When you’re ready to purchase a home, this question comes up often. Depending on whom you ask there may be many answers to this question. Here is what I know.
Reducing your debt will have a positive effect on your credit score and as a result of that, you will have an immediate increase in cash flow. On the other hand, having money in the bank is a great thing when looking to get a mortgage. How do you choose between saving your money and reducing your debt?
Banks make a decision on your loan approval using debt to income ratio. It is wise to keep your credit card debt below 50% of the limit. Banks don’t want to see you paying the majority of your income on credit card debt and student loans. All in all, paying down debt will increase your credit scores and lower your debt ratio. Both will improve your chances of mortgage approval.
When buying a house, cash is king! But once you pay down/off your debt, your money is gone. You need a certain amount of money in the bank for mortgage lender to feel comfortable that you can afford the house. Save your money. The larger the down payment, the smaller your monthly mortgage will be. It may take a little longer to get the house of your dreams by saving more money but it will be worth it. I would recommend that you get pre approved so that you know what your buying power is before you look for your home. You will know how much you need to save and this will, therefore, save you time on looking at homes that are not in your price range.
In summary, there are options in today’s market with low down payment programs, and down payment assistance programs, etc…. but even with the resources available, I feel reducing debt and saving for a down payment at the same time is equally important. Commit to doing both together and you will benefit when you are ready to shop for a mortgage.