I was recently presented with these questions and I thought it might be useful to share:
(1) Do I need to payoff debt before the mortgage application?
(2) Does the type of debt make a difference in the mortgage application?
(3) How much debt is ok when applying for the mortgage?
Unfortunately, there is no one-size-fits-all answer to the question of debt payoff prior to loan application. The amount of permissible debt is relative to how much someone wants to get approved for. A rule of thumb is to wait until after you have submitted an application to a loan officer to discuss whether paying down debt makes sense for you. It's important to review your current pre-approval, decide from there how much you want to increase, which will then influence which debts are paid off. If you're happy with the existing approval amount, then debt payoff would be unncessary for the application.
The type of debt is irrelevant. The dollar amount of the liability each month is what determines the success of the application. Mortgage approvals are based on a simple arithmetic formula, i.e., debt ÷ income, also referred to as DTI or debt-to-income. Most loan programs require the DTI to be 50% or less. Paying off credit cards can help reduce the DTI, enabling someone to qualify for a larger mortgage payment if they are comfortable with it.
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