Paying Off Debt to Qualify for a Mortgage

 In Qualifying for a Mortgage

Many people who apply for a mortgage have significant amounts of other, non-mortgage debt.  Sometimes, those other debts prevent them from qualifying for a mortgage because the payments on the other debts cause their debt-to-income ratio (DTI) to be too high.  

We are often asked if you can pay off or pay down the balances on other debts in order to qualify for a mortgage.  

Here’s what you need to know.

Installment Debt

If the debt you want to pay off is an installment debt, such as a car loan, personal non-mortgage loan, student loan, etc., you are allowed to pay the debt off or pay the balance down so you can qualify for a mortgage.  If you pay it down enough so there are 10 or fewer remaining monthly payments, we do not need to include the payment in your DTI.

Revolving Debt

If the debt you want to pay off is a revolving debt, such as a credit card account, you are not allowed to pay the balance down to qualify, but you are allowed to pay it off to qualify for a mortgage.  You do not need to close the credit card account – you just need to pay it off.

Benefits of Paying Off Debt to Qualify for a Mortgage

Regardless of which type of debt you are paying down or paying off, you can either pay it off before the closing, or you can pay it off at the closing.  One advantage of paying a debt off before the closing is it will probably raise your credit scores, and that may result in a lower interest rate. If you pay the debt off at the closing, it will still raise your credit scores, but it will not affect your interest rate because the mortgage loan will have already closed.

If you have any questions about paying off or paying down debt to qualify for a mortgage, or if you have any other questions related to qualifying or credit, contact us and we will be glad to give you the answers.

Recent Posts

Start typing and press Enter to search

Can You Borrow Money for the Down PaymentDon’t Pay Off Your Collection Accounts