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It is very important to have some personal debt before buying real estate. Your credit score is
a statistical history of your credit worthiness, and having some debt and paying
installments on time increases your score.
When applying for a mortgage, it's generally a good idea to have a "thin"
credit report (not have too many debt accounts). If your credit score is high, the credit report will be
"glanced" at by the loan officer. If your credit score is mediocre, a
"thin" report will imply good debt management. Less explanation will be required if there is an issue with your credit
report. A couple of credit cards, and an auto loan or mortgage
account, will be completely adequate to show your history.
Debt should be financed at the least possible interest rate. If you
have high interest credit cards, convert all accounts to a single credit
card with the lowest interest rate. Take advantage of interest rate
incentives when purchasing a car. Re-finance mortgages when rates
decrease, and when no closing cost "re-fi" mortgages are available. Related,
be careful using 401k loans to pay off debt, because it will be due if you leave your job.
Debt management is extremely important. Debt should be evaluated quite
often so you know you can afford the home you are buying. It's
difficult to live within one's means, but very necessary if you are to build
wealth with real estate assets. Also refer to the
full cost of ownership
page.
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