Ready to buy your own home? It’s the American dream—complete freedom in a space that is entirely your own. But before you can buy a home, there’s a lot to consider, especially if this is your first time applying for a mortgage.
Among the questions that you’ll undoubtedly be asking yourself: Should I pay off debt before buying a house? Should I be paying off debt or saving for a house? Should I focus on paying off my credit card debt or student loans first?
While everyone’s situation is different, a mountain of debt is almost never a good thing. Managing your debt responsibly is important to maintaining a strong credit score, which can help you show lenders that you’re a reliable choice for a loan .
When a lender considers you for a mortgage, debt isn’t necessarily a deterrent, but it may factor into the decision. Your debt-to-income ratio may help the lender understand how much mortgage you can take on (we’ll get into this explanation shortly).
There are a few important metrics that lenders use to determine your eligibility for a mortgage. Understanding what they are, and how they work with debt, could help you improve your chances of securing a mortgage for your dream home. As we get into this topic, it’s important to understand that this article is purely a broad overview—and you should always consult a professional if you have debt or mortgage-related questions. But we hope this provides you with a good jumping off point for your own research.
Debt-to-Income Ratio and Credit Scores
The debt-to-income ratio (DTI) measures your monthly gross income against all of the minimum amounts due on your recurring debts. This would include your mortgage payment, all your credit card debt, student loans, car payments, and any other recurring debt you may have. Lenders ideally hope to see that all of these debts combined do not exceed 43% of your gross earnings.
Gross income includes not just your paycheck before taxes but any other income such as annuities or bonuses. For those applying for a FHA home loan with a co-borrower such as their spouse, both your incomes and debts are reviewed by your potential lender.
Lenders use your debt-to-income ratio in addition to your overall credit score to determine your viability. So, it’s important to consistently make those credit card and loan payments on time and to keep an eagle eye on your credit utilization ratio. (And for the record, credit utilization is the amount of open credit you’re currently using—you can find yours by dividing the amount of debt you have by your total credit limit.)
Have debt? See how a credit card consolidation
loan can help get you on track to pay off your debt.
How Consolidation Can Help
It is possible to qualify for a mortgage while you still have debt to pay off, it’s just a question of how much debt you have and what kind of debt it is. Considering a solution that would potentially reduce your payments, lower your interest rate, or possibly even shorten the time it would take to pay off your debt might improve your chances with lenders.
According to a report by the National Association of REALTORS®, in recent years, 36% of home buyers were 37 years old or younger. This age segment is now the largest generational segment of homebuyers. Of those buyers, 46% had student loan debt—with a median loan balance of $25,000.
If you have credit card debt, consolidating your credit card debt might help. When you consolidate your credit card debt, you pay off each one of your credit cards with a single personal loan with a set term.
Then you just have to focus on paying back one loan instead of multiple credit cards. And the interest rate on the new loan can be much lower than traditionally high-interest credit cards.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the
FTC’s website on credit.
SoFi Mortgages are not available in all states. Products and terms may vary from those advertised on this site. See SoFi.com/eligibility-criteria#eligibility-mortgage for details.