How Much Is Too Much Debt to Have When You’re Looking To Buy A House?

In an ideal world, you would be debt-free when purchasing a home.  This allows the following:

  • Higher Credit Score

    • The higher the credit score, the lower your mortgage interest rate will be.
    • Boards of co-ops (and sometimes condos) will have no issue with your credit.

  • Greater purchasing power as debt may prevent you from borrowing as much as you wanted.

However, we live in a pragmatic world.  As such, I advise the following strategy with debt when buying:

  • Credit Cards/Store Cards:

    • Pay them off before applying for a mortgage.
    • Credit card debt is frown upon co-ops and condos.  You could be turned down because of it.
    • Do NOT max out your cards after you receive your mortgage commitment letter and board approval. Banks run everything one more time before the closing. People have been denied a mortgage after they maxed out their cards buying furniture for the new home prior to closing.

  • Back Taxes/Liens:

    • Definitely pay off.

  • Auto-loans

    • Ideally not great but "part of life" in some markets.  In urban centers such as NYC, a question may come up as to why you need a car.

  • Student-Deft

    • Perhaps the only "good debt" with caveats.  Having $200,000 in deft from med school and you are a doctor is different than $200,000 in debt from fine art major and you work at a coffee house.

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