What you need to know when paying off debt to buy a home

Here’s what you need to know if you’re trying to pay off debt before buying a home

Paying off debt to buy house can absolutely be beneficial. Debt cripples a would-be home buyer’s ability to afford a mortgage payment. Here is how you should strategically look at paying off debt to buy a home…

Mortgage lenders are concerned about the minimum payments that you make on credit obligations added to a proposed total mortgage payment. The sum of these numbers divided into your monthly income pretax is what determines your debt to income ratio.  Your debt to income ratio is a figure lenders’ take very seriously when granting you access to credit.

DTI limits on programs:

  • FHA/VA Loans up to 55%
  • Conventional Loans up to 50%
  • Jumbo Loans up to 43%

One of the things potential home buyers can do is to pay off the debt before applying for a mortgage. This is a great strategy if it’s done properly. Pay off the debt, then apply and consent to having your credit ran. The second strategy is to apply first then pay off debt. Make sure your lender specifically allows you to pay off debt to qualify.

Here is the reality- if you got yourself into the negative situation to begin with, how do you have the financial acumen to get you out of the situation that you put yourself in? This something a lender may not ask you, but will be looking for in your supporting documentation. The truth is having a conversation with a mortgage professional can create a homeownership plan would be far more beneficial than trying to pay off debt yourself when you might be paying off the wrong debt driving you further away from the prize. Put another way, get your lender’s advice about which debts to pay off in order of priority.

Generally, but not always you want to pay off the debts that have the biggest monthly payments with the lowest possible balances. This way you get the biggest bang for your buck. It is also generally better to pay off debt with your cash than it is to try to put more money down hoping for the same offset. If you are in this financial situation your best bet is to talk to a lender. The lender will have to pull a copy of your credit report, to identify the debt that would be most beneficial for you to pay off in full.

If you know you want to buy a home, but you feel you need to pay off debt first, get the buy-in from your lender on that plan. You might find by professionally paying off specific debts your credit score could also rise improving your ability to borrow.

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