“A 24-year-old paid off $20,000 in debt to qualify for a mortgage by budgeting aggressively, boosting income, and prioritizing high-interest debt. Strategic debt repayment and credit score improvement were key to meeting lender requirements. The article details practical steps, including DTI ratio management and credit utilization strategies, to help young adults achieve homeownership.”
Steps to Pay Off Debt and Qualify for a Mortgage
At 24, paying off debt to qualify for a mortgage is a daunting but achievable goal, as demonstrated by Sarah Thompson, a real-life example from recent financial blogs. Sarah, a graphic designer from Ohio, cleared $20,000 in credit card and student loan debt in 18 months to secure a mortgage for her first home. Her journey offers a blueprint for young adults aiming for homeownership.
Understand the Debt-to-Income Ratio (DTI)
Lenders assess mortgage eligibility using the debt-to-income (DTI) ratio, which compares monthly debt payments to gross monthly income. Most lenders prefer a DTI below 43%, with 36% or lower being ideal for competitive terms. Sarah’s initial DTI was 48%, driven by $15,000 in credit card debt and $5,000 in student loans against her $50,000 annual income. By paying off her debts, she reduced her DTI to 32%, making her a stronger candidate. To calculate DTI, divide total monthly debt payments by gross monthly income and multiply by 100. For example, $1,500 in debt payments on a $4,000 income yields a 37.5% DTI.
Prioritize High-Interest Debt
Sarah targeted her credit card debt first, which carried a 19% interest rate, compared to her student loan’s 4.5%. High-interest debt increases DTI and credit utilization, both critical to lenders. She used the debt avalanche method, paying minimums on all debts but allocating extra funds to the highest-interest balance. This saved her over $2,000 in interest. According to Experian, the average U.S. credit card debt in 2024 was $6,730, making this a common hurdle for young borrowers.
Boost Income and Cut Expenses
To accelerate repayment, Sarah took on freelance design projects, adding $800 monthly to her income. She also slashed discretionary spending, reducing dining out and subscription services by $300 a month. Apps like YNAB (You Need A Budget) helped her allocate funds efficiently. For others, side hustles like ridesharing or tutoring can provide extra cash, while cutting non-essential expenses—like unused gym memberships—frees up funds.
Improve Credit Utilization
Credit utilization, the percentage of available credit in use, significantly impacts credit scores. Sarah’s utilization was initially 70%, well above the recommended 30%. By paying down her credit cards, she lowered it to 15%, boosting her credit score from 650 to 720. Lenders view lower utilization as a sign of financial responsibility. Keeping balances low and avoiding new credit during the mortgage process is crucial, as lenders may recheck credit before closing.
Leverage Balance Transfers
Sarah transferred $5,000 of her credit card debt to a card with a 0% introductory APR for 12 months, saving on interest while paying down the principal. Balance transfers can be effective but require discipline to avoid new debt. Bankrate notes that such strategies can reduce DTI without harming credit, provided payments are made on time.
Work with a Mortgage Broker
Sarah consulted a mortgage broker who identified lenders willing to work with her financial profile. Brokers can access specialized loan programs, such as FHA loans, which allow DTIs up to 50% with strong credit or larger down payments. They also advised her to avoid paying off her student loan entirely, as consistent payments demonstrated reliability, slightly boosting her credit score.
Save for a Down Payment
While paying off debt, Sarah saved 5% for a down payment on a $200,000 home, qualifying for an FHA loan with a 3.5% minimum down payment for her 720 credit score. She avoided using all her savings for debt repayment, preserving cash for closing costs, which typically range from 2-5% of the home price.
Monitor Credit Reports
Sarah checked her credit report via Equifax for free, correcting a $200 error that falsely inflated her debt. Regular monitoring ensures accuracy, as errors can lower credit scores and affect mortgage approval. The CFPB recommends reviewing reports six months before applying for a mortgage.
Strategic Timing
Paying off debt too close to a mortgage application can temporarily lower credit scores due to changes in credit mix or utilization. Sarah spread her repayments over a year, allowing her credit score to stabilize. Mortgage advisors suggest completing major debt repayments at least two months before applying to avoid underwriting issues.
Sarah’s success highlights that discipline, strategic planning, and professional guidance can make homeownership accessible, even for young adults with debt. By focusing on DTI, high-interest debt, and credit health, others can follow her path to qualify for a mortgage.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Consult a certified financial advisor or mortgage professional before making decisions. Information is sourced from financial blogs, Experian, Bankrate, and the CFPB.
