Couple sitting in chairs across from a real estate agent.

Becoming a homeowner can feel like an overwhelming process with many steps to take before you reach your goal. When you’re preparing to buy a home, you need to start by getting your finances in order. Part of this process is determining how much you’ll have for a down payment. Another part is looking at your debt. Both will impact how much of a mortgage you will qualify for, and both are important to the process. Many would-be homebuyers feel homeownership is out of reach because they have debt and limited savings for a down payment, but it is possible! You can both pay off debt and have a down payment.

How Your Mortgage Amount is Determined

When applying for a mortgage, the bank looks at your income and any debt payments you have. A common amount that banks use for debt payment allocation (which will include your mortgage) is 36% of your income. So whatever the monthly payments are toward your debt will be taken into account. Any existing debt will reduce the size of the mortgage the bank will give you. How much of a down payment you have will not increase the size of the mortgage, but will only impact the price of the home. For example, if the bank qualifies you for a mortgage of $150,000 and you have a $10,000 down payment, you can look at houses with a max price of $160,000. If you had that $10,000 allocated for debt repayment before qualifying for a mortgage, the mortgage you qualify for may be more than that.

Advantages of Using Your Savings to Pay Off Debt First

When you have some savings available, it typically makes sense to use at least some of that money toward paying off your debt. Credit card debt usually comes with high interest rates and is not tax deductible. The interest you pay on your mortgage loan is tax deductible and likely to be a much lower interest rate. You will qualify for a much better mortgage, both in size and interest rate, if you have less debt. When taking all of this into consideration, using some of your savings to pay off debt makes fiscal sense.

Situations Where Savings are Better Used for a Down Payment

There are situations where you are better off keeping some of your savings for a down payment. There are mortgages that allow for no down payment, but they typically carry much higher interest rates. Even a small down payment can save you money in the long run. If you can reduce your interest rates and minimum payments on your debt, the money toward payoff may also be better used toward a down payment.

Benefits of Using a Real Estate Agent

Talking to the professionals about your personal situation and homeownership goals is the best place to start. While research you do on your own is helpful to get a general idea of how to proceed, talking to real estate and mortgage professionals allows you to get advice based on details that are specific to you. One of the many benefits of using a real estate agent is the personal touch from a professional who can guide you on the path to home ownership. An agent can help you get an idea of which types of homes may be available in your price range, and what kind of mortgage you would need to qualify for. A real estate agent has a good network of professionals to help you along the way, too.

Many homebuyers think the benefits of using a real estate agent don’t start until they feel that they are completely ready to buy, but bringing a professional into the conversation sooner can get you started on the right path, and will assure you that you have a good partner when it is time to buy! If you are researching what buying a house is going to look like for you, contact Amberwood Real Estate for some expert advice on your next step in the process.