Can You Buy a House with Credit Card Debt?
Yes, you can qualify for a home loan and carry credit card debt at the same time. But before you start the homebuying process, you’ll need to understand how credit card debt impacts your creditworthiness — this can help you decide whether it makes sense to pay down your credit card debt before buying a house.
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How credit card debt affects your credit score
If you’re carrying credit card debt, you’re far from alone — as of this writing, American consumers owe $986 billion in credit card debt. But your outstanding credit card balances, as well as any other debt you still owe for that matter, will impact your credit score.
Your credit score is a reflection of what’s on your credit report and gives mortgage lenders an idea of your creditworthiness; the higher your score, the less risky lenders perceive you.
One other big change worth noting: After May 1, 2023, the credit score benchmark to get the best rate on a conventional loan will be raised from 740 to 780. Look for the sign below for details about the new fees and how they could lead to a higher rate or more closing costs.
Your FICO credit score, which is used by most lenders, is made up of five different categories:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
Credit card debt falls under the “amounts owed” category, which simply means the total amount of debt you owe. The most important factor in this category is your credit utilization ratio, which measures the percentage of your available credit currently being used. For example, if you have $20,000 in available credit and you owe $3,000, then your credit utilization ratio is 15%.
Ideally, your ratio shouldn’t exceed 30% — individually and collectively — on your credit cards.
A higher ratio tells mortgage lenders that you’re overextending yourself and may be more likely to fall behind on loan payments.
However, don’t be so quick to pay down all your cards to a zero balance or close your paid-off accounts to get a higher credit score. Your credit mix — the variety of credit types you have — also matters, and completely ditching debt can negatively impact your score. Instead, keep your balances low and pay them in full each month.
Understanding how credit card debt affects getting a mortgage
Getting a mortgage with existing debt is possible, depending on how much debt you have and how well you’re managing it. Credit card debt affects three main factors that matter greatly in your ability to get a mortgage:
1. Debt-to-income (DTI) ratio. Lenders use your DTI — the percentage of your gross monthly income used to make monthly debt payments — to decide if you can afford a mortgage. It’s best to keep your DTI ratio at a 43% maximum to qualify for a mortgage, though some lenders make exceptions for DTI ratios up to 50% — especially if borrowers have high credit scores or large down payments.
2. Credit score. You typically can’t get a mortgage with a credit score lower than 500. As mentioned above, credit utilization measures how much of your available credit is in use, and it’s an important factor in your credit score. So if you have a lot of credit card debt, your credit score will suffer.
3. Down payment. For many, saving a down payment is one of the biggest hurdles on the path to buying a home, and your credit score can either shrink or raise the height of that bar. With a loan backed by the Federal Housing Administration (FHA), for example, you can get away with only a 3.5% down payment if your credit score is 580 or higher. But if you have credit card debt that is dragging your credit score down below 580, you’ll have to put down at least 10%.
How your credit score impacts your mortgage interest rate
Another important thing to know about how mortgages work with your credit score is that, in general, the higher your credit score, the better rates you can access. The table below shows how your credit score impacts the mortgage rate you’re quoted and what your monthly payments could be. For the purposes of this example, which is based on FICO data, the mortgage offers are for a 30-year, fixed-rate $400,000 loan.
|FICO Score range
|Monthly payment (principal and interest)
The main takeaway here is that your credit card debt isn’t isolated as a major component on your mortgage application; rather, it’s one of several key factors lenders consider. How that debt relates to your income, along with your credit score, is what lenders care about.
Can you buy a house with bad credit?
However, for the sake of clarity, let’s point out that trying to buy a house with bad credit is a slightly different scenario than buying while carrying credit card debt.
You can carry a high amount of debt fairly responsibly (for instance, with on-time payments and a decent credit score). But if your financial picture has slipped into “bad credit” territory, you almost certainly have some significant dings against you, like late or missed payments, that need to be corrected.
4 tips for buying a house with credit card debt
Provided you meet other minimum mortgage requirements for your chosen loan type, you can buy a house with credit card debt. However, keep the following tips in mind to stay on track for a loan approval.
1. REVIEW YOUR CREDIT REPORT
The last thing you want when applying for a mortgage is to be caught off guard by surprises in your credit history. Pull your free credit report from AnnualCreditReport.com and review it for accuracy. If you do come across an error, dispute it directly with the three credit reporting bureaus (Equifax, Experian and TransUnion).
2. PAY MORE THAN THE MINIMUM
The best way to tackle credit card debt, whether you’re applying for a home loan, is to pay more than the bare minimum. Your mortgage lender may have access to your trended credit data, which shows how much you’re paying toward your debts each month. If you pay more than what’s due, it demonstrates your commitment to handling your debt responsibly.
3. CONSOLIDATE YOUR CREDIT CARD DEBT
Remember, if your credit utilization ratio is higher than 30%, your credit score will suffer. Consolidating your debt using an unsecured personal loan could help you better manage and pay off your balances, as well as boost your credit score. Unlike credit cards, a personal loan is an installment loan that you (or your creditors) receive in a lump sum. Just be sure to consolidate your debt well before applying for a mortgage — perhaps six months to a year in advance, or even earlier. Doing so in the middle of the homebuying process could derail your loan approval.
4. DON’T RACK UP MORE DEBT
Resist the urge to swipe those credit cards to buy furniture for your new home, or to take out a new car loan. More debt will raise your DTI ratio, and may hurt your chances of getting to the closing table on schedule.