Q: My wife and I have been repairing our credit, and we've really turned the corner to where we've gotten spending down well below our income. We are in an apartment now, and hope to buy a house once we've made a little more progress. I have a question about what might ultimately help us get the best mortgage rate -- should we continue to put all of our excess income towards paying down our credit card debt, or should we be saving some of it for a down payment?
A: Ultimately, given today's tighter underwriting standards, you will need to both address your credit problems and build a sizable down payment. For starters, though, if you still have a substantial amount of credit card debt, paying that down should be your first priority.
For one thing, credit history is largely a matter of time: the sooner you can put your problems behind you and start building a better track record, the sooner your credit history will improve. For another thing, that credit card debt is probably outrageously expensive. While mortgage rates were falling below 4 percent, credit card rates barely budged. According to the Federal Reserve, the average rate paid on credit cards these days is nearly 13 percent, and if you have a troubled credit history, you are probably paying a good deal more than that.
As you pay your credit card debt down and improve your credit rating, you should start talking to mortgage lenders about what your next move should be. Find out what they are looking for in terms of credit quality and down payment, so you can put your resources where they will do the most good. Perhaps you can even get mortgage quotes based on different scenarios, such as one where you become debt-free sooner but with a smaller down payment, and one where you take longer to wipe out your debt but can put a larger down payment on the loan.