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Ready to buy your own home? There’s a lot to consider, especially if this is your first time applying for a mortgage and you’re carrying debt. While having debt is not necessarily a deal-breaker when you’re applying for a mortgage, it can be a factor when it comes to how much you’ll be able to borrow, the interest rate you might pay, and other terms of the loan.

Understanding how the home loan process works can help you decide whether it’s better to pay off debt or save up for a downpayment on a home. Here’s what you need to know.

How to Manage Debt before Buying a Home

Understand Your Debt-to-Income Ratio

When lenders want to be sure borrowers can responsibly manage a mortgage payment along with the debt they’re carrying, they typically use a formula called the debt-to-income ratio (DTI).

The DTI ratio is calculated by dividing a borrower’s recurring monthly debt payments (future mortgage, credit cards, student loans, car loans, etc.) by gross monthly income.

The lower the DTI, the less risky borrowers may appear to lenders, who traditionally have hoped to see that all debts combined do not exceed 43% of gross earnings.

Here’s an example:

Let’s say a couple pays $600 combined each month for their auto loans, $240 for a student loan, and $200 toward credit card debt, and they want to have a $2,000 mortgage payment. If their combined gross monthly income is $8,000, their DTI ratio would be 38% ($3,040 is 38% of $8,000).

The couple in our example is on track to get their loan. But if they wanted to qualify for a higher loan amount, they might decide to reduce their credit card balances before applying.

That 43% threshold isn’t set in stone, by the way. Some mortgage lenders will have their own preferred number, and some may make exceptions based on individual circumstances. Still, it can be helpful to know where you stand before you start the homebuying process.

Recommended: How to Prepare for Buying a New Home

Consider How Debt Affects Your Credit Score

A mediocre credit score doesn’t necessarily mean you won’t be able to get a mortgage loan. Lenders also look at employment history, income, and other factors when making their decisions. But your credit score and the information on your credit reports will likely play a major role in determining whether you’ll qualify for the mortgage you want and the interest rate you want to pay.

Typically, a FICO® Score of 620 will be enough to get a conventional mortgage, but someone with a lower score still may be able to qualify. Or they might be eligible for an FHA or VA backed loan. The bottom line: The higher your score, the more options you can expect to have when applying for a loan.

A few factors go into determining a credit score, but payment history and credit usage are the categories that typically hold the most weight. Payment history takes into account your record of making on-time or late payments, or if you’ve filed for bankruptcy.

Credit usage looks at how much you owe in loans and on your credit cards. An important consideration in this category is your credit utilization rate, which is the amount of revolving credit you’re currently using divided by the total amount of revolving credit you have available. Put more simply, it’s how much you currently owe divided by your credit limit. It is generally expressed as a percent. The lower your rate, the better. Many lenders prefer a utilization rate under 30%.

Does that mean you should pay off all credit card debt before buying a house?

Not necessarily. Debt isn’t the devil when it comes to your credit score. Borrowers who show that they can responsibly manage some debt and make timely payments can expect to maintain a good score. Meanwhile, not having any credit history at all could be a problem when applying for a loan.

The key is in consistency — so borrowers may want to avoid making big payments, big purchases, or balance transfers as they go through the loan process. Mortgage underwriters may question any noticeable changes in your credit score during this time.

Recommended: What Credit Score is Required to Buy a House?

Don’t Forget, You May Need Ready Cash

Making big debt payments also could cause problems if it leaves you short of cash for other things you might need as you move through the homebuying process, including the following.

Down Payment

Whether your goal is to put down 20% or a smaller amount, you’ll want to have that money ready when you find the home you hope to buy.

Closing Costs

The cost of home appraisals, inspections, title searches, etc., can add up quickly. Average closing costs are 3% to 6% of the full loan amount.

Moving Expenses

Even a local move can cost hundreds or even thousands of dollars, so you’ll want to factor relocation expenses into your budget. If you’re moving for work, your employer could offer to cover some or all of those costs, but you may have to pay upfront and wait to be reimbursed.

Remodeling and Redecorating Costs

You may want to leave yourself a little cash to cover any new furniture, paint, renovation projects, or other things you require to move into your home.

Be Aware of Housing Market Trends

Trends in the housing market may help you with prioritizing saving or paying down debt. So it’s a good idea to pay attention to what’s going on with the overall economy, your local real estate market, and real estate trends in general.

Here are some things to watch for.

Interest Rates

When interest rates are low, homeownership is more affordable. A lower interest rate keeps the monthly payment down and reduces the long-term cost of owning a home.

