Should we pay all our loans before saving for a house?

Hi!  I’m so glad you wrote.  There’s not really a “right” answer here, but I will give you my thoughts. I’m assuming that you are a younger couple in your late twenties/early thirties who is currently renting and would like to buy. You both probably have student loan debt, car loans, and credit card debt. You are working to pay off those debts and are trying to manage your expenses so that you don’t incur new debt. You’d like to buy a house in a few years but wonder if you can - or should – with the debt you are carrying.

When people are in stable financial situation in a location where they plan to stay, borrowing money to buy a home that increases in value and that you will eventually own makes a lot more sense than paying the same amount of money or maybe more in rent every month that you will never get back and will never be of any value.  It does make good financial sense to buy when you can.

To qualify for a home mortgage, lenders look at your financial situation including the amount of debt you have relative to your income, you down payment, your salary, your credit history, and other aspects that tell them how high a financial risk you might be. If you have all the earmarks of a person who pays their bills and who has a job that will allow them to continue to do that, you appear low risk. The lender will lend you the money you need at a low interest rate. If you haven’t paid your bills on time or have a high amount of debt with regard to what you own and make in salary, you appear to be a higher risk. In that case the lender will refuse to lend to you or will lend at an interest rate higher than the going rate.

So if you have a lot of loans in comparison to your assets and income, you may want to pay them down before you start saving for a home. It is good, however, to establish a habit of saving, so even if you can only save $25 a month, set up your paycheck to automatically deposit that money in a savings account you set up to save for your home. As you finish up with each of those loans, take the money you were paying toward them and direct it right into your savings account to grow your home down payment.

I hope so much that you can realize your dream of owning a home soon!  Best wishes to you!

Excellent answer from Kathryn.

In addition to her professional advice, I would suggest prioritizing loans depending upon their interest rate. If you have a student loan and a credit card debt, pay the credit card debt first. 

Good luck!