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.
- 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.
- 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.