Ask a group of people why they want to get out of debt, and chances are you’ll hear “I want to pay off my debt so I can buy a house” more than once.
Buying a house is a huge goal for many folks, and debt often stands in the way. (Especially large student loans, high credit card debt, or debt in collections.) And of course getting out of debt is another huge goal in itself!
So what do you do when debt stands in the way of buying a house? And will it help you to do so? Let’s take that second question first.
Should You Pay Off Debt Before Buying a House?
In general, it’s great to no longer have debt hanging over your head, so paying it off is usually a great thing.
If you have debts that are past due or have a high debt-to-income ratio, paying them off will almost certainly help.
If your home-buying plans are a year or more in the future, do your best to get in great financial shape. You’ll want to do that anyway, because home ownership comes with a whole slew of extra bills. Even if you pay cash for a house.
But if you plan to buy a house soon with a mortgage, you may not want to make any financial changes at all before then. Talk to your lender first, because they may also want you to pay down debt. It depends on your situation and their policies.
Put Together a Plan
If you want to pay off your debt so you can buy a house, you’ve got to put together a plan. It should be a plan you feel good about sticking with.
In general, most people see great success when they use the debt snowball method. So I highly recommend that.
It helps you break down your debt into manageable chunks so that you see lots of small successes.
But what if you only have one large debt, or a few larger ones?
You can still break them down to get those all-important successes. For example, suppose you have one loan for $29,000. You can break it down into amounts like $1,000, $2500, $5000, $10,000, etc. Then celebrate as you pay off each chunk.
You can also use printable debt coloring pages and trackers to keep your progress top of mind.
Maybe even write “I want to pay off my debt so I can buy a house” somewhere you can see it daily. (Although I suggest changing that phrase to “I’m paying off debt to buy a house”. Having a strong why like that will help you get there!
On top of celebrating as you make progress toward your goal, go beyond as well. Use the time to get the rest of your ducks in a row for the home-buying process.
Paying down debt will usually help improve your credit score. That’s a plus if you’re planning to take out a mortgage. Because having a higher credit score can help you qualify for lower interest rates.
Check your credit report as well to see if there are any errors on it that need to be fixed, or any debts you didn’t know about. You don’t want any surprises popping up later. Here’s how to get a copy.
You can also look into finding first-time buyer programs in your area that may help when you get ready to buy.
The Benefits of Paying Off Debt Before Buying a House
Paying off debt before buying a house will help you get into better shape money-wise. Your credit may improve, and your debt-to-income ratio will go down. (So long as you keep making the same amount of money too.)
Plus, you’ll no longer be spending a bundle on monthly debt repayment. THAT is awesome.
And it means you can use that money to save up for a down payment. (Or even the whole house. It is possible…)
You may be surprised at how quickly you make progress once you’ve gotten your loans paid off.