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Solution 5: Restructure Your Other Debt Obligations

If your housing ratio is low enough but your debt ratio is too high, lower your monthly debt payments. Your debt ratio equals your total monthly debt payments divided by your stable monthly income as defined by the lender. Consider the relationship between income and debt: For each dollar of your monthly debt payments, you must generate three dollars of income to stay within mortgage lenders' guidelines. Clearly, it is far more efficient (and usually easier) to reduce your debt than it is to increase your income.

• Plan ahead; pay off your debts – Before shopping for a home, make a sustained effort to reduce your overall debt burden. Prepay those items with the highest payment (relative to the balance due) first. This has the greatest impact on your debt ratios. While the lender is concerned with your overall debt burden, the total balance is not nearly as important as the monthly payment burden.

• Consolidate or recast your debts – Consolidate your debts well ahead of the time that you apply for your mortgage loan so that you can establish a payment history for the new debt, and your old debts show as paid on your credit report. Keep in mind that your goal is to reduce your monthly payment in order to reduce your ratios, so opt for longer term, lower payments. If you don't reduce your overall monthly payment, you have not accomplished your goal. Exercise care when you consolidate revolving debt, such as credit cards and store credit accounts that have no fixed payment amount. You can consolidate your debts once or twice with out creating problems. If you consolidate more than this, during a reasonable time span, you create a pattern of “running up" revolving debts followed by consolidations, resulting in an ever-increasing balance of outstanding debt. Be prepared to explain the source of funds for paying off the debts as payoff dates are listed on the credit report.

 
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