Should You Pay Down Debt Before Applying for a Mortgage?

You may feel ready to buy a house — but if your finances aren’t ready, the obstacles between you and your dream house may feel insurmountable. But debt doesn’t have to spell the end of your homeownership dreams: you might just have to take a few extra steps along the way. Here’s what you need to know.

What credit score do you need to buy a house?

We know this isn’t the most satisfying answer, but it’s the most accurate: it depends. There’s not one set score for all mortgage lenders, but generally speaking, the higher your credit score, the better — not only for qualifying, but for scoring a good interest rate, too.

That said, some lenders — including Quontic — won’t automatically disqualify you if you have an imperfect credit history. The minimum credit score for some of our most popular home loan programs is 660, which falls into the “fair” category.

But even good credit isn’t a guarantee, and it’s not just your credit score that matters. Lenders also look carefully at your overall financial profile, including your credit report, and how much outstanding debt you carry in order to make an educated guess as to whether or not you can really afford a mortgage payment.

What is DTI, and why does it matter?

One of the most important metrics mortgage lenders use to assess a potential borrower is DTI, or debt-to-income ratio. DTI is basically a measure of how much debt you have — specifically your required monthly debt payments — expressed as a percentage of your monthly income. That includes everything from credit card balances to student loans to auto loans: all of your monthly payments, totalled up, divided by your gross monthly income. When calculating DTI, Quontic factors in the proposed mortgage payment of the new loan.

Generally speaking, again, a lower DTI is better for your mortgage application; if the lender sees that you don’t have much existing debt to your name, they may feel more confident that you can easily afford to make regular, timely mortgage payments. Higher DTI borrowers are considered a bigger risk by lenders, and many lenders have a certain DTI cap — usually around 43% — over which a home buyer is disqualified from a mortgage loan entirely. Use Quontic’s free DTI calculator to help you determine your debt-to-income ratio.

How can I buy a house with credit card debt?

“Okay,” you may be thinking. “I get that it’s not ideal. But I do have some debt, and I still want to buy a house. Is it possible?”

It may be, but the more debt you’re in, the tighter your finances are going to be — and the worse it’s going to look on your mortgage application. It’s likely a good idea to try to resolve exorbitant debt before getting serious about homeownership… but the good news is, there are tangible steps you can take to make that happen!

For example, debt consolidation is a step that can help quicken your repayment timeline, simplify your monthly expenses, and even potentially save money on interest, depending on rates. The way it works: you take out a new personal loan or line of credit large enough to pay off your existing debts, and then work on paying down this singular new bill, while, of course, making sure not to run your credit cards back up in the meantime. Keep in mind that this may have an effect on your credit utilization ratio, which is part of the calculation credit bureaus use to determine your score.

You could also tackle your debt without taking out an additional loan by putting as much extra money as you can toward repayment. Many people find it helpful to choose a specific strategy, like the snowball method or avalanche method.

The snowball method involves choosing the lowest-balance debt you have, and putting your extra money toward it (while maintaining minimum payments on other debts) until it’s paid off. From there, you’d move up to the next-lowest-balance debt, and so on, until all of your debts are eradicated.

The avalanche method is similar, but instead of the lowest-balance debt, you start with the highest-interest debt, and move on down the line as the accounts are paid off. Either one can work with concentrated effort, though they do take some time. Quontic offers several free debt related calculators that may help you.

While a higher DTI or lower credit score may make it difficult to qualify for many conventional loans, there are lenders out there that will offer prime mortgages to non-traditional borrowers. Quontic is one of them! Our Community Development Loans, or CDLs1, are specifically designed to help low-income borrowers, self-employed borrowers, and others whose application paperwork might look a little different than most conventional lenders want to become homeowners, or refinance their existing loans. Even if you have credit debts, at Quontic, we believe that as long as you have a good repayment history and have displayed an ability to maintain that debt, something like a Community Development loan may be right for you.

We’re certified as a CDFI, or Community Development Financial Institution, by the U.S. Treasury, which means it’s part of our mission to match underserved borrowers with the lending products they need to meet their long-term goals — and that might very well mean the keys to your dream house. It only takes a minute to see if you prequalify, and we’re excited to guide you through the homebuying process one step at a time.

Footnote:

1All lending products are subject to approval. Rates, program terms & conditions are subject to change without notice. Not all products are available in all states or for all amounts. This does not represent an offer to enter into a loan agreement. Other requirements, restrictions & limitations apply. Information is accurate as of April 11, 2022 & is subject to change without notice.

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