Experts give different answers but this is truly a personal choice. Do you have to pay all your debts off? Usually, no. The issue some people has is their income isn’t high enough to carry much debt and a mortage so lenders will tell them to pay down debts first. I recently had a client working through pre-approval and they only had savings for the down payment but not closing costs and how much they could get approved for wasn’t as high. We also tried a no down payment program but because the rates were almost 9% for those programs they were approved for nothing in the area that low. Their biggest issue with both loan types? Their car payments.

When each spouse has a car payment, it really affects how much you can afford. Remember that you’re approved for payment, not overall price or rate. So if you’re approved for $3,500, it’s that payment regardless of home price and rates BUT that payment doesn’t go as far when rates are higher because more of that payment is interest so less is left for actual home price. And depending on rates, that payment gets you far or not. With 3% it gets you a great house in most areas! At 7% it doesn’t get you much in many areas and it could be a home at $350,000 in some areas where that doesn’t get you far. Now let’s say you have two cars that are about $500 a month. Well, lenders then deduct those payments from your overall approval payment. Now you’re only approved for $2,500. In your area at current rates, how far will you get in the market with that? Most people? About $250,000 which is around what my clients were approved for. It didn’t get them anything anywhere near them. The car payments were killing their chances of buying a new home. They’re now focusing on saving and paying off those cars instead.

So, it depends. If you $350k gets you a house without paying off debts, is it worth it then? Well, it depends if what you want is in that range or closer to $500k. It’s all subjective. If $350k gets you what you’re happy with, then no, you don’t need to pay off debts to get approved. Each circumstance is different and your needs should be first priority when deciding to or not. Do what’s best for you!