realtyshares review
April 9, 2019
By Mary Beth Eastman

Which to Focus on First: Debt Payoff or a Down Payment?

Simple. Thrifty. Living.

If you’re getting ready to buy a home, you know how important it is to have your finances in order. In addition to improving your chances of being approved for a home loan, having your finances in order makes the process more streamlined and less stressful.

One of the critical portions of “getting your finances in order,” however, is taking a good long look at your debt load. Debt load is important in the home-buying process for a few reasons. Not only does the amount of debt you have impact the size of the loan you can get, but it may also affect your interest rate and monthly budget. If you pay off debt before you buy a home, you may enjoy a lower interest rate and a larger loan approval amount.

Here’s what you need to know about the benefits and drawbacks of each approach.

There’s seldom a reason not to pay down debt. Not only is the process a good idea, it’s a legal obligation. That said, you don’t need to be completely debt-free when you go to purchase a home.

The choice of whether to pay off debt or save for a down payment depends hugely on your particular financial situation. If your debt is large and high-interest, as is usually the case with credit card debt, for example, you may actually save money in the long-term by paying off this debt before you buy a home. If you’re worried about your credit score, you can get help raising it from a reputable credit repair company. See our list of the top credit repair companies to get started.

If your debts are past-due collections, paying them off before you start the home loan process can improve your credit score and help you qualify for a mortgage. As a general rule, you want to keep your debt utilization at or below 30%. If your debt is higher than that, consider paying it off before you start saving for a home.

Saving a down payment for a home is an excellent idea. Even if you wind up with a mortgage that will finance 100% of your home purchase (as is true with USDA Rural Development loans, for example), having some cash on hand will help streamline the closing process and reduce your financial obligation.

The downside, however, to saving a large down payment is that you might not need all that cash. In fact, it may be better-used by applying at least some of it to outstanding debt.

As a general rule, it’s smart to go into home ownership with as little debt as possible. If you have debt and goals of home ownership, talk to a real estate agent about which approach will be best for you. Taking some time to do your financial due diligence now will help you enjoy homeownership and financial strength down the road.

  • No comments yet. Be the first to get the conversation started. Here's some food for thought:

    Do you have any thoughts?

Submit a Comment

Your email address will not be published. Required fields are marked *

Advertising Disclosure

Advertising Disclaimer: Simple. Thrifty. Living. does receive compensation for some of the services that we recommend, although we only recommend services that we truly believe are the best.