Rising interest rates aren’t necessarily a bad thing, though, especially if you’ve been struggling to find a home in a seller’s market. If higher rates thin the herd of potential buyers, a seller may be more open to negotiating and lowering a home’s listing price.

Either way, it’s good to be aware of where rates are and where they might be going.

Inventory

When you start your home search, you may want to check on the average amount of time homes in your desired location sit on the market. This can be a good indicator of how many houses are for sale in your area and how many buyers are out there looking. (A local real estate agent can help you get this information.)

If inventory is low and buyers are snapping up houses, you may have trouble finding a house at the price you want to pay. If inventory is high, it’s considered a buyer’s market and you may be able to get a lower price on your dream home.

Price

If you pay too much and then decide to sell, you could have a hard time recouping your money.

The goal, of course, is to find the right home at the right price, with the right mortgage and interest rate, when you have your financial ducks in a row.

If the trends are telling you to wait, you may decide to prioritize paying off your debts and working on your credit score.

Remember, You Can Modify Your Mortgage Terms

If you already have a mortgage, you may be able to make some adjustments to the original loan by refinancing to different terms.

Refinancing can help borrowers who are looking for a lower interest rate, a shorter loan term, or the opportunity to stop paying for private mortgage insurance or a mortgage insurance premium.

Consider a Debt Payoff Plan

If you decide to make paying down your debt your goal, it can be useful to come up with a plan that gets you where you want to be.

Because here’s the thing: All debt is not created equal. Credit card debt interest rates are typically higher than other types of borrowed money, so those balances can be more expensive to carry over time. Also, loans for education are often considered “good debt,” while credit card debt is often viewed as “bad debt.” As a result, lenders may be more understanding about your student loan debt when you apply for a mortgage.

As long as you’re making the required payments on all your obligations, it may make sense to focus on dumping some credit card debt.

Recommended: Beginners Guide to Good and Bad Debt

The Takeaway

Should you pay off debt before buying a house? Not necessarily, but you can expect lenders to take into consideration how much debt you have and what kind it is. Considering a solution that might reduce your payments or lower your interest rate could improve your chances of getting the home loan you want.

When you consolidate your credit card debt, you typically take out a personal loan, ideally with a lower rate than you’re paying your credit cards, and use it to pay off all of your credit cards. You then end up with one balance and one payment to make each month. This simplified the debt repayment process and can also help you save money on interest.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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 .

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Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.


The member’s experience below is not a typical member representation. While their story is extraordinary and inspirational, not all members should expect the same results.

Dr. Christine M. has always been goal-oriented about her finances. That approach worked well when she decided to become a doctor. She stretched an annual salary of $55,000 during her five years as a resident and fellow. Once she became a new doctor in private practice on the East Coast, she made paying down her medical school loans her top priority. By being frugal, she was able to pay them off in three years.

The road to becoming a doctor is long — 11 years at a minimum — and the average cost of medical school is expensive. The median medical school debt for the class of 2021 is $200,000, according to the Association of American Medical Colleges. And that’s not counting undergraduate student loans, credit card balances, or other debt.

But the hard work can pay off. A doctor’s median annual salary is around $208,000. That’s a significant increase from the $60,000 average annual salary a first-year resident earns.

If you’re a doctor, the beginning of your career marks a new phase of your earning power. It’s also a prime opportunity to get yourself on sound financial footing, including paying off your medical school loans. That’s why budgeting is so important for doctors. These strategies can help you reach your financial goals.

Resist the Urge to Start Spending Right Away

After years of hard work and sacrifice, you may be tempted to treat yourself. But don’t go wild. “I think lifestyle creep is the biggest danger we see [among new doctors],” says Brian Walsh, CFP, senior manager, financial planning for SoFi. Leveling up early in your career can wreak havoc on your savings and financial health while setting unsustainable spending habits that are hard to break.

Automate your finances whenever possible. For instance, preschedule your bill payments and set up automatic contributions to your retirement account.

To encourage good spending habits, use cash or a debit card for purchases, Walsh suggests. You may also need to practice extra self-control. Because Christine was thrifty, she was able to triple her loan payments to $4,500 a month. She also made additional payments whenever she could. “You just have to keep reminding yourself what your priorities are because it’s easy to want more,” she says.

Get Serious About Savings

As a new doctor, you may not start your career until you’re in your thirties, which puts you behind the curve on saving for long-term goals. The good news: earning a higher income can help you make up for lost time.

Walsh advises early-career physicians to set aside 30% of their income for savings. Of that, 25% should be for retirement and 5% for other savings, like starting an emergency fund that can tide you over for three to six months. The remaining 70% of your income should go toward expenses, including monthly medical school loan payments.

