When you’re preparing to buy a home or refinance your mortgage in Windsor, Ontario, your attention is likely on finding the best rate, negotiating favourable terms, and envisioning your new space. But there’s another crucial factor that can make or break your mortgage approval: your existing debt. In many cases, paying off debt before closing isn’t just a good idea—it’s a strategic move that can help you secure a better mortgage deal.
This may feel counterintuitive — especially when you’re about to take on a big new mortgage — but in many cases, it’s a critical move to satisfy lender requirements and make your application work.
Why Paying Off Debt Matters for Mortgage Approval
Lenders look at more than just your credit score when evaluating your mortgage application. One of the most important numbers is your Debt-to-Income (DTI) ratio—the percentage of your monthly income that goes toward debt payments. If your DTI is too high, lenders may view your file as too risky, even if you have excellent credit.
Here’s how paying off debt before closing can help:
- Lower your DTI ratio
- Increase your borrowing power
- Unlock better interest rates
- Strengthen your overall application
Sometimes, just paying down a few key debts can be the difference between a declined application and an approved one.
When Does Paying Off Debt Come Into Play?
Often, the need to pay off debt surfaces during the underwriting stage of your mortgage application. After you submit your paperwork, the lender may come back with a condition: “Borrower to pay off X debt prior to closing.” This could be a credit card, line of credit, personal loan, or even a car loan.
While this can feel like an unexpected hurdle, it’s actually a clear path to approval. With the right strategy—and a knowledgeable mortgage broker by your side—it’s very manageable.
What If You Don’t Have the Cash? If you’re worried about having enough cash to pay off debts and cover your down payment or closing costs, talk to your broker. Sometimes, debts can be paid out of the mortgage funds at closing, making the process easier and less stressful.
The Role of a Mortgage Broker in Managing Debt
A great mortgage broker will review your finances before you even apply. They can spot potential issues with your DTI ratio and recommend which debts to pay down or pay off. Sometimes, they can even structure your mortgage so that certain debts are paid directly from the mortgage proceeds at closing, saving you from having to come up with the cash upfront.
Your mortgage broker will also help you:
- Identify which debts to prioritize (often starting with high-interest accounts)
- Determine how much needs to be paid down to meet lender requirements
- Explore debt consolidation options if they make sense for your situation
- Understand how these changes will affect your borrowing power
Smart Strategies for Paying Off Debt
- Make a Budget: List your income, expenses, and all outstanding debts. This gives you a clear picture of what you can pay off before closing.
- Focus on High-Interest Debts: Target debts with the highest interest rates first. This improves your DTI and saves you money.
- Consider Debt Consolidation: If you have equity in your home, refinancing to consolidate debt can lower your monthly payments and simplify your finances.
- Avoid Taking on New Debt: Hold off on new credit card purchases or loans until after your mortgage closes.
The Bottom Line
Paying off debt before closing isn’t a setback—it’s a smart strategy that can help you secure a better mortgage approval and more favourable terms. With careful planning and expert advice, you can strengthen your application, increase your borrowing power, and enjoy a smoother path to homeownership.
If you’re considering buying or refinancing, reach out to a mortgage broker early in your journey. Together, you’ll create a plan to pay down debt and set yourself up for mortgage success!
