Should I pay off my debt?
To maximize your qualification of a mortgage loan it would be best to pay off debts that have the highest monthly payments with the lowest balance. It is best to consult with both a loan officer as well as a financial planner or CPA before paying off any debt. It may be best to pay off a debt during the real estate transaction rather than before you look to purchase.
Do not close any accounts leading up to or during the real estate transaction* This could dramatically change your credit profile and alter your credit score.
Example (Credit Card Debt):
3 credit cards:
- Balances (3 cards): $5000
- Credit Limit (3 cards): $30,000
Currently your debt is roughly 16.33% of your total credit limit. One of your cards has a balance of $1,000 and a credit limit of $20,000. You decide to payoff the balance and close the account. Your profile now looks like this:
2 credit cards:
- Balances (2 cards): $4,000
- Credit Limit (2 cards): $10,000
Now your debt is 40% of your total credit limit and although you paid off debt it has raised the percentage of debt in regards to your credit limit. This could negatively affect your credit score.
*Consult with your mortgage loan originator before paying down or paying off debt. Closing accounts, making various inquiries, and increasing credit limits may drastically affect your credit score.