Everyone tells you to pay off every debt before applying for a mortgage. That advice can actually hurt your chances. Here’s a clear, no-nonsense plan that will improve your approval odds without digging into old, long-forgotten debts.

Key idea: Cash is king

“Cash is king.”

If you have savings, your best move is usually not to pay off old collections or charge offs. Instead, keep the money available and verifiable in your bank account. Lenders and underwriters care far more about liquid reserves than they do about paying off decades-old medical bills or old utilities that have already been charged off.

Why paying off old debt often does not help

• Old collections and charge offs have already done the damage to your credit score. Paying them off rarely raises your score enough, and often not at all.
• Collection agencies buy debt for pennies on the dollar. If a collector owns an old $1,000 account, they likely bought it for less than $100. Engaging with them can restart reporting and reset the clock.
• Many accounts fall off your report after the statute of limitations or reporting period (commonly six to seven years). If the item is old, it will likely disappear without you having to pay it.

What underwriters actually look for

Underwriters want to know if you will be able to make the mortgage payment once the loan closes. The two biggest concerns are:

• Your ability to afford the monthly payment (DTI and income verification).
• Whether you have liquid cash left over after closing to cover emergencies and future payments—this is called reserves.

Reserves are the money left in your bank account after you pay your cash to close. That figure is a major compensating factor. The more months of mortgage payment you have sitting in the bank post-closing, the better you look to the lender.

Concrete examples

Here are simple examples to show how reserves work:

• Projected monthly payment: $1,500
• Cash to close: $5,000
• If your bank account shows $8,000 before closing, the lender can see you have the $5,000 to close and two months of reserves (1,500 x 2 = 3,000).
• If you show $30,000 after closing, that might represent multiple months of mortgage payments and is a strong compensating factor when your DTI is borderline.

Why reserves become a game changer

Underwriting models and investors hate first payment defaults. If someone misses the first mortgage payment, that loan is a much higher risk. Showing several months of liquid reserves reduces that risk and often turns a borderline denial into an approval.

Where to keep the money

Do not stash savings under a mattress, in apps, or split across a dozen accounts when you apply. Put the funds in one bank account—your checking or primary savings—so the funds are easy to verify. When underwriters can clearly see the cash and how many months of reserves it represents, approvals happen more easily.

• Put the full cash-to-close and reserves into one account.
• Avoid transferring funds in and out across many accounts right before applying.
• Keep funds accessible and verifiable. Lenders prefer liquid cash you can withdraw immediately.

Watch out for timing and verification

Bank statements can be dated and lag behind your current balance. Tools like Plaid can help pull more recent activity, but many times an underwriter still needs a human to verify recent balances. Real-time bank documentation showing the funds is commonly required when you are on the edge.

Collections and the statute of limitations

If a collection or charge off is very old, do not pay it just before applying. You could restart the reporting or legal clock. Let old, aged collections fall off per the reporting timeline. If a debt is recent and actively hurting your file, ask your loan officer for specific guidance before making a payment.

Simple action plan

1. Do not pay old collections or charge offs just before applying for a mortgage.
2. Gather your cash and deposit it into one primary bank account where you receive paychecks or maintain most liquid funds.
3. Keep several months of mortgage payments in that account as reserves. The more months, the stronger the compensating factor.
4. If you are on the edge with DTI or credit, provide up-to-date bank statements or a real-time balance verify tool when requested.
5. Avoid heavy interaction with collection agencies that could restart the reporting timeline. If a collection is recent, consult your loan officer before making any payments.

Bottom line

Cash is king. Having verifiable, liquid reserves in a single bank account is often worth more to an underwriter than paying off old debt. Keep your money accessible and documented. That single change can turn a denial into an approval and get you to clear-to-close.

Follow this approach and you will improve your odds of getting approved without sacrificing cash you may need after moving into your new home.