Paying off a loan before applying for a mortgage can improve your debt-to-income ratio (DTI).
Your DTI ratio is the percentage of your monthly income that goes toward paying debts, including credit card balances, car loans, and student loans.
Mortgage lenders typically prefer borrowers with a DTI ratio of 43% or lower, and a lower ratio can increase your chances of getting approved for a mortgage and securing a better interest rate.
Paying off a loan can also improve your credit score, which is another critical factor that lenders consider when approving mortgage applications.
When you pay off a loan, you reduce your overall debt load, which can lower your credit utilization rate (the amount of available credit you’re using).
A lower credit utilization rate can boost your credit score and make you a more attractive borrower to lenders.
However, there are also potential drawbacks to paying off a loan before applying for a mortgage.
For example, if you use your savings to pay off a loan, you might have less money for a down payment or closing costs on your mortgage.