Should you pay-off debt before applying for a home mortgage?

by Valisha K. Bogart, Mortgage Loan Officer on February 17, 2011

Many buyers think they must pay off all their debt before they can apply for a home loan.  The general conception is, “If I show less debt, then I can get approved for more money.”  This is true; however, if the amount of debt you owe is fairly minimal, like under $10,000, then you will not benefit much by paying it off, as only the minimum payments are calculated in the qualifying ratios, not the total debt owed.  So, if your minimum payment is only $80-100/month, then eliminating such payment may not put you in a significantly better buying/qualifying position as you would think.   In addition, if paying off that debt will significantly decrease your savings, then you should hold off as you must have enough cash for down-payment and closing costs.  If you were planning on paying off those debts because you would feel more comfortable and are “ready” to apply for a mortgage, then go ahead, but do NOT close any of the accounts-Even if you plan on never using them again!!  Any credit accounts you close will negatively affect your credit score and in turn, affect your mortgage interest rate, for the worse!!!  Higher rates WILL affect your purchasing power and over all, increase your cost of borrowing money over the long-run.  In summary, paying off those small balance/debts would primarily achieve one thing: Peace of Mind!   

Conclusion:  Talk to the experts first before doing ANYTHING to prepare your-self for homeownership.  THE very first step to homeownership is to consult a mortgage loan officer and real estate agent; they will guide you in the right direction.  Taking the “right” first step will prevent you from losing a great deal and/or the house of your dreams!

Previous post:

Next post: