Buying a Home While in Debt is Possible — Here’s How

Man in Blue Long Sleeve Shirt Sitting Beside Woman in Blue Denim Jeans

The average American has $51,900 worth of debt across auto loans, credit cards, student loans, personal loans, and of course, mortgage loans. Millennials, in particular, are burdened by student loan debt, with those in their 30s owing an average of $40,500. This significantly affects their debt-to-income ratio, making it difficult for them to qualify for affordable mortgages.

Despite these numbers, millennials comprise the largest share of homebuyers today at 37% of the market. They are now at the age where they have more buying power, whether they're purchasing properties with roommates or for their growing families. And despite being known as the generation that starts out with debt, millennials are proving that it is, in fact, possible to own a home.

Here are several steps you can take to secure your dream home, even if debt is a reality in your life.

Get Debt Under Control

Getting your debt under control should be your first priority. Start by calculating your debt-to-income ratio, which compares how much you owe to how much you earn. This determines exactly how much you can afford in monthly mortgage payments.

Once you've got a clearer picture of your finances, you can then make an action plan using a detailed budget. Experts recommend following the 28% rule to start, as it entails dedicating a set percentage of your income to the mortgage. Remember that your budget will depend on your unique situation; after all, what constitutes "affordable" will vary with each homebuyer. Take your other expenses and debts into consideration and get the lender's help in calculating what you can actually afford.

Consider a Low Downpayment Option

Larger downpayments have additional benefits, such as lower interest rates, lower upfront and ongoing fees, lower monthly payments, and more equity. Homeowners can also waive paying for private mortgage insurance with the commonly used 20% downpayment rule. However popular this guideline is, homebuyers should remember that it isn't a mandated requirement.

There are conventional mortgages that offer much more manageable downpayment rates as low as 5%. And even with higher monthly payments over the course of the mortgage, there are payment strategies you can align with your budget without compromising your current financial standing.

Invest in Home Warranties

Although home warranties are optional, the investment can be worth it to cover unexpected repairs and replacements that homeowners encounter constantly. You're not just paying for the coverage, but for your peace of mind and the convenience it offers, too.

The last thing you want when your boiler breaks down in the middle of winter is to scramble around for a trusted technician. Home warranties can readily cover such instances for much lower prices, preventing financial strain in the months and years to come.

Consider Renting a Room for Extra Income

When making a big purchase like buying a home, most people focus on bringing costs down and often forget there are ways to earn extra income. Consider renting out one of your rooms for an easy source of funds that can help you settle monthly payments.

However, it's important to do your research before opening your doors to potential housemates. Search for similar ads to get an estimate of how much you should charge, and prepare a rental lease agreement that stipulates specific rules from the start — your future self will thank you for it!

Avoid Being “House Poor”

The term “house poor” refers to overspending on your home and sacrificing your other financial obligations in the process. While your house is important, it's just one of many financial responsibilities, especially if you started out with debt.

When purchasing a home, anticipate scenarios that may change your finances. For instance, will a job and income change significantly affect your ability to keep up with the mortgage and your savings? Or perhaps you're compromising your quality of life to maintain the house. Remain grounded in your decision-making and use your budget to help you remain on track.

Avoid Taking on Other Debts

Buying a home means taking on a huge financial responsibility, one which will put you in debt until the mortgage has been paid off. Too often, people have faced foreclosure due to additional debt or other situations that can easily be prevented. This causes undue financial stress and may even worsen mental health issues when left unresolved.

People who live debt-free don't just enjoy the benefit of less stress, they also have the freedom to work on their credit scores and improve their work-life balance. Without debt, you have more options to invest in your future – whether it’s retirement, continuing education, a business opportunity, or even a dream vacation. You’ll also be able to maintain a proper work-life balance since you won’t have to work extra shifts just to make ends meet.

The key to avoiding more debt is to curb the temptation of overspending. Habits such as not purchasing what you can't afford, having an emergency fund, and budgeting regularly can help you from biting off more than you can chew.

Find Your Perfect Home Today

Buying a home is a challenging milestone to achieve, and it can seem like an impossible aspiration to have if you’re in debt. With the right tips and guidance on purchasing a home, first-time buyers can certainly make it happen. Debt doesn’t have to be a hindrance to your dreams of owning your very own home – all it takes is a bit of financial know-how, discipline, and determination to make it happen.

If you’re ready to start looking for your perfect home, browse homes for sale in your area today!

About the author

Rania Jem is a freelance writer who is passionate about lifestyle and finance. She is passionate about helping others achieve financial wellness. When she's not working on a new piece, she's often baking desserts in the kitchen.