How to Pay Off Debt Before Buying a House

You want to buy a house. You also have debt. The question isn’t whether you need to be completely debt-free before applying for a mortgage — most homebuyers aren’t. The question is how much debt is too much, which debts to target first, and how to build a realistic timeline that gets you from where you are to holding the keys.

Why Lenders Care About Your Debt

When you apply for a mortgage, lenders don’t just look at your income. They look at your debt-to-income ratio (DTI) — the percentage of your gross monthly income that goes toward debt payments. This single number has more influence on your mortgage approval than almost any other factor besides your credit score.

Here’s how DTI requirements typically break down by loan type:

Loan Type	Front-End DTI Max	Back-End DTI Max	Notes
Conventional	28%	36-45%	36% is preferred; up to 45% with strong credit and reserves
FHA	31%	43-50%	Up to 50% with compensating factors
VA	None specified	41%	Higher may be approved with residual income
USDA	29%	41%	Strict limits for rural housing loans

Front-end DTI counts only your projected housing costs (mortgage, taxes, insurance). Back-end DTI counts your housing costs plus all other monthly debt obligations — credit cards, student loans, car payments, personal loans.

It’s the back-end number that most people need to worry about. Calculate yours now with our DTI calculator to see where you stand.

How Much Debt Is Too Much?

Let’s run a real example. Say you earn $6,000 per month (gross) and you’re looking at a house that would cost about $1,500/month in total housing expenses.

That puts your front-end DTI at 25% — fine for all loan types.

Now add your existing debts:

Debt	Monthly Payment
Student loans	$350
Car payment	$400
Credit card minimums	$150
Total non-housing debt	$900

Your back-end DTI: ($1,500 + $900) / $6,000 = 40%

That’s borderline. A conventional lender at 36% would reject you. FHA might approve it, but at a higher interest rate that costs you tens of thousands over the life of the loan.

Now imagine you pay off the credit cards and one of the student loans, reducing your non-housing payments to $500/month. Your back-end DTI drops to 33% — comfortably within conventional loan range, likely qualifying you for a better rate.

This is the math that makes pre-purchase debt payoff so powerful. You’re not just clearing debt — you’re buying yourself a better mortgage.

Which Debts to Pay Off First

Not all debt hurts your mortgage application equally. Focus your payoff efforts strategically:

High Priority: Revolving Debt (Credit Cards)

Credit card debt is a double hit. It raises your DTI and it tanks your credit utilization ratio, which directly impacts your credit score. Paying off credit cards gives you the biggest bang for your buck: lower DTI, higher credit score, and lower interest costs all at once.

If you can’t pay them off entirely, aim to get each card below 30% utilization. Below 10% is even better for your credit score.

High Priority: Small Debts You Can Eliminate

Any debt with a monthly payment that you can eliminate entirely removes that payment from your DTI calculation. A $2,000 personal loan with a $100/month payment that you can knock out in a few months? That’s $100 off your DTI forever. The debt snowball approach is particularly effective here.

Medium Priority: Car Loans Close to Payoff

If your car loan has fewer than 10 months of payments remaining, many lenders will exclude it from your DTI calculation. Check with your specific lender, but this can mean that a car loan that’s almost paid off doesn’t need to be aggressively targeted.

Lower Priority: Student Loans

Student loans are trickier. They’re often large, they have relatively low interest rates, and income-driven repayment plans can keep the monthly payment manageable. If you’re on an IDR plan, lenders typically use the IDR payment (not the standard payment) for DTI purposes.

That said, if your student loan payments are pushing your DTI over the threshold, you may need to either pay down the balance or explore refinancing to lower the monthly payment.

Don’t Touch: Mortgage-Eligible Debt

If you have a low-rate mortgage on a current property, an auto loan under 3-4%, or other low-interest installment debt, the math often doesn’t support paying these off aggressively. The money is better deployed as a down payment, which reduces your loan amount and can eliminate private mortgage insurance (PMI).

