How to Overcome Debt and Buy Your First Home

Is your current debt situation clouding your dream of becoming a homeowner? You’re not alone. According to a 2020 Northwestern Mutual Report, 24% of Millennials have $21,367 in student loan debt, and 42% of Americans have an average of $5,400 in credit card debt. Instead of being embarrassed by or ashamed of your debt, get to know all of the details of your debt. While it’s advised to pay off as much debt as you can before trying to buy a home, it’s still possible to buy a home if you owe money. Here are some ways to get a grip on your debt so you can become a homeowner: 

How to Overcome Your Debt

1. Create a Practical Budget 

Before you can tackle your debt, you’ll need to sit down and map out a realistic budget that you’ll be able to stick to. Track all of your expenses for a month to see where your money is being spent. Is there anything you can cut back on? Or, do you have any subscriptions that are collecting dust? Once you paint a picture of your monthly spendings, factor in how much you’d like to allocate to your debts. To stay on top of your monthly debt payments, consider jotting them down on a calendar or switch to automatic payments. 

2.  Form a Debt Reduction Plan

After you’ve established an attainable monthly budget, you can start paying off your debt! Gather all of the information you have on your debts, the in’s and out’s. Calculate how long it will take to pay off each debt, then formulate an action plan. Decide the order in which you want to pay off your debts. Try to focus on one debt at a time, while still paying the monthly minimum on the other debts.  

3. Consider Consolidating Your Debt

Debt consolidation works by combining all of your debts into a single monthly payment and is best when you can get a lower interest rate than before. This option is a good idea for those who have multiple debts with different interest rates so that the debt is easier to manage. However, if any of the scenarios below apply to you, debt consolidation might not be your best option:

  • If you owe a small amount that can be paid off in less than a year.
  • If you’re drowning in debt, and you don’t think you’ll be able to pay it off. 
  • If your total debt equals more than half of your income. 

Learn more about debt consolidation here

4. Debt Avalanche or Debt Snowball? 

Some may think you need to pay off your most expensive debt first, which is the one with the highest interest rate. In some cases that’s correct, but it’s important to remember that everyone’s debt is different. There are two well-known repayment methods you could explore. Have you ever heard of the “Debt Avalanche” repayment method? In the Debt Avalanche method, you pay more on your highest interest rate debt while simultaneously paying the minimum on all of your other debts. This method focuses on paying off your highest interest rate debt first. There are some cases in which the “Debt Snowball” method might be best for you. Let’s say your highest interest rate debt happens to be quite large and will take a significant amount of time to pay off – it might be best for you to pay off your smaller loans first. To find out which method is best for you, learn more here.  

5. Go Beyond Your Minimum Each Month 

Whether you decide to debt avalanche or debt snowball, it’s crucial to pay more than the monthly minimum on at least one of your debts. If you’re only making minimum payments each month, you’ll be in debt for a long time due to the rate at which interest builds.  

6. Work with a Professional 

If you’re feeling intimidated by the thought of talking to a professional about your finances, just remember that they work with people from a variety of financial backgrounds on a daily basis. The very first step you need to take before buying a home is connecting with a mortgage lender. Debt does hinder your ability to qualify for funding, but a lender will be able to analyze your financial situation to determine whether or not you can afford a mortgage. They’ll look at your credit score, tax history, loan eligibility, and debt-to-income ratio. After assessing your financial standing, they’ll be able to tell you what you’re pre-approved for or at least where you need to be financially before you buy a home. 

Once you’re feeling ready to start house hunting, a real estate agent will be able to guide you through the home buying process. If you’re looking for a Realtor in the Long Beach area, give us a call at 562-896-2456. We’re happy to help! 

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About the Author

Shannon Jones has been selling real estate since 1998 and specializes in listing and marketing homes. She has consistently been one of the top Realtors in the Long Beach area. Prior to her award-winning career in real estate with the Shannon jones Team, Shannon has had successful careers in journalism and public relations. She holds a bachelors degree from UC Irvine and a masters degree from UC Berkeley. Shannon holds E-Pro, CDPE (Certified Distressed Property Expert), and PSC (Pre-Foreclosure Specialist) certifications. Shannon is very personable and maintains a very strong moral compass, always putting the best interest of home buyers/sellers above monetary goals. A California native, Shannon enjoys gardening, travel, reading, cooking and poker when she’s not selling homes MY DESIGNATIONS Lic# 01247705 | CDPE (Certified Distressed Property Expert) | E-Pro | PSC (Pre-Foreclosure Specialist) MY SERVICE AREAS Anaheim Bellflower Buena Park Carson Cerritos Cypress Downey Fountain Valley Garden Grove Huntington Beach La Palma Lakewood Long Beach Los Alamitos Los Angeles County Norwalk Orange County Rossmoor San Pedro Seal Beach Signal Hill South Bay Westminster