Paying off debt before applying for a mortgage

What lenders are actually measuring

Debt-to-income ratio, or DTI, is calculated by adding up your monthly debt payments and dividing by your gross monthly income, the amount before taxes. Lenders use this number as one way to judge whether you can handle a new mortgage payment on top of what you already owe.

Different lenders and loan types use different DTI limits, so there's no single number that applies everywhere; a loan officer can tell you what a specific lender is looking at.

Why the monthly payment matters more than the balance

Because DTI is based on your monthly payment, not your total balance, paying off a card with a large minimum payment can move your DTI more than paying down part of a loan with a smaller monthly payment, even if that loan's balance is bigger.

This is why it's worth looking at monthly payments across all your debts before deciding where to send extra money if a mortgage application is the goal, rather than defaulting to whichever balance feels largest.

The tradeoff with your down payment

Aggressively paying down debt in the months before applying can shrink the cash you have available for a down payment and closing costs, both of which lenders also want to see. There's a real tradeoff between a lower DTI and having enough saved, and it's worth mapping out both numbers rather than optimizing for just one.

Steps in the months before applying

Doing this a few months ahead, rather than right before applying, gives any changes time to show up.

1. List every debt's monthly payment and your gross monthly income to calculate your current DTI.
2. Identify which debts have the highest monthly payments relative to their balance, since those affect DTI the most per dollar paid.
3. Decide how much you can put toward those debts without shrinking your down payment savings below what you'll need.
4. Avoid opening new credit or making large new purchases on credit in the months before applying.
5. Ask a loan officer what DTI and down payment they're actually looking for on the loan type you're considering.

What doesn't help right before applying

Closing old credit accounts or taking on a new loan to consolidate debt right before a mortgage application can sometimes work against you rather than for you, since it can affect your credit history and add a new inquiry. Checking with a loan officer before making a move like that is safer than assuming it will help.

Common questions

What DTI do I need to qualify for a mortgage?

It varies by lender and loan type, so there's no single universal number. A loan officer can tell you the specific range for the loan you're considering.

Does paying off a loan early hurt my credit before applying?

It can affect your credit mix and history in ways that aren't always predictable, so it's worth asking a loan officer or checking your credit report before making a big move right before applying.

Should I use my down payment savings to pay off debt first?

That depends on how much it actually improves your DTI versus how much it shrinks your available down payment, which is worth mapping out with actual numbers rather than guessing.

Do all debts count toward DTI the same way?

Lenders generally count recurring debt payments like loans, credit cards and child support, but the specifics can vary, so ask a loan officer which of your accounts they're including.