The sooner you start saving and investing, the sooner you can enjoy compound growth, which is when your money grows faster over time. That’s because the interest you earn on what you save or invest increases your principal, which earns you even more interest.

Consider Different Investments

For investing your retirement savings, you may need to think beyond maxing out your 401(k) or 403(b), though you should do that as well. Walsh suggests new doctors tap into a combination of different investment vehicles. This strategy, known as diversification, can help protect you from risk. Here are some vehicles to consider:

•  A health savings account (HSA), which provides a triple tax benefit. Contributions reduce taxable income, earnings are tax-free, and money used for medical expenses is also tax-free.

•  An individual retirement account (IRA), like a traditional IRA or Roth IRA, can offer tax advantages. Contributions made to a traditional IRA are tax-deductible, and no taxes are due until you withdraw the money. Contributions to a Roth IRA are made with after-tax dollars; your money grows tax-free and you don’t pay taxes when you withdraw the funds. However, there are limits on how much you can contribute each year and on your income.

•   After-tax brokerage accounts, which offer no tax benefits but give you the flexibility to withdraw money at any time without being taxed or penalized.

Two options to consider bypassing are variable annuities and whole life insurance. Walsh says they aren’t suitable ways to build wealth.

Regardless of the strategy you choose, keep in mind that there may be fees associated with investing in certain funds, which Walsh points out can add up over time.

Protect Your Income

There are a variety of insurance policies available to physicians, and disability insurance is one worth considering. It covers a percentage of your income should you become unable to work due to an injury or illness. If you didn’t purchase a policy during your residency or fellowship, you can buy one as part of a group plan or as an individual. Check to see if it’s a perk offered by your employer. Christine’s practice, for example, includes a disability plan as part of its benefits package. Monthly premium amounts vary, but in general, the younger and healthier you are, the cheaper the policy.

Recommended: Short Term vs. Long Term Disability Insurance

Develop a Plan to Repay Student Loans

No matter how much you owe, having the right repayment strategy can help keep your monthly payments manageable and your financial health protected.

To start, consider the types of student loans you have. Federal loans have safety nets you can explore, like loan forgiveness and income-driven repayment (IDR) plans, which can lower monthly payments for eligible borrowers based on their income and household size. The Biden Administration is currently working on revamping IDR and Public Service Forgiveness to make it easier to qualify and to accelerate forgiveness for some borrowers.

Once you’ve assessed the programs and plans you’re eligible for, determine your goals for your loans. Do you need to keep monthly payments low, even if that means paying more in interest over time? Or are you able to make higher monthly payments now so that you pay less in the long run?

Two approaches to paying down debt are called the avalanche and the snowball. With the avalanche approach, you prioritize debt repayment based on interest rate, from highest to lowest. With the snowball method approach, you pay off the smallest balance first and then work your way up to the highest balance.

While both have their benefits, Walsh often sees greater success with the snowball approach. “Most people should start with paying off the smallest balance first because then they’ll see progress, and progress leads to persistence,” he says. But, as he points out, the right approach is the one you’ll stick with.

Explore Your Refinancing Options

Besides freeing up funds each month, paying down debt has long-term benefits, like boosting your credit score and lowering your debt-to-income ratio. And you may want to include refinancing in your student loan repayment strategy.

When you refinance, a private lender pays off your existing loans and issues you a new loan. This gives you a chance to lock in a lower interest rate than you’re currently paying and combine all of your loans into a single monthly bill. Some lenders, including SoFi, also provide benefits for new doctors.

Though the refinancing process is fairly straightforward, some common misconceptions persist, Walsh says. “People overestimate the amount of work it takes to refinance and underestimate the benefits,” he says. A quarter of a percentage point difference in an interest rate may seem inconsequential, for instance, but if you have a big loan balance, it could save you thousands of dollars.

That said, refinancing your student loans is not be right for everyone. If you refinance federal student loans, for instance, you may lose access to benefits and protections, such as federal repayment and forgiveness plans. Weigh all the options and decide what makes sense for you and your financial goals.

The Takeaway

As a new doctor, you stand to earn a six-figure salary once you complete medical school and residency. But you’re likely also saddled with a six-figure student loan debt. Learning new strategies for saving and investing your money, and coming up with a smart plan to pay back your student loans, can help you dig out of debt and save for your future.

If you decide that student loan refinancing might be right for you, SoFi can help. Our medical professional refinancing offers competitive rates for doctors who have a loan balance of more than $150,000.

Photo credit: iStock/Ivan Pantic

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.