Fix Credit, Save Money, or Pay Debt First? A Homebuyer Guide

Welcome to our comprehensive guide designed to help you navigate the complexities of homebuying while managing your credit, savings, and debt.

The $500 to $1,000 Starter Fund

A starter emergency fund is an essential first step for any homebuyer, typically ranging between $500 and $1,000. This fund covers unexpected expenses like car repairs or medical bills before you purchase a home.

Payment History

Your payment history makes up about 35% of your credit score. Late payments can negatively impact it for seven years, so make sure to pay bills on time.

Debt Above 7 to 8 Percent

If you have debt above 7 to 8 percent of your total income, it's essential to focus on paying it off before applying for a mortgage. High levels of debt can reduce your ability to qualify or increase the interest rate.

Snowball vs Avalanche Method

There are two common strategies for paying off debt: snowball and avalanche methods. With the snowball method, you pay off debts in order of smallest to largest balance. The avalanche method focuses on high-interest debts first.

Full Emergency Savings

A full emergency fund typically equals three to six months of living expenses. Once you reach this goal, you're better equipped to handle financial emergencies without relying on credit or loans.

Buying in 3 Months

If your home purchase is within three months, focus on clearing up errors on your credit report and paying down any high-interest debt. Late payments should also be addressed before applying for a mortgage.

Buying in 6 Months

With six months until your planned home purchase, prioritize paying off high-interest debt and building your emergency fund. Continue working on improving your credit score as well.

Buying in 12 Months

If you have a year to prepare for a home purchase, aim to pay off all high-interest debt and achieve a full emergency fund. In this scenario, it may be beneficial to work on repairing your credit score as well.

Five-Step Checklist Comparison

Here's a comparison of the five-step checklist for deciding what to prioritize: Save first, protect your credit, attack high-interest debt, fix errors, then build 3 to 6 months of reserves. This order helps you prepare for a mortgage application.

Mortgage Applicant Priority: What to Improve Before Applying for a Mortgage

Before applying for a mortgage, focus on building your starter emergency fund, paying off high-interest debt, and fixing errors on your credit report. Addressing these items can improve your chances of qualifying for a mortgage.

Disputing Credit Report Errors

Check your credit reports from Equifax, Experian, and TransUnion for errors -- incorrect account details, payments marked late that weren't, or accounts that aren't yours. File a dispute directly with the relevant bureau online or by mail; the bureau generally has 30 days to investigate.

Timing matters for a home purchase: disputes can take several weeks to resolve, so check your reports and file any disputes as early as possible, not right before applying for a mortgage or during closing.

See what to improve before applying for a mortgage

Learn more about what improvements you should make before applying for a mortgage. This guide covers the importance of a starter emergency fund, high-interest debt, and credit repair strategies.

Still Building Your Starter Emergency Fund?

If you're still building your starter emergency fund, here are some tips to help accelerate your progress. Prioritize saving, cut unnecessary expenses, and consider additional sources of income.

Common Questions

This guide provides educational information on credit repair, savings, and debt payoff in the context of homeownership. Results may vary based on individual circumstances.