The Quick Read: On a conventional cash-out refinance, a debt you pay off with the loan proceeds usually stops counting in your debt-to-income ratio, but only if the payoff is documented and the underwriter accepts it. Paid-off credit card balances drop out, and the card does not have to be closed. Installment loans drop out when paid off, or when 10 or fewer payments remain. The catch is that your new mortgage payment is larger, so the net effect can help or hurt.
What to Know First
- Revolving debt (credit cards): a balance paid off at or before closing removes its payment from your ratio. The account can stay open.
- Installment debt (auto, personal, student loans): paying the loan off, or down to 10 or fewer remaining payments, removes it from the ratio.
- Leases and support obligations: these follow their own rules. A lease payment counts no matter how few months remain.
- The new loan: a larger balance means a larger housing payment. That payment goes into the ratio too.
- Underwriters ask why: a payoff made only to qualify gets a closer look, including your credit-use history.
- Rules differ by file: automated underwriting and manual underwriting use different ratio ceilings, and each lender may add its own requirements.
Which Debts Drop Out, and Which Don’t?
Revolving balances and installment loans paid at closing drop out. Leases, unmet support obligations, and any debt left standing after closing stay in. This table is the fast lookup. The sections below explain each row.
| Debt type | Effect on DTI when paid at closing | Must the account close? | Key condition |
|---|---|---|---|
| Credit card (revolving) | Payment removed | No | Balance paid in full, documented |
| Auto or personal loan | Payment removed | Not applicable | Paid off, or 10 or fewer payments left |
| Student loan | Payment removed if paid off or 10 or fewer payments left | Not applicable | Paid off, or 10 or fewer payments left |
| 30-day charge account | Often no payment counted | Not applicable | Funds to cover balance must be verified |
| Lease | Stays in your ratio | Not applicable | Counts regardless of months left |
| Debt left after closing | Stays in your ratio | Not applicable | Payment counts as shown |
How Does the Lender Rebuild Your DTI Step by Step?
The lender lists every debt, drops the ones being paid, adds the new mortgage payment, and re-runs the ratio. That is the whole idea. The details sit in the order of operations.
Debt-to-income ratio (DTI) is your total monthly debt payments divided by your gross monthly income. On a refinance, the housing piece is the new loan’s principal, interest, taxes, insurance, and any HOA dues.
Here is how the sequence runs on a typical file for cash-out refinance programs:
1. Confirm it is a true cash-out. You take equity out of the home. Using that equity to pay off debt is a standard use of the proceeds.
2. List every liability. The lender pulls your credit report and your application and calculates a monthly payment for each debt. Cards with no reported payment still get a payment assigned, based on a percentage of the balance.
3. Pick the debts to be paid at closing. Each payoff shows up as a line on the Closing Disclosure, the final itemized statement of your loan. Payoffs normally go straight to the creditor from your proceeds.
4. Remove those payments and recalculate. Any debt that stays after closing keeps its payment in the ratio.
5. Check the bigger loan against the leverage cap. Across the conventional programs Lendmire places files with, cash-out on a one-unit primary residence tops out at 80% loan-to-value, and 75% on a two- to four-unit primary residence. Every dollar of debt you roll in raises the loan balance. Debt payoffs can push you into the cap before the ratio ever becomes a problem.
6. Run automated underwriting. The system returns a finding based on credit, ratio, reserves, and the rest of the file. The total ratio ceiling is 50% on automated findings.
7. Re-check before closing. If new debt appears or income drops before you sign, the file gets re-underwritten.
For the full rules on the loan itself, Lendmire’s piece Conventional Cash-Out Refinance Rules on a Primary Residence covers leverage, seasoning, and occupancy.
Revolving Debt: Pay It Off, Keep the Card
When a credit card balance is paid off at or before closing, the payment drops out of your ratio. The account does not need to be closed. That comes straight from the Fannie Mae Selling Guide topic on debts paid off at or prior to closing.
Many borrowers assume the lender will make them cancel the cards. It will not, under the conventional rule. That is good news for your credit profile, since an open, unused card keeps your available credit intact.
