Why Paying Off All Your Debt Might Hurt Your Home Loan

For homebuyers in competitive markets like Sacramento and Fresno, deciding whether to use savings to pay down debt or preserve cash for a down payment is a critical choice. This guide explains how to strategically manage your debts to maximize your home borrowing power.

• Focus on Monthly Payments: Your mortgage eligibility is more influenced by a debt's monthly payment amount than its total balance. To significantly lower your debt-to-income (DTI) ratio, prioritize paying off loans with the highest monthly payments.
• Target Installment Loans First: Paying off an installment loan, such as a car loan, completely eliminates its fixed monthly payment from your DTI calculation. This often provides a much larger boost to your borrowing power compared to paying down a credit card with the same amount of cash.
• Quantify Your Gains: As a general guideline, every $100 of monthly debt you eliminate can increase your potential loan amount by approximately $15,000 to $20,000, depending on current interest rates.
• Time Your Payoffs: The ideal time to pay off a debt is at least two months before applying for a mortgage. This allows ample time for the change to be reflected on your credit report, leading to a smoother pre-approval process.

Read the full blog article here: https://www.iqratemortgages.com/blog/pay-debt-or-save-cash-for-a-california-mortgage