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

November 28, 2017/sonomacountym

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.

Looking to buy a home? Get preapproved today!

Share:

Share on Pinterest Share on LinkedIn

Posted in: , , , , , , , ,

RELATED MORTGAGE ADVICE FROM SCOTT SHELDON

When buying a home, it’s natural to want the lowest mortgage rate possible. But sometimes, chasing a slightly better rate from another lender—especially after your offer has already been accepted—can backfire in a big way. Let’s walk through a real-world scenario. You’ve got an offer accepted on a house. You’re working with a lender who has you approved, documents in underwriting, and a 21-day close of escrow in place. Everything is moving forward. Then you hear from another lender offering a rate that’s 0.25% lower, with slightly better closing costs. It’s tempting. But before you make a jump, here’s what you need to consider. Switching Lenders Comes with Time Costs When you pivot to a new lender mid-contract, they’ll need to: Re-underwrite your entire loan, Order a new appraisal, Disclose and sign new loan documents, Submit the file for final loan approval, Schedule and fund closing—all over again. This doesn’t happen overnight. Even in ideal circumstances, the new lender is likely going to need at least 25–30 days to close. If you’re in a fast-moving or competitive market, this is a real problem. Most sellers won’t grant a contract extension just because you’re switching lenders. So, what happens next? A Contract Extension Can Jeopardize Your Deal Asking for a contract extension means the seller must agree to delay closing. But that delay introduces risk—especially if the seller has backup offers or simply wants certainty. They may not grant the extension. Or worse, they could cancel the deal outright and take another buyer’s offer. Even if the seller agrees to extend, your earnest money and negotiation power could take a hit. And for what? A slightly lower rate that might save you $50 to $75 a month? Mortgage Rates Aren’t as Far Apart as You Think Here’s the truth: all mortgage lenders get their money from the same place—the bond market. The pricing differences between lenders usually range from 0.125% to 0.25% in rate on any given day. If one lender seems to be offering dramatically better pricing, the first thing you should ask is: How? Head over to FreddieMac.com and check the average 30-year fixed rate posted weekly. This is one of the most reliable benchmarks for where rates truly stand in the market. If a lender is quoting you a rate that’s well below that average, ask for the details: Are they charging extra points? Is this a teaser rate with a prepayment penalty? Is it based on a different loan product or risky structure? Often, what sounds “too good to be true”… is. Consider the Bigger Picture Think long-term. If you’re financing $600,000, a 0.25% lower rate may reduce your payment by roughly $75/month. But what if you lose the house and have to start over? That monthly savings doesn’t mean much if you’re outbid on your dream home or lose your deposit. Also, remember: you’re not going to keep this rate forever. Today’s homebuyers typically refinance when rates drop by about 0.75% or more. So if rates fall within the next year or two, you’ll likely be refinancing anyway. Instead of paying extra points now or risking the entire deal for a minor monthly savings, it may be better to accept a slightly higher rate—knowing you’ll refinance when the time is right. The Real Risk Isn’t the Rate—It’s the Delay When shopping for a home loan, don’t just ask, “What’s your rate?” Ask: Can you close on time? Is this rate sustainable or based on hidden costs? Will switching lenders delay or jeopardize my contract? A home purchase contract is a binding agreement between you and the seller to perform within a set timeframe. If you can’t meet those dates because you're chasing a slightly better rate elsewhere, you may want to reconsider if now is the right time to buy. Final Thoughts Yes, interest rates matter. But execution matters more. Before making a switch mid-transaction, talk to your lender. Have an honest conversation about pricing, timelines, and strategy. You might find that staying the course, securing the house, and planning to refinance later offers a better path to financial security. Want to Know Your Options? Let’s compare rates and strategies the smart way—without risking your dream home. 👉 Click here to get a custom rate quote today.

The Risks of Chasing a Lower Mortgage Rate

Why Chasing a Lower Mortgage Rate Can Backfire When buying a home, it’s natural to…

A woman sitting at a kitchen table looking through documents with an American flag and framed military photo beside her, symbolizing a surviving spouse exploring VA loan options.

VA Loan Options for Surviving Spouses

Understanding VA Loan Refinance Options for Surviving Spouses Losing a spouse is one of life’s…

Smiling man holding a "Mortgage Approved" sign in front of a modern home and a DSCR loan presentation board showing rental income exceeding mortgage payments.

How to Buy a Home Without a Job Using a Rental Property Loan Strategy

If you’ve got solid credit and a decent amount of cash on hand—but no W2…

View More from The Mortgage Files:

begin your mortgage journey with sonoma county mortgages

Let us make your mortgage experience easy. Trust our expertise to get you your best mortgage rate. Click below to start turning your home dreams into reality today!

GET YOUR FREE RATE QUOTE NOW