Two practical points matter here.
How you pay changes the paperwork. If the lender pays the card from your proceeds at closing, the payoff appears on the Closing Disclosure. If you pay it before closing, the file needs proof of payment in full and the source of the funds.
The underwriter still looks at your history. The same guide cautions that paying down debt solely to qualify must be evaluated within the overall loan analysis. A borrower who has cycled the same balances for years gets a different read than one with a single large purchase. The guide says the borrower’s history of credit use is a factor in deciding whether to include or exclude the debt.
Installment Debt: The 10-Payment Rule
An installment loan can leave your ratio two ways: you pay it off entirely, or you pay it down to 10 or fewer remaining monthly payments. The Fannie Mae guide excludes installment loans that meet either test.
Picture a car loan with a long way to go. Paying it fully removes the payment. Paying it down until only 10 payments remain also removes it, and you keep the loan, which can leave more of your proceeds free for other debts.
The paydown path is a conventional feature. Government-backed programs treat it differently, so do not carry the idea over if you later switch loan types.
Freddie Mac uses a similar structure. Its guide counts installment debts with more than 10 months remaining and allows exclusion when the credit report or file documentation shows 10 or fewer. Individual lenders apply the version their investor requires, and each confirms the current text.
30-Day Charge Accounts
A 30-day charge account is a card that must be paid in full each month, such as some travel and entertainment cards. When the report shows no monthly payment, or a payment equal to the balance, the lender must verify funds to cover the balance.
Those funds come on top of the money for closing costs and reserves. On a cash-out file, that detail catches borrowers off guard, so ask your loan officer how the lender handles it before you count on those balances as already covered.
Debts That Don’t Get the Payoff Break
Some obligations stay in your ratio no matter how you handle them, or come with extra conditions.
Leases. A car lease payment counts as recurring debt regardless of months remaining. The 10-payment exclusion is for installment loans, not leases. The lender confirms the exact treatment under the monthly debt obligations section of the guide.
Collections, charge-offs, judgments, and liens. These sit under a separate heading in the same guide, with their own payoff requirements. Some small collections may be treated differently, and the lender confirms that for your file. Plan on paying these at or before closing.
IRS installment agreements. Fannie Mae’s monthly debt obligations section says the payments can be excluded only if the agreement meets the terms for debts paid by others or installment debt. Otherwise the balance must be paid off. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Debts paid by someone else. A parent or business partner who makes the payments can take a debt out of your ratio, but only with proof. The lender needs 12 months of canceled checks or bank statements from the other party, with no late payments in that period. A verbal promise does not count.
Where the General Rule Breaks
The rule “pay it off and it disappears” holds until one of these edge cases hits. Each one has sunk a file that looked solid on paper.
The bigger payment cancels the benefit
This is the most common surprise. Rolling debts into a larger mortgage removes the old payments but raises the housing payment. Whether your ratio improves depends on which effect is bigger.
A borrower with several high-payment cards and a modest equity draw often sees the ratio fall. A borrower with low-payment debts and a large equity draw can see it rise. Consolidating a 4-year car loan with a small remaining balance, for example, usually helps less than clearing three maxed-out cards.
The leverage cap bites before DTI does
Debt payoffs raise the new loan amount. A file can pass on ratio and still fail on loan-to-value (LTV), which compares the loan to the home’s appraised value. On a one-unit primary residence the cap is 80%. On two- to four-unit primary residences it is 75%, per the Fannie Mae Eligibility Matrix. Manufactured housing carries a much lower cash-out cap. Appraisals are required on cash-out loans, so the value you assume is not the value that counts.
Seasoning and title
Seasoning is the waiting period between events. On a cash-out, the first mortgage being paid off must be at least 12 months old, counted note date to note date. You also need to have been on title for 6 months. Exceptions exist for delayed financing (a cash-out refinance soon after a cash purchase), inheritance, and legal awards. If you borrowed to buy the home, any remaining payment on those borrowed funds can stay in your ratio.
