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Home & Garden

Re/Max Real Estate Concepts explains paying off debt before buying a home

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You’re ready to buy your first home and you want to be sure you’ll qualify for a loan, but where do you start?

Paying off debt is key, say real estate experts. But there is a right way and a wrong way to do so.

Your debt-to-income ratio is your gross monthly income divided by your total monthly debt, including a house payment. Your DTI should not exceed 43 percent in order to qualify for a conventional mortgage, according to realtor.com, which notes that some lenders may require even lower DTI ratios, especially if you have a low credit score or little cash.

If your credit card debt is too high, you may not be able to qualify for a mortgage, although FHA loans may allow a higher DTI ratio.

If you can afford it, pay off your debts, especially credit card debt.  But make sure you have enough cash for your down payment, closing costs, and any unforeseen expenses. Don’t use your down payment fund to pay down your credit cards because it can lower your credit score and DTI ratio since you no longer have that money in the bank, says realtor.com.

If you do pay off a credit card, do not cancel it. Cancelling a credit card can also affect your credit, and ultimately, your chances of being approved for a mortgage because it reduces the total amount of credit available to you. And don’t consolidate all your debt on one credit card. You’ll have a higher credit score with a low balance on several cards.

In addition to improving your chances for obtaining a mortgage loan, the higher your credit score, the lower your interest rate. Realtor.com advises that If your credit score is under 700, paying off some debt can improve your score. If it’s 640 or lower, you may qualify for an FHA loan

ReMax Real Estate Concepts

120 N 2nd Avenue West

Newton, IA 50208

641.521.0302

www.BarbBarr.com