The Timeline: Working Backward From Your Target Date

The most effective approach is to pick a target home-purchase date and work backward:

12-18 months out:

• Run your DTI calculation with current debts
• Identify the gap between where you are and where you need to be
• Pick a payoff strategy (avalanche saves the most interest; snowball gives the fastest psychological wins)
• Start your payoff plan immediately
• Check your credit reports for errors and dispute any inaccuracies

6-12 months out:

• Check your progress against your DTI target
• Start saving for a down payment alongside debt payoff (you’ll need both)
• Avoid opening any new credit accounts — each hard inquiry temporarily dings your score
• Get pre-qualified (not pre-approved; pre-qualification is a soft pull) to see where you stand

3-6 months out:

• Shift from aggressive debt payoff to down payment accumulation (assuming you’ve hit your DTI target)
• Stop making any large purchases or financial changes
• Pay all bills on time — even one late payment can crater your approval chances

1-3 months out:

• Get formally pre-approved
• Do not take on any new debt, change jobs, or make large deposits without documentation
• Keep credit card balances as low as possible

Down Payment vs. Debt Payoff: Where to Put Extra Money

This is the most common dilemma. You have extra cash each month — should it go toward debt or toward a down payment savings account?

Pay off debt first if:

• Your back-end DTI is above your target loan threshold
• You have credit card debt at 15%+ interest
• Your credit score is below 680 and revolving debt is dragging it down

Save for a down payment first if:

• Your DTI is already within range
• Your debts are all low-interest (under 5-6%)
• You’re close to the 20% down payment threshold that eliminates PMI

Split the difference if:

• Your DTI is close but not quite there
• You have a mix of high and low-interest debt
• Your timeline is 12+ months and you can do both simultaneously

A practical split: put 70% of extra money toward the highest-priority debt and 30% into a high-yield savings account for the down payment. Adjust the ratio as your DTI improves.

What About Debt Consolidation?

Consolidation loans and balance transfers can be useful pre-mortgage tools, but approach them carefully:

Consolidation can help if:

• It lowers your total monthly payment (reducing DTI)
• It reduces your interest rate, accelerating payoff
• It converts revolving debt (credit cards) to installment debt (personal loan), which can improve your credit mix

Consolidation can hurt if:

• The new loan extends your repayment term, meaning you’ll still have the payment when you apply for a mortgage
• It results in a hard credit inquiry close to your mortgage application
• It tempts you to run up the credit cards again now that they’re “empty”

Time any consolidation at least 6-12 months before your planned mortgage application so the hard inquiry has time to age off and the new payment history shows a track record.

Protecting Your Credit Score During Payoff

Your credit score matters almost as much as your DTI. A few points can mean the difference between a 6.5% and 7% interest rate — which on a $300,000 mortgage translates to over $35,000 in additional interest over 30 years.

Do:

• Pay every bill on time, every single month
• Keep credit card utilization below 30% (below 10% is ideal)
• Keep old accounts open even after paying them off (length of credit history matters)
• Dispute any errors on your credit report

Don’t:

• Close credit cards after paying them off
• Apply for new credit in the 6 months before your mortgage application
• Make large balance transfers without understanding the score impact
• Co-sign for anyone else’s debt during this period

FAQ

Can I buy a house with debt?

Yes. Most homebuyers carry some debt. The question is whether your DTI ratio fits within lender guidelines. A back-end DTI under 36% gives you the widest range of conventional loan options. Under 43% keeps FHA and VA loans on the table.

How fast can I lower my DTI?

It depends on how much debt you can eliminate. Every monthly payment you remove immediately lowers your DTI. Paying off a credit card with a $200 minimum payment reduces your DTI by that $200, which can be significant. Use a payoff calculator to see how quickly you can eliminate specific debts.

Should I pay off my car before buying a house?

If the car loan has more than 10 payments remaining and its payment significantly impacts your DTI, consider paying it down or off. If it’s under 10 payments, many lenders will exclude it from DTI calculations. Check with your specific lender.

Does student loan debt disqualify me from a mortgage?

No, but it impacts your DTI. If you’re on an income-driven repayment plan, lenders typically use that lower monthly payment for DTI calculations. If your student loans are in deferment, lenders may calculate 0.5-1% of the total balance as a hypothetical monthly payment.

How much should I save for a down payment?

Conventional wisdom says 20% to avoid PMI, but many first-time buyers put down 3-5% with conventional loans or 3.5% with FHA. A smaller down payment means a higher monthly payment (and PMI), so factor that into your DTI calculations alongside your remaining debt.