Can I buy a house if I have a lot of credit card debt?

In the last few weeks I have met with a number of people, mostly married couples, who want to buy their first house, or buy a bigger house because of their growing family.

They tell me they are eager to buy their house now, because they are afraid that real estate prices will continue to increase, and if they wait too long they may never be able to afford a home.

It is true that over the last three years house prices in every city in Ontario where we have offices have increased. It is also true that house prices do not increase forever; the real estate market goes up, and goes down, based on supply and demand.

I personally believe that as interest rates increase, house prices will level off and perhaps even decline. Unless you have a very secure job, and can lock in a favourable interest rate, it may not be advisable to purchase a house at what may turn out to be the peak of the real estate market.

In addition, if you already carry debt, such as high interest credit card debt, adding more debt by purchasing a house may not be wise. First, it is unlikely that a bank or mortgage lender will lend you money if you are already over-extended. Second, more debt will only place an even greater strain on your already tight finances.

I suggest the following approach:

If you want to buy a house, start by eliminating your existing debt. Pay off your credit cards and bank loans. If you need help, consider contacting a credit counsellor in Ontario to arrange a debt management plan to repay your debts in full over a three to five year period. The credit counsellor will normally be able to negotiate an interest freeze, so all of your payments go towards repaying your debt.

If your debts are too high for that approach, consider a consumer proposal or, as a last resort, personal bankruptcy.

Obviously having a personal bankruptcy or consumer proposal on your credit report will make it more difficult to get a mortgage. However, if you eliminate your debts, you will have money to save for a down payment; with a sufficient down payment you can qualify for a mortgage, even with a bankruptcy on your credit report.

House prices in Ontario will probably not increase substantially over the next few years, so dealing with your debts first is probably your best option.

For advice on dealing with your debts, please contact the Hoyes Michalos office near you, and one of our professionals will meet with you personally to help you make a plan to deal with your debts.

Posted by J. Douglas Hoyes, CA, Trustee @ 11:59 AM

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