Is your goal to qualify for a mortgage in the near future? The steps you take before applying could have a big impact on making that happen. One preparatory step that many people consider is paying down or off their credit card debt before getting a mortgage. While this can be a great idea, follow these few dos and don'ts to make it the most successful it can be.
Do Learn Your Debt-to-Income Ratio
The debt-to-income ratio, or DTI, is the percentage of your monthly income which goes to obligatory debt. Mortgage underwriters and lenders specify the maximum number this can be in order to qualify for certain mortgages. Learn your numbers and the numbers you need to qualify for your desired types of mortgages so you know your debt goals.
Don't Wait Until the Last Minute
Counterintuitively, debt payoff may have a small negative impact on your credit score. This is largely because you lose a portion of your history of timely payments. This drop will pass, but if the lender tries to run your credit during the interim, it may be lower. In addition, you must give payoffs enough time to be reported to all the credit agencies. So start on payoff early for the best results.
Do Leave a Cash Buffer
Don't put your finances at risk in an attempt to pay off more debt than you can reasonably afford right now. If you use all your savings to pay off credit cards and then the mortgage requires you to pay closing costs, you could end up without the cash or having to take on more debt to pay these. Similarly, you need to be able to deal with a financial emergency without taking on even more debt. So be balanced about your funds.
Don't Close All Accounts
Many consumers follow through on debt payoff by closing the empty accounts. This can be helpful, as it prevents you from charging them up again. However, when you close credit accounts, you also see a drop in your credit score. Minimize this impact by closing only a few accounts, spreading out the closures, or waiting until after you close on the mortgage to close them.
Do Pay Off Strategically
If you can't pay off all credit card debt before applying, formulate a strategy for which debts to pay off. Many borrowers pay off or down accounts with the largest minimum monthly payment due, resulting in the biggest drop in their DTI. Others pay off small individual debts to maximize their dollars. Still others pay off a percentage of each card. Many approaches can work, so just make a plan and stick with it.
Where to Start
Ready to learn more about how to handle your debt paydown before your mortgage? Start by consulting with a lending agent in your area to learn more about the DTI, credit score requirements, and mortgage rules today.
