Should I pay off my car before buying a house?

Of course I have to start this post off by saying, everyones financial scenario is different and before taking any actions – please consult with your local licensed mortgage originator

It seems logical that paying off a car might help someone qualify for more home. Did you know it may have negative impacts on getting preapproved for a mortgage?

First of all, paying off a car loan reduces the amount of funds available for possible down payment or any reserves (savings after closing) that may be required.  

When you pay off the car, that old credit tradeline is also closed. Credit scoring modules favor older established debts with good payment history. Once you pay off and close that car loan, believe or not, your credit scores will most likely go down.  

As far as your debt to income ratios are concerned, many program guidelines will not count installment debts when there are less than 10 months of payments remaining on the term of the loan.  Assuming you have enough funds for down payment and reserves, you could possibly pay down (instead of paying off) your car loan to have only 8 payments remaining on your term.  This may cause you to not have the car payment considered in your DTI ratios for qualifying for a mortgage.

****WARNING**** PLEASE talk to your mortgage originator before you take any significant actions with your debts or assets if you are considering buying a home. There may be other stragegies you should be considering for your home buying goals.

If you're considering buying a home located anywhere in Washington, I am happy to help you!  I've been originating mortgages at Mortgage Master Service Corporation since April 2000.  Simply click on the quote or apply link at the top of this page.

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