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Use retirement account pay down debt before mortgage?

Should I use money from a retirement account to pay down credit card debt before I apply for a mortgage? How does this affect my debt-to-income ratios?

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

The answer to your question about using retirement money to pay down credit card debt depends on what your financial priorities are. Paying down your credit card debt will improve your debt-to-income ratio which means you can afford a larger mortgage amount.  The less personal debt, such as credit card, car and student loans, you have, the larger the mortgage you can afford while the more debt you have the smaller the mortgage you can afford. We provide a thorough overview of debt-to-income ratios on FREEandCLEAR. Additionally, when you apply for a mortgage you really do not get any "credit" for retirement account savings. Specifically, retirement savings does not allow you to qualify for a larger mortgage amount.

On the other hand, withdrawing money from a retirement account usually involves a penalty which means you are handing money to the government which is not good. Plus you want that money to be there when you retire. So there is a trade-off between affording a larger mortgage today and paying a penalty to access your retirement funds and potentially not having that money when you need it in retirement.

My recommendation is that you use our Mortgage Qualification Calculator to determine what size mortgage you can afford at different monthly debt levels and use that information to decide if you need to pay down your debt and the best way to do that.

Please note that you can use up to $10,000 ($20,000 if you are married) in funds from your retirement account to buy a home without paying a penalty, although this exception typically applies to first-time home buyers. We provide a comprehensive overview of How to Use Money from a Retirement Account to Buy a Home on FREEandCLEAR.

Because you may be able to access your retirement funds penalty-free to buy a home, it may make more financial sense to use retirement funds to pay for all or part of your down payment which may allow you to afford more house, as opposed using that money to pay down credit card bills. We highly recommend that you consult a tax specialist to understand the tax consequences before withdrawing money from an retirement account.

You can use our Down Payment Calculator to determine how much home you can afford based on different down payments.

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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