How important is it to pay off debt before applying for a home loan?
April 18th, 2009
Kerrie H asked:
I want to apply for a home loan but I have about $10,000 in credit card debt. I want to get in on the market now, how important is it that I pay off my debt before applying for the loan?
I want to apply for a home loan but I have about $10,000 in credit card debt. I want to get in on the market now, how important is it that I pay off my debt before applying for the loan?
It depends on your income. The biggest factor taken into consideration is your debt-to-income ratio. You will be financed based on this; no one is going to give you a loan that is more than you can afford. The ratio determines what you can afford and you can be financed accordingly.
It may not be necessary, even harmful. First get your credit score(s) – there are now two “flavors.” Then calculate your debt to income ratio and your budget – how much are you spending each month out of your income. If you have not been saving any money, that is not good.
Check the market you want to buy the house in. Are the prices something you can afford? Is the interest rate you are likely to qualify for going to make for an affordable monthly payment? How much of a down payment can you make?
Avoid the no-down-payment people and the interest-only for a year or more people. If possible deal with a local bank that keeps the mortgages in-house.
You may not have to, unless you feel you won’t be able to afford the home you want with the debt you have.
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