How to Pay Down Debt Quickly
How to Pay Down Debt Quickly and How It Affects Homeownership
Debt is a major factor in your financial health, especially when you’re planning to buy a home. But it’s not always about the amount of debt you have—it’s about how much you’re paying on that debt each month. Lenders focus heavily on your debt-to-income ratio (DTI) when determining your ability to qualify for a mortgage. By strategically managing and reducing your debt, you can improve your financial standing and move closer to homeownership faster.
Understanding Debt and Homeownership
Lenders evaluate your ability to repay a mortgage based on your DTI ratio, which is the percentage of your gross income that goes toward debt payments. A high DTI can make it harder to get approved for a mortgage, even if your credit score is strong.
How DTI is calculated:
Most lenders prefer a DTI of 43% or lower for conventional loans, though lower is always better.
Step 1: Renegotiate Your Monthly Debt Payments
Before aggressively paying off debt, the smartest first move is to lower your monthly obligations where possible. Since lenders focus on monthly debt payments rather than just the total balance, lowering these payments can improve your home-buying eligibility quickly.
Refinance Your Car Loan: If you have a car loan, see if you can refinance for a lower interest rate and lower your monthly payment.
Negotiate Your Student Loans: Many federal student loans offer income-driven repayment plans that could reduce your monthly payment.
Consolidate High-Interest Debt: Consider consolidating credit card debt with a lower-interest personal loan to reduce monthly payments.
Call Creditors for a Lower Rate: Sometimes, a simple call to your credit card company can get you a lower interest rate, reducing your minimum monthly payment.
Step 2: Pay Off Debt Strategically
Once you’ve lowered your monthly obligations, it’s time to start paying down debt. Not all debt affects your ability to buy a home in the same way, so prioritize the ones that have the biggest impact.
1. Pay Off Revolving Debt First (Credit Cards & Lines of Credit)
Credit card debt is the most damaging to your DTI because minimum monthly payments increase as your balance grows. Paying down your credit card balances can quickly improve your DTI and credit score.
Use the Snowball Method: Pay off the smallest balance first while making minimum payments on the rest, then roll that payment into the next highest debt.
Use the Avalanche Method: Pay off the debt with the highest interest rate first, saving the most on interest over time.
Make Extra Payments: If possible, make more than the minimum payment to reduce your balance faster.
2. Keep Fixed-Rate Loans (Like Auto Loans) for Last
Loans with fixed monthly payments, such as car loans, don’t fluctuate with the balance, so paying them down doesn’t impact your DTI as much. However, if refinancing is an option, it may be worth exploring.
If your interest rate is above market rates, refinancing your auto loan can save money and reduce your DTI.
If you’re close to paying off a car loan, consider paying it off entirely if it makes a significant impact on your monthly obligations.
3. Reduce or Eliminate Small Personal Loans
If you have small installment loans, knocking them out can help free up cash flow. Since personal loans have fixed monthly payments, paying them off won’t lower your DTI significantly, but it can help you manage cash flow more effectively.
Final Thoughts: Balance Debt Repayment & Homeownership Goals
Paying down debt is a powerful way to improve your financial health, but the key to homeownership is not just being debt-free, but having a manageable monthly payment structure. Lowering your DTI by renegotiating, refinancing, and strategically paying off debt can put you in a better position to secure a mortgage and move into your dream home faster.
If you’re thinking about buying a home but aren’t sure how your debt impacts your ability to qualify, let’s talk! I can help you create a home-buying strategy that works for your financial situation so you can confidently move forward.
