Pay Off Car or Credit Cards Before a Mortgage in Texas?
Should I Pay Off My Car or Credit Cards Before Applying for a Mortgage?
Quick Answer: Paying down credit cards usually helps more per dollar than paying off a car, because it lowers your monthly debt and can raise your credit score at the same time. Paying off a car frees up a bigger payment, but it can drain your down payment. Talk to a loan officer before you pay off anything.
Key Takeaways:
Lenders judge your debts by the monthly payment, more than the total balance.
Your debt-to-income ratio, or DTI, is your total monthly debt payments divided by your gross monthly income.
Paying credit cards down below 30% of the limit can raise your credit score, and below 10% can help even more.
On many loans, a car loan with 10 or fewer payments left may not count in your DTI, depending on the loan type.
Never use your down payment or closing cost funds to pay off debt without running the numbers first.
You're getting ready to buy a home. You've got some cash saved. And you're wondering if you should use it to wipe out your car loan or your credit cards first.
It's a smart question. But the wrong move can cost you the house.
How lenders look at your debt
Lenders care most about your monthly payments. Your debt-to-income ratio, or DTI, is your total monthly debt payments divided by your gross monthly income, which is your income before taxes. Many loan programs cap DTI somewhere around 43% to 50%, depending on the loan and the rest of your file.
A real example
Say you earn $7,000 a month before taxes. Your car payment is $550. Your credit card minimums add up to $150. The new house payment on a Round Rock home comes to $2,700.
Your total monthly debts are $3,400. That puts your DTI at about 49%. That's tight.
Now pay off $4,000 in credit cards. The card minimums drop to $0, and your DTI falls to about 46%.
Or pay off an $18,000 car loan instead. The $550 payment goes away, and your DTI falls to about 41%.
The car moves the ratio more. But it took $18,000 to do it. If that $18,000 was your down payment, you just traded one problem for a bigger one.
Why credit cards usually come first
Credit cards hit your file two ways. The minimum payment counts in your DTI. And your credit utilization, the share of your card limits you're using, is a big part of your credit score. Dropping a card from 80% used to under 30% can raise your score. A higher score can mean better loan terms. Paying off a car loan doesn't give that same boost, and closing out an installment loan can even dip your score a few points for a short time.
When paying off the car makes sense
Paying off the car can be the right call when your DTI is just over the limit and the car payment is what's pushing it there. It can also make sense when you only have a few payments left and plenty of savings. On many loans, a car loan with 10 or fewer payments left may be left out of your DTI. The rules change by loan type, and a car lease usually counts no matter how many payments are left.
What to avoid before you apply
Don't close your credit cards after you pay them off. Closing a card lowers your total available credit and can drop your score.
Don't drain your savings. Lenders like to see cash reserves, the savings you still have left after closing.
Don't open new credit or finance furniture before closing.
Ask before you move large funds, because big transfers get questioned.
Credit bureaus can take 30 days or more to show a new balance. If timing matters, your lender may be able to order a rapid rescore, a quick credit update after you pay down a balance.
Numbers before houses
Here's what I'd do if this were my file. I'd pull your credit, list each debt with its balance and payment, and run your DTI with and without each payoff. Then you'll see which choice gets you approved and still leaves your down payment and savings in place. Buyers in Round Rock, Pflugerville, Leander, and Austin do this with me before they ever tour a home.
Ai Tran is a Realtor and Loan Officer in Round Rock, Texas, NMLS #2627075, with 2020 Realty, serving Round Rock and Williamson County. Because Ai holds both licenses, the price range you shop in matches the loan you can really get.
Text me PLAN and let's run your numbers before you pay off a single thing.
FAQ
Does paying off a credit card raise my credit score? Paying down a credit card often raises your credit score because it lowers your credit utilization, the share of your card limits you're using. Keeping utilization under 30% helps, and under 10% helps more. The new balance can take about 30 days to show on your credit report.
Should I close my credit cards after I pay them off before buying a house? In most cases, no. Closing a credit card lowers your available credit, which can raise your utilization and drop your score. Keep the card open, keep the balance low, and don't add new charges before closing.
Will paying off my car loan help me qualify for a mortgage? Paying off a car loan can help because it removes the car payment from your debt-to-income ratio. But if the payoff uses your down payment or closing cost funds, it can hurt your approval instead. Run the numbers with a loan officer before you pay it off.
Can I pay off debt after I get pre-approved? Talk to your loan officer before you do. Paying down debt usually helps, but moving large funds or dipping into your down payment can change your approval. Your lender will want to see where the funds came from and what's left in savings.
Does a car loan with only a few payments left count against me? On many loans, a car loan with 10 or fewer payments left may be left out of your debt-to-income ratio. The exact rule depends on the loan type and the lender. A car lease usually counts no matter how many payments remain.
Ai Tran (Ái)
Loan Officer tại Round Rock, Texas hỗ trợ người mua nhà
https://www.loanfactory.com/aitran
512-300-8611
Loan Factory | NMLS #320841
Ai Tran | NMLS # 2627075
NMLS Consumer Access
Ai Tran, Realtor and Loan Officer Round Rock, TX 512-300-8611 https://www.AiTTran.com
