When it comes to buying a home, one of the most important steps you can take is to reduce your debt. Debt from credit cards, student loans, and other debts can lead to significant concerns for lenders who you may be applying for a loan through. In short, lenders want to know that you can make all of the required debt repayments for your mortgage. If you have a great deal of debt already, you may struggle to make your monthly payments, putting the lender in a worrisome position. However, paying off all of your debt may not be a good thing.
Pay Down Debt
It is a good idea for most consumers to work to pay down their debts. That is, you should be avoiding adding to any debt that you have. By paying down this debt balance, you will be creating more gaps in your debt to income ratio, an important concern for mortgage lenders. This allows the lender to feel good about lending to you. You have less debt, you are making payments on your debt, and your debt amount is falling. Avoid using credit cards and be sure to make payments on time. This is also important.
Don't Pay It All Off
It is a good idea to keep your debt balance as low as possible. However, for those people who may have credit scores that are less than ideal, having some debt can be helpful, if you make payments on time. The key here is that you are working to reduce the debt you have and in doing so, you are showing lenders that you can make wise financial decisions. Take the time to pay down your debt before applying for a loan, but you do not need to pay it all off.
What is also important is working with a mortgage lender that can give you accurate advice and guidance on how to manage your credit score. Take the time to work with our mortgage partner, and learn more about the options you have for loans. The good news is that you'll likely find that most lenders expect consumers to have some level of debt. What you are doing with that debt, though, is also important.
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