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First Time Home Buyer

Should I Pay Off My Debt Before I Apply for a Home Loan?

Once you’ve found your dream home, your next step is to apply for a home loan so you can get the funds to proceed with the purchase. 

In order to obtain a loan, you must prove that you are financially qualified. But what if you have outstanding debt? Will this impact your ability to get a loan and purchase your dream home?

Here’s what you need to know.


How Does Debt Affect Home Loan Eligibility?

Almost everyone has debt. In fact, approximately 77% of American households have outstanding debt. But debt isn’t necessarily bad, nor does it automatically disqualify you from being able to obtain a home loan. 

What matters is how much debt you have and whether you’ve made your payments on time in the past. Specifically, lenders will want to review your credit score and debt-to-income ratio. 


How Debt Impacts Your Credit Score

It is a common belief that the only way to have a good credit score is to never borrow at all. Wrong! It is essential to borrow in small amounts and pay back on time. This builds a strong credit history that lets lending institutions know that you are responsible with your money. 

If you’re not sure where your credit stands, you may want to do a quick credit check. Many banks will do credit checks for customers for free. There are also apps that can help you get a good estimate of where your credit stands.


Your Debt-To-Income Ratio

Having credit card debt doesn’t hurt your credit score, and it rarely ever stops anyone from qualifying for a mortgage. However, if you have a high debt-to-income ratio, then it can be challenging to get a home loan. Your debt-to-income ratio should be no more than 43%.

If your DTI is high, you may want to pay down your debt before applying for a home loan.


Down Payment Requirements for Home Purchase 

In addition to having low debt and a good credit score, one way to prove your worthiness to lenders is to have money saved for a down payment. As a rule of thumb, you should try to save for a down payment of at least 3.5%. If you’re having trouble coming up with that kind of cash, reach out and ask your lender for help. They may know about down payment grants or programs that you aren’t aware of.


Wrapping Up

While you are better off paying down debt before applying for a home loan, the honest answer is that having debt doesn’t automatically disqualify you. Your eligibility primarily depends on your earnings, credit score, down payment, and debt-to-income ratio. 


Let Mortgage Solutions Financial Help You Apply for a Home Loan

Our mortgage experts are here to guide you through the process of applying for a home loan. Call our office today to speak to an expert and get started.