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By David Delgado | Freedom Choice Lending
If you’re working with buyers right now, you’ve probably heard this question more than once:
“Should I pay off my debt before buying a home?”
The short truth? Paying off the right debt can dramatically increase buying power — without increasing income.
The longer truth is what separates average guidance from expert advice.
Let’s break this down in a way you can clearly explain to clients and use to win trust in buyer consultations.
Buying Power Is Built on Monthly Cash Flow, Not Just Credit Score
Most buyers think qualifying is about credit score.
Lenders think in monthly obligations.
The single biggest limiter on how much home a buyer can afford is their Debt-to-Income ratio (DTI).
DTI = Monthly debt payments ÷ Gross monthly income
That includes:
- Car payments
- Credit cards (minimum payments)
- Student loans
- Personal loans
- Any recurring monthly obligations
Every dollar of monthly debt reduces the mortgage payment they can qualify for.
Why Small Debts Create Big Problems
Here’s the math most buyers never see.
A $450/month car payment doesn’t just cost $450.
It can reduce buying power by $80,000–$120,000, depending on rates and program.
Why?
Because lenders don’t care what the debt is — only that it exists monthly.
💡 Agent translation:
It’s not about total balances. It’s about recurring monthly payments.
Paying Off Debt vs. Saving for a Bigger Down Payment
This is where guidance matters.
Many buyers try to save more down payment money while carrying:
- High-interest credit cards
- Large auto loans
- Deferred student loans about to activate
In many cases:
- Paying off $5,000–$10,000 in debt can increase approval power more than adding that same amount to the down payment.
Why?
- Down payment affects loan size.
- Debt affects approval and monthly affordability.
DTI is often the bottleneck — not cash.
The Domino Effect of Lower Debt
When a buyer pays off or reduces debt, multiple things happen at once:
- Lower DTI → higher approved loan amount
- More comfortable monthly payment → less stress
- Stronger offer position → sellers feel safer
- Better loan options → fewer restrictions
- Cleaner underwriting → fewer last-minute issues
This is why debt strategy matters before house hunting — not during escrow.
Which Debts Matter Most (And Which Matter Less)
Not all debt is equal.
High-impact debt to prioritize:
- Auto loans
- Credit cards
- Personal loans
- Buy-now-pay-later accounts
Lower-impact (but still relevant):
- Student loans (depends on repayment structure)
- Small installment loans close to payoff
💡 A $75 credit card minimum can matter more than a $20,000 student loan with income-based repayment.
How Agents Can Use This to Win More Deals
This is a powerful conversation to have before pre-approval.
Instead of saying:
“Let’s see what you qualify for.”
Try:
“Before we run numbers, let’s see if there’s a way to increase your buying power without changing your income.”
That positioning:
- Builds authority
- Shows strategy (not sales)
- Creates trust
- Prevents disappointment later
Buyers don’t need more pressure.
They need better math.
The Big Takeaway
Paying off debt isn’t about being financially perfect.
It’s about being strategic.
The right debt payoff plan can:
- Unlock higher price points
- Lower monthly payments
- Improve approval odds
- Reduce stress during escrow
And when agents understand this, they stop losing buyers to “I’ll wait another year.”
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David Delgado – NMLS #349079
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