Should I Pay Off My Debt Before Buying A House? (2024)

FAQs

Should I Pay Off My Debt Before Buying A House? ›

You may need to ​​pay off debt before buying a house if your debt-to-income ratio (DTI)—the amount of your monthly income that goes to debt payments—is too high. For most lenders the limit is ​​36%, but some allow up to 43%.

Should you pay off debt before buying a house? Not necessarily, but you can expect lenders to take into consideration how much debt you have and what kind it is. Considering a solution that might reduce your payments or lower your interest rate could improve your chances of getting the home loan you want.

There's no set timeline for how long it takes to get a mortgage after debt settlement. Your ability to qualify for a mortgage will depend on how well you meet the lender's requirements on the issues raised above (credit score, DTI, employment and down payment).

Mortgage lenders want to see a debt-to-income (DTI) ratio of 43% or less. Anything above that could lead to the rejection of your application. The closer your DTI ratio is to that percentage, the less favorable your mortgage terms are likely to be. A Home Purchase Worksheet can help you determine your DTI ratio.

For some, it may make more sense to pay off debt before saving for a down payment, especially considering the ways in which having debt can impact your mortgage application You may want to prioritize paying off debt if you: Have a significant amount of consumer debt.

Prepayment penalties are usually equal to a certain percentage you would have paid in interest. So, if you pay off your principal very early, you might end up paying the interest you would have paid anyway. Prepayment penalties usually expire a few years into the loan.

Most mortgage lenders want your monthly debts to equal no more than 43% of your gross monthly income. To calculate your debt-to-income ratio, first determine your gross monthly income.

Potential home buyers that may have too much debt may limit the size of mortgage they are qualified to borrow. On the other hand, those who pay off debt too close to the date of application may experience other issues while obtaining a mortgage due to fluctuations in their credit score.

Wiping out high-interest debt on a timely basis will reduce the amount of total interest you'll end up paying, and it'll free up money in your budget for other purposes. On the other hand, not having enough emergency savings can lead to even more credit card debt when you're hit with an unplanned expense.

You may notice slight variations between different lenders' calculations of DTI, but generally, these amounts are considered debt: Monthly housing costs, including a mortgage, insurance, homeowners' association fees and property taxes. Rent payments. Home equity loans or lines of credit.

What is considered a lot of debt? ›

Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.

Based on data from the Federal Reserve Bank of New York and the U.S. Census Bureau (based on 2024 and 2023 data respectively), it can be calculated that each American household carries an average of around $8,674 in credit card debt in a year.

Yes, you can qualify for a home loan and carry credit card debt at the same time. But before you start the homebuying process, you'll need to understand how credit card debt impacts your creditworthiness — this can help you decide whether it makes sense to pay down your credit card debt before buying a house.

Should you pay off all credit card debt before getting a mortgage? In some cases, especially if your current credit score makes it difficult for you to get a mortgage loan, it's a good idea to pay down credit card debt. But keep in mind that credit card debt isn't the only factor in getting mortgage approval.

The snowball method focuses your repayment efforts on your smallest debts, regardless of your interest rates. With this strategy, you'll rank what you owe from the smallest balance to the largest. Then, pay the minimum amount each month on all debts, but focus the majority of your efforts on that smallest account.

Prioritizing debt by interest rate.

This repayment strategy, sometimes called the avalanche method, prioritizes your debts from the highest interest rate to the lowest. First, you'll pay off your balance with the highest interest rate, followed by your next-highest interest rate and so on.

If the interest rate on your debt is 6% or greater, you should generally pay down debt before investing additional dollars toward retirement. This guideline assumes that you've already put away some emergency savings, you've fully captured any employer match, and you've paid off any credit card debt.

The Bottom Line. Paying off debt can boost your credit score, lower your debt-to-income ratio, and lead to better loan terms, making it easier to get preapproved for a mortgage. However, it may delay saving for a down payment and miss out on potential home equity.

Paying off your credit card debt can raise your credit score since you will be using less of your available credit and lowering your credit utilization (which accounts for about a third of your credit score). Lenders can see that you have more of your income available to make mortgage payments.

Your credit score can take 30 to 60 days to improve after paying off revolving debt.