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I have credit card debt and a loan. All added up probably about $12-15,000. I have the money to pay it off. I also want to buy a house soon. Should I pay off the debt now, before getting pre approved? thank you

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Answers (1)

Answers (1)

Thanks for your question!  There are multiple factors at play when you are preparing to buy a home, all of which will impact the decision to pay off the debt now or wait.  


1. How much money will you need to fund the home purchase?  You'll likely need cash available for a down payment as well as closing costs, on top of keeping a cash reserve for emergencies should other expenses arise. 

  • Down Payment - You can save money on private mortgage insurance and possibly getting a lower rate by paying 20% or more down, but some loans can go as low as 0% or 3% down to get started.
  • Closing costs - These vary from lender to lender, estimate 2-5% of the cost of the home as a good place to start in your figures before contacting a lender to narrow that range down.
  • Emergency savings - we recommend you keep 3-6 months of your living expenses set aside in an emergency fund, not to be used for the home purchase.

2. How is your credit?  If you pay off the $12,000 to $15,000 in credit card and loan debt, it likely will give your credit score a boost up.  This may help in qualifying you for the mortgage loan, or improve your mortgage loan rate.  However, lenders also check the amount of savings, investments, and other available assets when evaluating you for the mortgage loan as well.  So, if paying the $15,000 leaves you with little or no cash remaining, it's probably not the best idea, especially if your credit was good enough to qualify with the debt still in place.


3. How soon are you purchasing?  Are you looking to buy the home within a few months, or are you still a year or more out?  If soon, you need to run the above costs of the home purchase to see if you have enough money to pay off the debt and cover costs of buying the home.  If you are a year or more out, I'd lean toward paying the debt off, then taking the freed-up cash flow and applying it to a "house move fund" that makes you better prepared to buy in the future.


I'd also point you to the Home Learning Center for various articles and tips on buying a home, and specifically to this article: Planning for a Future Home Purchase