The instinct to pay off all debt before buying a home is understandable. But it's not always the right move. Paying off the wrong debts in the wrong order can hurt your credit score, drain cash you'll need for a down payment, and leave your financial picture weaker than if you'd left certain debts alone. Here's how to think through it.
What Matters Most to a Mortgage Lender
Lenders care about your debt-to-income ratio (DTI) and your credit score. DTI is the ratio of your monthly debt payments to your gross monthly income. Most conventional loans allow up to 45 to 50 percent DTI; FHA allows up to 50 to 57 percent in some cases. The lower your DTI, the more loan you qualify for.
Your credit score is affected by payment history, utilization (how much of your available credit you're using), length of history, credit mix, and new inquiries. Paying off a debt can improve your score by lowering utilization. But it can also hurt it if you close the account and reduce your available credit or shorten your credit history. For a deeper look at how DTI works in the approval process, see our DTI mortgage guide.
Which Debts to Prioritize Paying Down
Credit cards with high utilization have the biggest impact on your score. A card with a $10,000 limit at $8,000 balance (80% utilization) is dragging your score. Paying it down to below 30% ($3,000 balance) can add 20 to 50 points. Paying it to zero is even better.
Monthly payment obligations that raise your DTI are worth eliminating if you have the cash: car loans, student loans, and personal loans all count against your DTI calculation. If a $400-per-month car payment is the difference between qualifying at the price you need and not qualifying, and you have enough cash to pay it off without depleting your down payment fund, paying it off makes sense. Run that exact scenario by your lender before writing the check.
What to Leave Alone
Installment loans with small balances that are nearly paid off may not be worth eliminating before the mortgage. If you have $2,000 left on a car loan with a $350 monthly payment, paying it off saves $350 per month in DTI improvement. Whether that's worth the cash depends on how tight your DTI is and how much cash you'll need at closing.
Don't close old credit card accounts just to feel debt-free. Closing them reduces your total available credit, which raises utilization on remaining cards, and can shorten your credit history. Both hurt your score. You can stop using them without closing them.
Not sure which debts to pay off first?
We review your full financial picture before recommending any payoffs. The right move depends on your specific numbers, not a general rule.
Review My Numbers for FreeThe Cash vs. Credit Score Trade-Off
You need cash for a down payment and closing costs. If paying off debt depletes that cash, the lender still needs to see funds to close. Draining $15,000 in savings to pay off a $15,000 car loan might eliminate the car payment from your DTI but leave you short of closing funds.
Some programs allow gift funds, grants, or seller concessions to offset closing costs, which can preserve your cash while improving your DTI. Talk through the trade-off with your lender before making large payoffs. There are also Florida down payment assistance programs that can help bridge the gap if cash is tight.
Debt Consolidation Specifically
Consolidating multiple debts into one personal loan or balance transfer can simplify payments. But it typically doesn't improve DTI unless the new payment is lower than the sum of the old payments. And opening a new account generates a hard inquiry and reduces average account age, which can temporarily dip your score.
Consolidation right before applying for a mortgage is often counterproductive. If you're within six months of applying, avoid opening new accounts or taking on new debt of any kind. The timing matters as much as the action.
At 14 Days To Close, we review your full financial picture before recommending any payoffs or consolidations. Give us a call or start your pre-approval now.
