If you currently have credit card balances, reducing your debt load can make it easier to afford a home. Eliminating all credit card debt can give you peace of mind, but you can become a homeowner even if you owe money to creditors.
You Should Tackle Credit Card Debt Before Buying a House
When you apply for a mortgage, a lender will calculate your debt-to-income ratio. That is the percentage of your monthly income that goes toward debt repayment. If a large chunk of your earnings goes toward credit card bills, you might be unable to qualify for a mortgage. If a lender approves your request for a loan, you might get saddled with a high interest rate.
If you have significant credit card debt with high interest rates, paying it off can be challenging. Taking on the additional burden of a mortgage, homeowners insurance, taxes and maintenance can make it even harder to dig yourself out of debt. If you get in over your head and default on your loan payments, you can wind up in foreclosure.
Delaying a home purchase and reducing your debt load can give you financial breathing room. Once your credit card balances are more manageable, you’ll be in a better position to afford a mortgage and other costs associated with homeownership.
With a lower debt-to-income ratio, you’ll qualify for a mortgage with a lower interest rate. That will make it easier to buy the house you want and keep your loan payments affordable.
You Don’t Have to Eliminate All Credit Card Debt Before Buying a House
Paying off your credit cards first can make it easier to afford housing payments, but you don’t have to be debt-free to buy a house. Moving ahead with a home purchase while you still have outstanding credit card debt might be the best move in the long run.
Putting a large sum of money toward credit card bills each month can help you pay them off faster, but it will make it harder to save for a down payment on a house. Pursuing both goals at the same time might be a better approach. You can make more than the required minimum payments on your credit cards while also setting aside money for a down payment each month.
In some regions, renting a home is more expensive than owning. If you live in one of those areas, buying a house can make sense, even if you still have credit card debt. Reducing your living expenses can leave you with more money to put toward credit card balances and improve your overall financial situation.
Look at the Big Picture
Removing or reducing the burden of credit card debt can make it easier to afford a home. Consider your unique financial situation, including your total debt level, interest rates, income and monthly expenses, to figure out what approach is right for you.