The student loan feature
Fannie Mae has a separate student-loan cash-out feature that changes how the cash-out pricing adjustment applies when the loan meets its requirements. It is a different path from simply paying a student loan with proceeds. Ask the lender whether your loan fits it before assuming either way.
Occupancy
For a cash-out secured by a primary residence, the borrowers must occupy the home. If your loan is for a second home or rental, occupancy decides the leverage, and the figures change. This article covers the primary-residence version only.
The wholesale high-leverage lane
One lane across the programs Lendmire works with reaches 89.99% LTV with no mortgage insurance. It needs a 680 score, a 50% ratio, a 30-year fixed loan, a primary residence, a conforming balance, and its own 6 months of seasoning. It is not written on a Texas homestead, where the state constitution caps cash-out at the agency figure. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
What Does a Before-and-After Look Like?
Here are two borrowers in plain terms, no dollar figures.
| Factor | Borrower A | Borrower B |
|---|---|---|
| Debts being paid | Three high-payment cards | One low-payment installment loan |
| Equity taken out | Modest | Large |
| Housing payment change | Moderate rise | Large rise |
| Net DTI effect | Falls, often under the 50% ceiling | Rises or stays flat |
| Likely next step | Strong candidate | Rethink the structure |
Borrower A pays off the debts that take the biggest bite out of income each month. Most of the new loan goes to existing obligations, so the housing payment rises only a little while the other payments disappear.
Borrower B pays off a debt that was never the problem and raises the loan balance a lot. The ratio does not improve, and the leverage cap gets tighter. This borrower might do better paying that loan down, or leaving it alone.
Honestly, that second case is where borrowers talk themselves into a refinance the math does not support. Run the before and after on the ratio, not on the monthly relief you feel.
Closing-Day Mechanics
Payoffs work best when the paperwork matches. Here is what to watch.
- Payoff statements. Each creditor issues one with a good-through date and a daily interest amount. If funding slips past that date, the payoff amount can change.
- Direct disbursement. The settlement agent normally sends the money to the creditor from your proceeds. You do not receive the cash and pay it yourself.
- Closing Disclosure lines. Payoffs show as line items. Compare them to the payoff statements before you sign.
- Balance drift. A card balance can grow between application and closing. If it does, the payoff falls short and the remaining payment may land back in your ratio.
- New debt. A new loan or card before closing triggers a fresh review. If the recalculated ratio goes past the allowed limit, the loan is not eligible for delivery to Fannie Mae. The ceilings are 50% on automated findings and 45% when manually underwritten.
Do not open new credit between application and funding. Skip the furniture store financing. It sounds obvious, and it still happens.
What Underwriters Check
On a file with debts paid at closing, the underwriter generally looks for:
- A payoff line or payoff letter for each debt you claim is being cleared.
- Proof of payment in full and source of funds if you paid before closing.
- Your credit-use history, to judge whether paid-off cards are likely to fill back up.
- A reserve requirement, which can apply when automated underwriting returns a ratio above 45%. The exact amount depends on the Eligibility Matrix and your file.
- A loan amount that still fits the leverage cap after the payoffs are added.
- Any collections, judgments, or liens that need to be paid. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
Some lenders add their own requirements on top of the agency rules. A lender may set a higher credit floor, for example, even when the agency allows less. Across the wholesale programs Lendmire places files with, the common starting point is a 620 score, with the automated finding governing most files and 36% or 45% ratio tiers for manual underwriting.
Mistakes That Cost Borrowers
1. Paying off cards and then running them up. The Consumer Financial Protection Bureau points out that converting non-mortgage debt into mortgage debt puts the home at risk if payments become unsustainable, while defaulting on a card usually does not cost you the house. Its research on cash-out refinances and non-mortgage debt covers that tradeoff.
2. Paying off debts that were already excluded. A loan with 10 or fewer payments left may not need to be paid at all. Paying it wastes proceeds and raises the loan balance.
3. Ignoring the leverage cap. Rolled-in costs and payoffs can push the new loan past the limit.
4. Assuming one ratio limit applies to every file.
5. Closing the cards for no reason. Not required, and it can reduce your available credit.
6. Leaving a lease off the list. It stays in the ratio.
Should You Do It? A Quick Decision Check
Ask these in order.
