Pay off debt or put more money down?

“Marla” asks: I have $20,000 and my new husband has $9,000 in credit card debt. Should I pay off his credit card and only have 11,000 for a down payment on a house, or should I use the entire $20,000 for the down payment?

Great question! There are several things to look at here.

My first question would be: who will be getting the mortgage? Just because you are married, doesn’t mean you both have to be on the loan. Whether you decide to get a loan together, or in the name of just one of you, depends on your income, credit scores and qualifications. If your credit scores are significantly higher than your hubbie’s, and your income alone is sufficient for the loan, then you could get the loan using your down payment and keep him off the application. (In most cases, even if one of you gets the loan, however, the home title will have to be held jointly because of state property laws.)

However, let’s assume you will get the loan together. You need to get both of your three bureau credit scores to make sure they are accurate, and to see who has the higher credit scores. Usually the credit scores of the person with the highest income will be used as the primary borrower, and the other person will be the co-borrower. If your credit scores are significantly different, you may have some work to do on his (or your) credit before you buy.

The other thing to look at is what a different down payment will do to your loan options and rates. Loan programs and rates often change quite a bit when you go above certain thresholds such as borrowing more than 80% of the home’s value, 90%, or 95%. If you have enough money for a 20% down payment, for example, and your credit scores and income qualify you for a good loan, you may want to put the money into the house and then tackle the debt.

Keep in mind that the lender will be looking primarily at the “debt ratio” not your husband’s overall level of debt. To figure your debt ratio, it will take into account the required monthly payments on your mortgage (including principal, interest taxes and insurance) and other required debt payments. For your husband’s credit cards, that may mean only looking at a required payment of $200 or so, depending on the minimum payments reported for his credit card debt on his credit reports. If you don’t have much other debt (car loans, student loans, etc.) then that minimum payment may have little impact on the debt ratio or the loan.

I would recommend you run a search and then ask your lender to help you evaluate these various scenarios to find which one gets you the right loan. Remember, once you are registered, you can change your search criteria as well. So you can run the loan with the $20,000 down payment and then with a smaller one. (For the most accurate results, though, you should both have your 3-bureau FICO scores.)

Finally, the biggest challenge for you two may not be choosing a loan but marrying your different styles of handling money. It sounds like perhaps you are a saver and he’s a spender. Not only do opposites attract (as I can say from personal experience!) but, money clashes can also push apart a couple just as easily. A great book for the two of you to read together would be Olivia Mellan’s book, Money Harmony.

Good luck on your home purchase and the best to both of you!