Home Lender Shopping: Should I use Savings Funds to Zero-out Credit Cards?

Question

[USA] A seller just agreed to my offer on their house ($500k). This would be my first, and I am about to start reaching out to lenders for loan offers. I have $50k in savings ($15k in cash and $35k in an S&P 500 ETF). I also have $40k in credit card debt, at an average of 11% above Prime.

Should I pay off my credit cards with my savings fund to make myself more attractive to lenders (or other house buying considerations)?

I purchased ETF shares instead of paying down credit cards (mostly), figuring that the market would appreciate at an interest rate greater than the my credit cards interest rate, which indeed it has over the past 2 years (mostly). If it is better for lender terms/house buying considerations, I would sell tomorrow.

Other details: My income is $6k/month, with $3k in recurring expenses (inc. bills). I have $200k in my 401(k). My Experian credit score is 790. One lender has issued me a preapproved letter at $600k. I am married and in my 40s. I am aware that home-buying is primarily a lifestyle choice, and not a fantastic investment, and intend to live in it for 30 years (hopefully).

Answer 1

One lender has issued me a preapproved letter at $600k.

Because you have had an offer accepted you have only a matter of weeks to get a better interest rate deal. Check the contract you and the seller signed. There is probably a option for you to cancel the deal if you can't get financing in X days. Theoretically you could still look for a better deal after this date, but if you never find a deal you like you will have to live with the one you have. There is also the practical part that the seller won't wait for you, and won't tolerate a slip because you change lenders.

Should I pay off my credit cards with my savings fund to make myself more attractive to lenders (or other house buying considerations)?

You have to understand what the lender was considering when approving your loan with your financial situation.

I have $50k in savings ($15k in cash and $35k in an S&P 500 ETF). I also have $40k in credit card debt, at an average of 11% above Prime.

How much of the $50K did the lender assign to a required down payment? If you use that money to pay off the credit cards instead of for the down payment, you may no longer qualify for the specific loan.

How much were the estimated closing costs? If some of the $50K was assigned to cover the closing costs, then you will have problems at closing. Sometimes the seller helps pay closing costs, and sometimes the lender rolls some closing costs into the loan, but you have to know what you have agreed to.

Also remember selling the ETF will have a tax issue if there are any capital gains. Therefore you won't be able to access all the $35K for the home or the credit card debt.

I have $200k in my 401(k).

Did the lender expect you to get money from your 401(k)? You might qualify to get a 401(k) loan or to make an approved withdrawal. But those options have other impacts besides just interest.

Did the lender expect to to pay off some of the credit cards before closing?