Clear Your Debt and Upgrade Your Home by Downsizing to A Condo

Having debt of any kind is normal for anyone, and that includes today's home buyer. Credit cards, lines of credit, auto loans, they’re all commonplace in a typical household. But how much debt is too much, and will it affect your mortgage qualification?

Debt-to-Income Ratio

Lenders are primarily interested in your debt load versus your income. Unsecured debt such as credit cards are your highest risk, as there is no collateral to cover those kinds of debts in case of default. Auto loans and lines of credit against your home equity are less of a risk to lenders.

Your debt-to-income ratio is a quick calculation of your total household income minus all of your monthly payments. This includes items such as your mortgage or rent payments, auto loans, credit cards, student loans, and lines of credit, among others. Sources of income can include your main employment, alimony/child support, pension, and other benefits.

Clear Your Debt and Upgrade Your Home by Downsizing to A Condo Couple ImageTo determine your debt-to-income ratio, add up all of your monthly payments, add up all of your income, and divide the payments by the income amount. You can also use this online calculator to do the math. This will give you a percentage value.

Lenders ideally want your ratio to be less than 36%. This is a healthy, highly manageable debt load.

If your ratio is between 37-44%, lenders can see you as a moderate risk. You will still likely qualify for a mortgage, but your options will be more limited. It is advisable to plan to reduce your debt load and ensure you have savings set aside in case of emergencies.

If your ratio is higher than 45%, you may not qualify for a mortgage. Lenders will see you as a high-risk applicant and if you are approved, you will most likely be offered higher interest rates or a smaller mortgage amount for your purchase.

Other Mortgage Qualifying Factors

Your credit score is another major factor in your mortgage qualification. How you handle your credit is reflected in your credit score. Your score ranges anywhere from 300 to 900, with a minimum of 680 being ideal for qualification.

Your score is affected by the amount of debt you’re carrying against your income. In addition, the amount of payment you apply against your outstanding balances, as well as whether or not you pay on time, will affect your score.

If you are able to improve your overall credit score and improve your debt-to-income ratio, lenders will view your level of risk favourably.

Clear Your Debt and Upgrade Your Home by Downsizing to A Condo Rubinstein Living Room Image

The Rubinstein Model Kitchen

Clearing Your Debt by Buying a Condo

Downsizing to a condo may sound like a bit of a sacrifice against living in a house, but in fact, it’s financially beneficial. If you own your home and have debt you’d like to pay off, selling your home and purchasing a condo will free up equity you can then use to reduce your debt load. 

If you already have a long-term plan to pay off your debt, an option such as this may allow you to significantly speed up that process. You’ve spent a good portion of your life paying off your home and building equity. Now, it’s time to take advantage of the hard work you’ve put into it.

By freeing up your home’s equity, you may also be able to consolidate your debts into one single loan. If the amount of equity you have isn’t enough to pay off your debt completely, this is another option. By consolidating your debt, you will reduce several payments down into one, improving your debt-to-income ratio considerably. This will also help you pay off the debt much faster.

If you’re looking to buy a condo but you’re carrying any amount of debt, there are options available to help you reduce your outgoing payments. Downsizing to a condo can be the most efficient way to get rid of your debt for good and free up your income for the more fun things in life.

Photo credits: depositphotos.com
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