Should I pay off debt before buying a house?

Low mortgage rates have encouraged many people to buy homes for the first time, even those with consumer debt.

Some potential homeowners are hesitant to seek out a mortgage since they have either credit card debt, personal loans or student loans.

Should you be debt-free before buying a house?

Financial experts recommend that consumers consider these five factors before they obtain a mortgage:

1. Should I take a mortgage out with existing credit card debt?
2. Pay off debt first
3. Considerations before buying a house when they already carry debt
4. How to pay off credit card debt quickly
5. How it impacts couples with credit card debt who want to buy a house

1. Should I take a mortgage out with existing credit card debt?

People who still owe money on their credit cards can qualify for a mortgage, but it depends on how much they owe compared to their salary and other savings. The amount of credit card debt you have will impact the amount you can borrow to buy a house and receive one with good rates and limited costs, said Leslie Tayne, a Melville, NY attorney specializing in debt relief.

“Consumers should consider checking their debt-to-income ratio before buying a home and existing credit score along,” she said.

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2. Pay off debt first

Paying down as much debt as possible before applying for a mortgage is ideal since it helps consumers improve their credit score, which mortgage lenders use to decide the interest rate a homebuyer will receive.

“Becoming completely debt-free from credit cards might be unnecessary and unrealistic,” Tayne said.

3. Considerations before buying a house when they already carry debt

Having less debt means it can free up a homeowner’s budget since there are other costs to factor in each month, including property taxes, maintenance fees and other bills.

Applying for a mortgage when you have credit card debt is not a deal-breaker as long as what you owe does not exceed the lender's debt-to-income ratio guidelines. Typically, lenders look for a ratio of 36% or less and arrive at that figure by dividing your monthly debt payments by your monthly gross income, said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, DC-based non-profit organization.

Use an online mortgage calculator to determine potential monthly payments or plug your numbers into Credible and see your estimated mortgage rates and monthly payments.

4. How to pay off credit card debt quickly

Beyond paying at least 10% more than the minimum monthly payment, consumers should consider affordable balance transfer or debt consolidation options.

“As long as you can lower interest and fees as a result, you will come out ahead,” McClary said. “You shouldn’t take on any new debt or open new accounts just before applying because it could be a red flag in the approval process.”

Consider prioritizing and paying high-interest debt first.

“Budgeting allows borrowers to see the big picture in terms of money coming in and going out of their accounts each month,” Tayne said. “After bills are paid, leftover money can be used to make a sizable dent in their debt, which can improve the borrowers' chances of receiving loan approval quickly and with fewer costs.”

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5. How it impacts couples with credit card debt who want to buy a house

Couples should discuss their credit scores and history before they apply for a mortgage because they're both being considered. The total amount of debt can impact the amount of a mortgage that you can qualify for together.

If your unsecured debt is $250 a month, it could reduce your potential purchase price by approximately $50,000, while $500 a month could reduce your potential purchase price by around nearly $100,000, said Jackie Boies, a senior director of housing and bankruptcy services for Money Management International, a Sugar Land, Texas-based nonprofit debt counseling organization.

“Carrying debt into the process will make it harder to qualify for a loan and to live comfortably after your purchase,” she said.

Meeting with a housing counselor from a non-profit credit counseling agency can be helpful since your financials are reviewed and other important factors such as your credit score, debt-to-income ratio and down payment plans are discussed.

“You’ll develop a realistic budget and come away from that session knowing if you can truly afford to purchase a home,” Boies said. “Your counselor will issue a certificate of counseling, which you can present to the lender you choose.”

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