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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 debt from med school and you are a doctor is different than $200,000 in debt from a fine arts major and you work at a coffee house.



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