1. Is your current ratio the real obstacle? If the ratio already clears, paying debts off at closing is a budgeting choice, not a qualifying need.
2. Which debts carry the biggest monthly payment per dollar owed? Those are the ones that help the ratio most.
3. Does the larger loan still fit the leverage cap? If not, pay some debts yourself first, with documentation.
4. Is converting this debt into mortgage debt worth it? A cash-out only makes sense when the full cost of the refinance is lower than the cost of paying the debts down another way.
5. Will you hold the line afterward? Open cards with zero balances are an asset only if they stay that way.
Many borrowers use cash-out proceeds to pay other bills. In the Consumer Financial Protection Bureau’s survey data, more than half of cash-out borrowers each year from 2014 to 2019 chose that use. Being common does not make it right for your budget.
Key Terms Defined
Debt-to-income ratio (DTI): your total monthly debt payments divided by your gross monthly income, which lenders use to judge whether you can carry the loan.
Revolving debt: an account like a credit card where the balance and payment change from month to month.
Installment debt: a loan with a fixed payment and a set number of payments, such as a car or personal loan.
Cash-out refinance: a new mortgage larger than your current one, paying off the old loan and giving you equity in cash or in debt payoffs.
Loan-to-value (LTV): the loan amount as a percentage of the home’s appraised value.
Seasoning: the waiting period required between two events, such as getting the old mortgage or taking title and refinancing.
Closing Disclosure: the final itemized statement of your loan terms and costs, including each payoff line.
Comparing Your Options
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. Lendmire is a mortgage broker, not a lender, and every program is subject to lender guidelines and full file review. Nothing here is a commitment to lend.
Frequently Asked Questions
Do I have to close my credit cards after paying them off at closing?
No. The conventional rule says a revolving account paid off at or before closing has no payment counted in your ratio, and the account does not need to be closed. The underwriter may still weigh how you have used credit, so a history of maxed-out cards can draw questions.
Can I pay down a loan instead of paying it off completely?
Yes, on a conventional loan. Paying an installment loan down to 10 or fewer remaining payments removes its payment from your ratio. Government-backed programs handle this differently, so check the rule for the program you are using.
What is the maximum DTI on a conventional cash-out refinance?
It depends on how the file is underwritten. Automated findings allow a total ratio ceiling of 50%. Manually underwritten loans fall at 36% or 45%, with reserve and score factors from the Eligibility Matrix. Lenders can set stricter limits, so the number that applies to you comes from the lender reviewing your file.
Does paying off debt right before closing look suspicious?
It gets a closer look. The guide says paying off or paying down debt solely to qualify must be evaluated in the overall analysis. The lender wants documentation, including where the money came from if you paid before closing.
Will a bigger mortgage payment erase the benefit of paying off my debts?
It can. Rolling debts into a larger loan removes the old payments and raises the housing payment, so your ratio can improve, stay flat, or rise. The leverage cap can also stop a file even when the ratio looks fine.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
For the program’s current guidelines, see conventional loan programs.
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References
1. Fannie Mae Selling Guide: Debts Paid Off At or Prior to Closing
2. Fannie Mae Selling Guide: Monthly Debt Obligations
3. Fannie Mae Eligibility Matrix
This article is part of Lendmire’s Conventional Loans series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: Fannie Mae Cash Out Refinance LTV Investment · Refinance Appraisal Came In High: Can You Borrow More Or Drop PMI Sooner? · Conventional Refinance Debt-to-income Limits: 45%, 50% And The Compensating Factors
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Compliance and disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage broker and is not a direct lender, depository institution, financial advisor, or tax professional. Content in this article is general market analysis and educational information — not financial, legal, or tax advice for any specific situation. Lendmire does not guarantee loan approval; every transaction is subject to underwriting by the funding lender. Mortgage pricing and loan program guidelines are subject to change at any time without notice and vary by borrower characteristics, property type, and state regulations. Lendmire complies with Equal Housing Opportunity. Licensure verification: NMLS Consumer Access.