You want to buy a house, but you’re in debt. Since this is likely the biggest purchase you’ll ever make, you’re trying to decide whether buying a property right now makes sense financially.
Being in debt can feel constraining, but you’re certainly not alone. As of 2022, the average American had $39,032 in student loan debt, $5,910 in credit card debt and $1,110 in retail card debt, according to Experian.
GOBankingRates spoke with several experts to get their advice on whether someone in debt should buy a house. Here’s what they had to say.
Hold Off for Now
It might not be what you want to hear, but Jay Zigmont, Ph.D., CFP, and founder of Childfree Wealth, said you need to focus on paying off debt before buying a home.
“You are ready to buy a house when you have paid off your consumer debt, have an emergency fund of three to six months of expenses and have enough money for a 20% down payment,” he said. “While for many people, that may mean you have to put off buying a house, that is OK.”
He said combining a home purchase with other debt is a challenge, because it requires you to take on too much risk.
“If you lose your job or an emergency happens, you don’t have any space in your budget if you are still paying off debt,” he said. “Keep in mind that banks will approve you for a larger mortgage than you can afford.”
He said you should strive to pay no more than one-third of your take-home pay on your mortgage payment — including principal, interest, taxes and insurance.
“Owning a home is a choice, not a requirement,” he said. “While it can be challenging to find a reasonable place to rent, the bonus is that when you rent you don’t have to worry about maintenance and a mortgage payment.”
Ultimately, he said, with credit card interest rates at 20% or higher, you need to pay off cards before you even consider taking on a mortgage.
Maybe — Depending on the Type of Debt and Interest Rate
The decision to purchase a home while still in debt might be a good one, depending on the specifics of your debt, said Patrick Di Cesare, a certified financial education instructor and owner of the financial education company Basic Financial Literacy.
“If you’re in credit card debt and paying close to 20%, buying a home doesn’t make much sense until you’re out,” he said. “Everyone always asks what the best investment is, [but] no investment will give you a better guaranteed rate of return than paying off high interest debt like credit cards.”
However, he said buying a home can make more sense if your debt has a lower interest rate, such as student loans.
“I would never tell anyone you need to be completely debt free to buy a home,” he said, “but being high interest debt free — anything over an 8% interest rate — is a good idea.”
Maybe — Depending on How Fast You Can Pay Off Debt
“In the current market with higher interest rates, the more debt you currently have is going to make it more difficult to afford a house,” said Dean Kaplan, president of The Kaplan Group, a commercial debt collection agency. “But if you can afford it, it is almost always a good idea to buy instead of spending money on rent.”
However, he said if you’re able to significantly reduce your debt over a relatively short period of time — i.e., less than two years — it might be best to focus on that first.
“When real estate prices are increasing 10% a year or more, the sooner you get in the market, the better, regardless of your current debt load,” he said. “Now, due to higher interest rates, there is pause in price increases.”
If paying down your existing debt would allow you to qualify for a lower interest rate, he said that could make sense. “Plus, if you pay down debts that have a higher interest rate, that will give you more money to afford a house.”
He also emphasized the importance of homeowners having emergency funds.
“You never know when something might go wrong, from an appliance failing to something more significant,” he said. “You need to have savings or available credit to deal with these issues; so, if you are already in debt, this might be harder to achieve.”
Yes — With a Solid Plan in Place
“As a financial expert, I believe that it is indeed possible to make this work, but only if approached with planning and strategy,” said Erica Davis, a mortgage expert and loan officer at Guild Mortgage. “The key is to budget for a home with a payment that is less than your current rental payment, thus freeing up additional funds to chip away at your outstanding debt.”
When searching for a home, she said, it’s important to put your emotions to the side and let rational thinking guide you.
“The ultimate goal is to gain equity in the short term, around two to five years, and use the proceeds to pay off the remainder of your debt,” she said. “By taking a smart and considered approach, buying a house can help you take concrete steps towards financial stability.”
While there are differing opinions on whether you should buy a house if you’re in debt, hopefully these insights offered more guidance on your specific situation. Instead of a question with a one-size-fits-all answer, this is likely a topic that requires a multi-layer approach.
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