• Your debt ratio affects your ability to finance a new home.picket fence detail image by Aaron Kohr from Fotolia.com
  
  

Debt Ratios and Your Credit Score

• Paying down your debt generally improves your credit score, but you don't need to pay off all debt before qualifying for a home loan. Borrowers with higher credit scores generally qualify for more advantageous loan terms, and when it comes to improving your credit score, "Getting your balances below 30 percent of the credit limit on each card can really help," according the MSN finance columnist Liz Pulliam Weston.
  
  

Overall Financial Health

• While not necessary to qualify for a home loan, paying off all your debt allows more money toward buying a home. According to the National Association of Realtors, lenders gauge a mortgage with a cap of no more than 36 percent of a borrower's income going toward total debt, including the mortgage payment, taxes and other debt like credit card debt.
  
  

Bottom Line

• Since a home loan can be a debt you carry for 15 to 30 years, paying down debt to improve your credit score and qualify for the best loan possible makes good financial sense, but you don't have to pay off all debt to buy a home.