Your debt-to-income (DTI) ratio is one of the primary factors lenders consider when gauging your qualifications for a mortgage. It represents the portion of your gross monthly income that goes to your financial obligations, and therefore represents how much more debt you can handle.
No mortgage lender is under any illusion to meet a borrower to have zero debt, but your DTI ratio must be below 43% to become creditworthy enough to buy a piece of real estate in any neighboring community.
If you are far from this magic number, mortgage companies in Arizona recommend making a conscious effort to lower everything you owe when you begin shopping around. Below are the strategies you should consider the most:
Focus on Smaller Debts First
The debt snowball approach is popular because it promotes positive reinforcement. This method suggests that you starting pay off your smallest debts first to score faster wins and see most of your financial obligations disappear more quickly.
The caveat is that the debt snowball approach does not necessarily promise more interest savings. Nevertheless, it can be helpful if you need to train yourself psychologically to be more financially disciplined.
List all of your debts, prioritize the full repayment of the small one (regardless of its interest rate), and take care of the minimum payment of the rest. Once the smallest debt is paid off, concentrate on the next one until you are current on your bills.
Eliminate Liabilities with the Highest Interest
Unlike the debt snowball approach, the debt avalanche method preaches the virtue of prioritizing financial obligations according to the interest rate. It may take you more time to decrease your number of debts, but it will surely save you money if you commit to it.
The debt avalanche repayment strategy is suitable only if you do not any additional encouragement to zero out your bills more quickly. The sooner you can eliminate debt with the highest interest rate, the faster you can free up cash to pay down the rest.
Do a Balance Transfer
Consolidating all of your credit card balances to a different card can help you save on interest and gain extra motivation to pay off your debts. Psychologically, facing one financial obligation is less overwhelming than dealing with multiple ones with different due dates and interest rates.
A balance transfer credit card may involve a 0% introductory period. If you are given the privilege to have such a grace period, take advantage of it to save even more on interest.
Being more responsible when it comes to debt management improves not only your DTI ratio but also your credit scores. Punctual payment can make FICO happy. A low level of indebtedness also makes you appear a less risky customer in the eyes of mortgage lenders. Sure, paying down some of your current loans may decrease your FICO scores to some extent, but the gains of doing so always exceed the drawbacks.
If you could consolidate all of your debts with a single loan, taking it out may be worth the trouble. But if you want to be as less indebted as possible when you apply for a mortgage, follow any of the said strategies to impress your prospective lenders more.