Housing Counselor Certification (HUD) Practice Exam

How can clients effectively manage their debt levels before purchasing a home?

1. By ignoring small debts

2. By consolidating all debts into one

3. By selectively paying off high-interest debts

4. By waiting for better financial conditions

The correct answer is: By selectively paying off high-interest debts

Clients can effectively manage their debt levels before purchasing a home by selectively paying off high-interest debts. This approach is beneficial because high-interest debts tend to accumulate more costs over time, making it harder to achieve financial stability. By focusing on these debts first, clients can lower their overall financial burden, improve their credit scores, and create a more favorable debt-to-income ratio, which is a crucial factor in qualifying for a mortgage. In this context, ignoring small debts may lead to them accumulating and potentially affecting credit scores negatively. Consolidating all debts into one might seem appealing, but if the consolidation loan has a higher interest rate than the original debts, it can worsen the financial situation. Additionally, simply waiting for better financial conditions does not address existing debt and could lead to missed opportunities for homeownership if the market improves or interest rates rise. Therefore, the strategy of paying off high-interest debts specifically aligns with the goal of becoming a more attractive candidate for mortgage lending.