Should I Pay Off Debt or Buy a Home?

February 11, 2022

Usually, when you want to buy a home it often requires borrowing money. Excessive debt, however, can hurt your net worth.

Is that to say you can’t buy a home if you have debt?

No. Basically, you need to figure out how much debt you are comfortable with and only take on what you can handle. 

Can you tell me how much that is?

This information will be provided by lenders. Using key numbers (debt, income, assets), they determine how much you can afford to borrow while still being able to repay it.

In particular, they weigh your front-end debt-to-income ratio, or how much you could potentially pay for a mortgage (principal, interest, taxes, and insurance) in relation to your monthly income. In addition, you need to divide your income by the back-end ratio, which is the amount of your mortgage payment plus all your other monthly obligations (student loans, credit cards, even child support payments). You should target front-end DTI below 28% and back-end DTI below 36%. That’s the 28/36 rule.

The maximum mortgage payment you should make if you earn $6,000 per month is $1,680. To qualify, your other monthly debt obligations must equal or be less than $480.

You will need to pay some off before you can get a mortgage if you have too much debt now. It is also a good idea to pay off debt if you need to improve your credit score – another factor lenders look at when evaluating your loan application.

Are lenders going to tell me if I should pay off debt?

The only person who knows your financial situation and how homeownership could impact it is you. You should do some research.

Make a budget so you can see how much money you earn and where it is spent. After this, you can decide if you are able to comfortably pay off your current debt and take on a mortgage. Or if paying off the debt is a better option.

Your finances can also help you determine if you need to make any changes to your spending patterns. If downgrading or cutting expenses is a better option to make room for future home costs.

That makes sense. Everything comes down to numbers.

A math problem is not all there is to life. Getting your priorities straight is also important. If you have a goal of becoming debt-free, you should probably pay off your existing debt before anything else. If the idea of taking on more debt increases your anxiety, even if it’s financially possible, it might not be worth it. 

Managing your debt wisely can be an effective financial tool. If you are interested in buying a home, consider the potential mortgage payment (plus homeowner costs like insurance and upkeep). In the world of big money questions like this, there is no one answer that fits all.

*This means a sponsored section.

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