⚖️ Debt Impact Calculator

Usually pay off debt first, especially high monthly payments.

Example comparison:

Scenario A: $70K income, $700/mo debts, 20% down ($80K saved)

• Qualifies for: $320K home

Scenario B: $70K income, $0 debts, 10% down ($40K saved, used $40K to pay debts)

• Qualifies for: $400K home (with PMI)

Result: Gained $80K in buying power by paying debt vs saving more!

When to save instead:

• If already under 36% DTI with all debts
• If debts have interest rates under 4%
• If need to reach 20% down to avoid PMI
• If debts will be paid off naturally within 6 months

Priority order for maximizing buying power:

1. Highest monthly payment (not highest balance!)

• $400/mo car loan = +$40K-50K buying power
• $300/mo personal loan = +$30K-40K buying power
• Every $100/mo = +$20K-25K buying power

2. Credit cards near maxed out

• Reduces DTI AND improves credit score
• Pay to under 30% utilization minimum
• Can boost score 20-50 points = better rates

3. Debts almost paid off

• Car with 6 payments left? Pay it off
• Personal loan with $2K balance? Eliminate it
• Quick wins give psychological boost

Example scenario:

You have $10K to deploy. Which pays off first?

• Option A: $15K student loan at $200/mo
• Option B: $8K car loan at $350/mo
• Option C: $4K credit card at $120/mo + $6K personal loan at $180/mo

Answer: Option B. Pays off highest monthly payment completely, increasing buying power by $35K-42K.

Yes! Even deferred or income-based repayment loans count.

How lenders calculate:

• If making payments: Use actual payment amount
• If deferred/forbearance: Use 0.5-1% of total balance
• If income-driven ($0 payment): Use 0.5% of balance OR $0 with documentation

Real impact example:

• $50K student loans in deferment
• Lender calculates: $50K × 0.5% = $250/mo
• This reduces buying power by $25K-30K

Strategies to minimize impact:

1. Income-driven repayment: Get on plan, document $0 or low payment
2. Pay down balance: Every $10K paid = $50-100/mo less in DTI
3. Consolidate: Sometimes lowers monthly payment
4. 10 payments before buying: Some lenders will use actual low payment if you've been on IDR plan for 10+ months

Exception - FHA loans: If you can document income-driven repayment of $0/mo, they'll use $0 in DTI calculation.

Quick formula: Car payment × 200-250 = Buying power increase

Examples at 7% mortgage rate:

• $300/mo car = $60K-75K more buying power
• $400/mo car = $80K-100K more buying power
• $500/mo car = $100K-125K more buying power
• $600/mo car = $120K-150K more buying power

Real scenario:

Sarah earns $75K/year. Current situation:

• $450/mo car payment
• $250/mo student loans
• Qualifies for $310K home

Option 1: Pay off $18K car loan

• Eliminates $450/mo
• Now qualifies for $400K home
• Gained $90K buying power!

Option 2: Save $18K for bigger down payment

• Down payment goes from $62K to $80K
• Still only qualifies for $310K (DTI still too high)
• Gained $0 buying power

Decision: Pay off car worth $90K in buying power vs extra $18K down payment. Car payoff wins.

NO! Keep them open but at $0 balance.

Why keep them open:

• Credit utilization: Closing reduces available credit, increases utilization ratio
• Credit age: Closing reduces average age of accounts
• Credit mix: Having revolving credit (cards) helps score

Example impact:

Before: 3 cards, $15K total limit, $3K balance = 20% utilization (good)

Close 2 cards: 1 card, $5K limit, $3K balance = 60% utilization (bad)

Score drops 30-50 points from closing cards!

What TO do after paying off:

1. Keep all cards open (even with $0 balance)
2. Use occasionally (Netflix subscription, gas once/month)
3. Pay off immediately to keep 0% utilization
4. Never carry a balance again

Exception - close if:

• Card has annual fee and you don't use benefits
• You truly cannot control spending with cards available
• Card is brand new (under 6 months old) - minimal impact

Immediately! DTI improves as soon as debt is paid.

Timeline for maximum impact:

Month 0: Pay off debts

• DTI drops immediately
• Can get pre-approved right away

Month 1: Credit cards reflect $0 balance

• Credit utilization improves
• Score increases 10-30 points

Month 2: Credit score fully updated

• All 3 bureaus show improvements
• Optimal time to lock in rates

Best approach:

1. Week 1: Pay off debts
2. Week 2: Get pre-approved (new DTI)
3. Week 4: Wait for credit cards to report $0
4. Week 6: Check credit score improvement
5. Week 8: Start house hunting with maximum buying power

Real example:

Mike paid off $8K car loan on July 1st:

• July 1: Paid off car, DTI dropped from 42% to 36%
• July 5: Got pre-approved for $80K more home
• July 15: Credit card $0 balances reported, score up 25 points
• July 20: Re-ran pre-approval, got 0.375% better rate
• August 1: Started house hunting
• September 15: Closed on home

Total timeline: 2.5 months from paying off debt to closing.