From blog comments to social media posts to emails, we get lots of questions about buying and financing a home. We do our best to answer them privately and publicly, in hopes of helping the person asking but also anyone looking to buy. We recently received the question below:
My wife and I are currently beginning to think about buying our first home. Would it be in our best interest to save for a down payment or pay off some bills before a purchase is attempted?
The short answer: It depends. First of all, let's be clear. Amerifirst Home Mortgage is a mortgage lender, not a financial counselor or advisor. The information we provide is meant to help you focus your efforts on what works for you. We'll go over some pros and cons and share a couple of answers from our mortgage consultants. And whether you pay off bills or save money for a down payment, it's all good because you're taking steps towards financial freedom. If you're able to do both, you'll come out ahead even more so. With that in mind, let's look at each situation separately.
Down payment: The pros and the cons
Saving for a down payment to buy a home is a great idea. Even if you end up with a mortgage that finances 100% of the purchase (like the USDA Rural Development option) or a low down payment option like an FHA loan, you'll likely need at least some cash on-hand at the closing table. So saving up money is a positive.
The downside to saving a long time for a big down payment is that you may not need that large of a stash of cash. We know that saving a big pile of money while you're paying rent and other expenses can be challenging. Be sure and take a look at your options. Have you considered buying a home with an FHA loan that requires 3.5% down? While its commendable to save up $10,000 to buy your first home, you could be opening the door to your first home with just half of that amount, or even less. Saving for a down payment for years and years may not fit your lifestyle and finances. That would be a "con" in the down payment category.
Paying off bills: The pros and the cons
Can you find a reason not to pay your bills? Hard to do, right? Paying off bills is not only a good idea, it's your obligation. However, do you need to pay off all your bills and be debt-free before you buy a home? Not necessarily (sorry Dave Ramsey). Part of this answer depends on what you mean by "paying off bills." If you're talking about paying off old collections, slow down and talk to a mortgage consultant. Read "Should I Pay Off My Collections?" to find out why you may want to wait on paying off collections. Here's an excerpt:
When it comes to paying off collections, it's certainly good to clear your credit report in the long run. However, paying off a collection also brings the report "current," which can actually drop your credit score in the immediate time period. Also, paying off collections typically stops your score from dropping long-term, but doesn't usually raise your score.
If you're talking about your credit cards and department store cards, paying them down can definitely help your credit. However, paying them off and closing them down can have a negative impact. Seasoned and varied credit lines can actually help your FICO score. The commonly offered tip is to keep your credit lines at or below 30% of their limits. For example, a $10,000 limit on a credit card should not go above $3,000.
What do the professionals say?
Loan Officer Brandon Davis: Typically the math works in the favor of paying off consumer debt and cash-flowing the mortgage payment. It depends on the debt and how much the borrower wants to save, but I tell people paying down debt to help free up that cash is a good move.
Loan Officer John Insco: There is no simple answer as every borrower is different. It depends on the situation, where your life is at the present time, and what your future looks like as far as income, jobs, family, etc. I would rather see my customers pay off their bills (do not close any charge accounts), and work to raise their credit score to get the best interest rate they can. Also, paying off bills frees them up to get a larger home.
It's Your Call
It all boils down to this: What is your lifestyle and your financial situation? Can you pay down your bills while saving up for a down payment? Do you need to pay just the minimum on your bills in order to save cash for a low down payment option? Take a good look at your income, your obligations and your goal for the next six months. And if you need to talk with a mortgage consultant to get on a plan, don't hesitate to do so.
If you're buying your first home, we know you've got questions. That's why we've put together Get Mortgage Ready, a step-by-step guide for first-time homebuyers. Get it here.