this up doesn’t have to be difficult. Typically, you will need to collate your credit card bills, bank statements, utility bills, and mortgage/auto loan statements. Converting all these into a digital format is at first a tedious process. However, it will make it so much easier to track and manage your financial situation over time. With this close scrutiny of your statements, you may find tangential running costs that can be canceled, bills that can be cut, and loan rates that can be re-negotiated.

When setting out your personal budget each month, consider following the 50-30-20 rule—CNBC explains that this equates to 50% of your budget for needs, 30% for your wants, and 20% for savings. If you can limit your leisurely expenditures, then you’ll find that the rest of your spending levels out evenly.

Following this kind of budget can be tricky if your income is irregular, such as when you own your own business. Organizing your business as an LLC can help smooth out your income by providing you with a regular paycheck. You will save yourself from paying more taxes as well. An online formation service can help you set up an LLC quickly at a low cost.

Debt Managment

Use Debt Management Services

The utility of a debt relief service is obvious: These organizations aim to advise or manage your finances on your behalf with the aim of eliminating unpaid debt. Whilst the offer is tempting, you’ll need to take serious care to ensure that the service in question is reputable. Be certain to carry out background checks with every company, checking licenses, costs, time estimates, and written contracts.

Money Management International notes that debt management plans (DMPs) involve a deposit of money every month. Using your deposit, the organization will then seek to pay off unsecured debts and credit card bills. During this period, you will likely pay a monthly fee for every card included in the account.

It is important to act with caution if you are settling debts in dispute. Though there’s a maximum time period when you can be pursued for a debt, that clock resets if there’s any payment activity. It may be best to speak with an attorney before attempting to settle debts on your own.

Secure a Lower Interest Rate

Lower interest rates

Home loans may look daunting but, with some thorough research, it’s possible to secure one at a lower rate. Doing so may require you to pay points on a mortgage—this results in lower month-to-month payments but costs a direct fee to lenders at the time of closing. Whether or not this is a good option will depend on your finances and how long you expect to own your home.

It’s important when making a decision on your home loan, to understand market rates and customs. With a good perspective, you can avoid common scams such as prepayment or unexpected balloon penalties. Many of these operate within the rule of law, so be sure to check reviews and read the fine print before proceeding with any major decisions. When reviewing interest rates, be sure to consider 15, 20, and 30-year mortgage rates as part of your budget. A 15-year loan enables you to pay off your home sooner, but a 30-year loan offers a lower mortgage payment.

Become Financially Literate

Ultimately, your monthly income is the most important variable when it comes to debt management. You can often save unnecessary costs just by sharpening your understanding of money matters. There are a number of resources to help you improve your banking relationships, credit score, and financial management. Learning the basics will help you to avoid mistakes and bad deals and could even lead to professional opportunities.

Alternatively, there is a multitude of personal finance courses available online. Through portals such as EdX, Skillshare, or Udemy, you can sign up for short-term classes that will provide applicable, lifelong skills for managing budgets and personal spending.

When it comes to debt management, understanding is half the battle. Make sure that, whatever steps you take moving forward, you’ve carried out the necessary research to avoid further damage and ensure financial progress.


When you’re ready to find the South Bay home of your dreams, contact Merit Real Estate today!