Best Step 1 - Check Your Credit Now
You've got your eye on a new home and you've checked your credit. Perhaps you've had to "clean it up" a bit, but now your credit score has been raised and you're ready for the next step.
Best Step 2 - Diminish the Debt
Lenders limit the amount you can spend on housing to a percentage of your total income. What that percentage is depends on what type of loan program you're looking at, and that's a decision to be made when you consult with a trusted lender. But if your total consumer debt exceeds 8% of your income, in nearly every case, the allowable housing payment will be reduced.
So, now it is time to pay down those credit cards or pay off your auto loan if you can.
The best bet is to pay off the items with the highest rate of interest charged against them first, even if they are one of your larger balances. Sometimes the temptation is to pay off smaller balances, because it "feels better" to have a smaller number of payments going out. But if you're really trying to maximize how far every dollar goes, then getting rid of the bills with the larger interest and fees is much more important.
Each time you pay off a particular balance in full, the next month re-allocate the money from that monthly payment and add it to the payment on your next highest interest bill. This one will pay itself off much faster, and before long, your debt load will shrink, and shrink, and shrink some more!
And, once you've diminished your debt, remember, this is not the time to open a new charge card or upgrade your transportation. Even if you know your budget can handle it, these things are best done AFTER the closing on your new home. You've worked hard to get this far...success and a new home are just around the corner!
If you have questions about a debt reduction plan, call me for a free list of resources. Getting your debt load as small as possible is another absolute Best First Step to a successful home purchase.
Coming Soon: More "Best First Steps" to Getting Ready to Buy a Home