Buying a home is the American dream. Who doesn’t want a place to call their own and to invest in their future rather than someone else’s? But before you rush out and start hunting for the perfect house, you need to consider your finances. Let’s take a closer look at why you should be debt-free before you buy a house.
You Need to Learn to Be Financially Responsible
Just because you carry debt doesn’t mean you’re not financially responsible. How you got into debt determines that. If you’re the type that loves to shop as a pastime or reaches for your credit card when it’s really not an emergency, you need to step back and consider how responsible you are. Owning a home requires a lot of responsibility. Paying off your debt, and being debt-free, can teach you a lot about that.
It’s Easier to Get a Loan
It can be much easier to get a loan if you have a small debt to income ratio. In other words, the banks want to see that you’re responsible with your credit. Large balances and maxed out credit cards are red flags. You want a credit history that shows you take on and pay off debt responsibly.
You’ll Be Able to Save Up a Larger Down Payment
If you’re debt-free, that means you have so much more money to save toward your down payment. A 20% down payment isn’t required but it can certainly help lower your interest rate (and will keep you from having to pay for expensive PMI). It shows the bank that you’re invested in this dream and will be less likely to walk away and let the home go into foreclosure.
There’s More Than Just the Mortgage Payment
Your mortgage payment estimate might leave you with lots of room in your budget. However, many estimates don’t take homeowner's insurance and property taxes into account. You also need to consider maintenance of your home and the possibility of increasing interest rates, depending on the loan you get.
You may also want to do renovations or upgrade your appliances. Being debt-free allows you to take care of things. Put your extra money into savings accounts for yearly expenses, such as insurance, and for general maintenance and upkeep.
Debt can drag you down, especially as a homeowner. You want to be able to do the things you love and still own a home. This is why you need to get out of debt now rather than later.