Paying off Debt vs. Saving for a House
When you’re paying off debt, it can be hard to know if you should put everything you can towards getting out of debt as quickly as possible, or keep something back to save for a major purchase such as a house. While it’s always a good idea to keep a small stash of cash for emergencies, buying a home really a higher priority than paying off debt?
For most people, the answer is no. In order to qualify for a mortgage, a person needs to have a good credit score, a relatively no amount of debt, and enough money in savings to pay a down payment and cover repairs. When a person has a large amount of debt, it can be next to impossible to meet the first two conditions of qualifying for a mortgage.
Keep in Mind when Paying off Debt
Having a lot of consumer and/or student loan debt is considered to be a warning sign of a credit risk by most banks. High levels of debt tend to indicate that a person does not have a secure method of dealing with emergencies, making them more likely to miss payments on a mortgage. For this reason, most banks have a maximum allowable level of “other” debt that they want to see for their mortgage applicants. It’s not at all uncommon for banks to insist that monthly debt payments be less than 20% of a person’s take-home pay.
The best way to meet this requirement is to lower the amount of debt that you are paying. That means getting your debts completely paid off before starting the process of applying for a mortgage. This will greatly improve your loan to income ratio and if you have missed payments on any current loans, there is a possibility that paying off the accounts can improve your credit score.
If you’re worried about not being able to afford a downpayment, remember that saving will be easier once your debts are paid off. Redirect the money that you were using for your debt repayment to a savings account for a house downpayment. You won’t have to change your budget, and it’s a good way to build up your savings quickly. After purchasing the home, you can continue to redirect all or a portion of this money into an emergency savings fund for repairs.