Does It Make Sense to Pay Off My Student Loans Before Buying a Home?
Short Answer:
Maybe. Paying off your student loans might help reduce your debt-to-income ratio allowing you to qualify for a higher loan amount. However, paying off installment debts like student and car loans might lower your credit score.
Longer Answer:
In a recent Reddit post, a first-time homebuyer discussed his plan to pay off his student loans before purchasing a house. He was shocked to hear that might not be the best idea.
The Case for Paying Off Student Loans First
Paying off student loans before buying a home can provide peace of mind and financial freedom. Without the burden of monthly student loan payments, you may find it easier to manage a mortgage and other home-related expenses. Additionally, eliminating student debt can improve your debt-to-income ratio, potentially qualifying you for better mortgage terms and interest rates.
The Case Against Paying Off Student Loans First
Paying off student loans to reduce monthly obligations might be a good financial decision in the short term, but it may not be in the long term.
First, the money you will use to pay off your student loans might better be used for a larger down payment. For example, if the interest rate on your student loans is lower than your mortgage, using the funds to pay off your student loans towards a lower mortgage payment would be a good use. You would be paying less interest over the long term.
Lenders and Debt with Less Than 10 Payments Left
Interestingly, lenders often do not count installment debts, such as student loans and car loans, when fewer than 10 payments are remaining. This can be advantageous when applying for a mortgage, as it reduces your overall debt load in the eyes of the lender. If you're close to paying off your student loans, it might be worth considering whether the remaining balance will significantly impact your mortgage application.
The Impact on Your Credit Score
While paying off student loans can seem like a financially responsible move, it's important to note that it may temporarily decrease your credit score. This is because installment loans contribute to your credit mix, and closing an account can reduce your credit history's length. However, this dip is usually short-lived. If you are close to buying a home, the dip in the score might be enough to impact your interest rate and mortgage insurance.
Conclusion
Ultimately, the decision to pay off student loans before buying a home depends on your financial situation, goals, and comfort level with debt. Consider consulting with a financial advisor to explore your options and make an informed decision that aligns with your long-term financial objectives.
If you have questions about paying off debt before getting pre-approved for a mortgage, please reach out to me at teamjd@mainstreethl.com
These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact me.
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