Pay off debt or down payment on house?

Question

When I was 17 I was in a pretty bad car accident that was not fault, now i’m 19 and looking to buy my first home in a year or two and soon to be getting my settlement money from the car accident (finally.) Almost a year ago I bought my car after almost 2 years driving my parents car around and have a car loan. I’m wondering if I should pay off my car loan with my settlement money so it allows me to focus on any house bills I’ll have or use the settlement money as a good down payment to the house. The interest of my car loan is at 4.9% and i also understand that there is down payment assistant programs that could be available. I come from a family that’s not very financially intelligent so i as well only know what I have educated myself on so please give me opinions, suggestions, and advice.

Dave Skow · Answer

@Alexia Healy- thanks ...do you have  employment / income that can be used to qualify for a loan ?   I would recommend getting a  free  pre approval  started with a lender so you can  1)  learn and understand the  process and  the  current numbers  related to the scenario you are considering and  2) make sure you are  able to obtain the  financing  you might need .....without the  financing - you wont be able to  buy    3) once you see what loan amount you can  qualify for and using the  average  prices of homes in the area you are  considering - you can then determine the answer to your  question regarding using the funds to payoff the car  or retain for the  down payment - let me know if you would like a  MD based loan officer to  contact...all the best

Lien Vuong · Answer

You need to establish income and credit first before worrying out the purchase. Without that, you're running before you crawl.

Scott Crowley · Answer

@Alexia Healy Hey! First, let me just say that I am proud to see you asking this question on here at the age of 19! I wish I was as passionate about RE then as I am now.

My hot take: Definitely speak with a lender to dive into the details and better understand what you can actually qualify for. With that being said, if you can qualify for a loan that will allow you to purchase a 'house hack' property of 2-4 units, I would absolutely recommend looking into that strategy. Depending on what capital you may get from your settlement and how you need to rationalize what you do with it, you could look into an FHA loan and pay as little as 3.5% down. Or, if you have plenty to put 20-25% down on a home then I would also recommend doing that as well. Even if it means not paying off the car loan.

The way I look at this: If you house hack and do it effectively(I am including house hacking in here even though you didn't bring it up because I'm trying to recommend a strategy that will set you up for wealth building while buying your first house at the same time), you will be saving money on your monthly housing expenses from the rent of the other tenants(if you do it really well you may even cash flow a little). What you could do with some or all of that extra savings from those tenants is pay down your car loan faster, so you aren't just picking one way or the other.

All of this does rely on many factors that you will just have to uncover with a lender and go from there because your specific situation may alter how to approach things.

Bottom line: Paying off bad debt(your car) is a good thing, but if you can utilize the funds you would have used to pay off the car to wealth build and accelerate the pay off of your bad debt with that accumulated savings...that is POWER and could position you for a fruitful beginning in REI.

Best wishes to you!

Frank Avallone II · Answer

Hey @Alexia Healy,

Happy to hear your are eager to learn and create a better future for yourself.

I agree with @Theresa Harris, I think talking to lender like myself would be a great place to start just to see where you are at as far as qualifying for purchasing a home. From there you should have a little more insight on what the best move with the settlement money would be. I wouldn't pay off the car just yet until you look into the whole scenario as a whole. If paying off that car is going to make the difference in qualifying then that may be a good route to take.

Eliott Elias · Answer

Get rid of bad debt, car payments won't make you any money

Theresa Harris · Answer

Start by talking to a bank to find out how much you are qualified to borrow and what type of house that will buy in your area.  If it is enough to buy a home, I'd use it as a down payment.  You can rent out rooms in the house, if you want, to earn extra income and help with your mortgage payment.  Be sure that you know all of the expenses (mortgage, property taxes, etc).