Owning a home may sound like a good idea, until you start thinking about the credit card bills you have to pay. While having credit card debt can certainly impact your ability to qualify for a mortgage, having that debt doesn't have to stop you from getting a mortgage, especially once you understand the tips and strategies we've outlined below to help improve your chances of not only qualifying, but qualifying for more.
What Are Lenders Looking At?
When determining if you qualify for a mortgage, lenders look at many things. This includes your ability to pay your capital and assets, your debt-to-income (DTI) ratio, and your FICO score. Only a couple of these apply to your credit card debt, so let's take a look...
Debt-to income-ratio (DTI) is one of the critical pieces affecting your ability to qualify. Your DTI ratio tells a lender if you'll be able to afford your new mortgage. So while having credit card debt won't stop you from qualifying, having a credit card balance will affect your mortgage application if it results in a high debt-to-income ratio. For more information, read about the 43% debt-to-income ratio. That's typically the highest you can go and still quality for a mortgage.
Need help calculating your DTI? Use our calculator.
How to Improve DTI
If you're able to pay down your card balances, your DTI will improve. And if you pay them in full by closing, they won't be calculated in your DTI. This will help reduce your DTI when you're looking to close on your mortgage.
Keep in mind, if you're an authorized user on a card, that card's monthly minimum payment is calculated in your DTI. So you may need to pay those cards down as well.
Your FICO score is comprised of five factors:
- Payment History
- Credit Utilization Ratio
- Length of Credit History
- New Credit
- Credit Mix
Credit Utilization on Revolving Accounts
The percentage of the credit you're using is your credit utilization on revolving accounts. Because the total amount owed on all your accounts comprises 30 percent of your FICO score, not only does this affect your ability to qualify for a mortgage, it also affects how much of a mortgage you qualify for.
High credit utilization percentages typically represent higher risk to lenders. In addition, having many accounts that carry a balance may also be an indication of a greater risk of over-extension. By keeping the number of accounts with balances, as well as your overall credit card utilization low, you'll be able to qualify for a larger mortgage.
What to Do with Outstanding Debt
The key to dealing with your existing debt is to keep your monthly payments low. Having cards that are maxed out certainly won't help. Aim to keep credit card balances under 30 percent of your credit limit, if possible. If you can, pay down credit cards with the highest monthly payments first. You might try spreading your credit card debt out across multiple cards, as long as it keeps your monthly payment lower. Or you could consider consolidating your credit card debt into one lower monthly payment.
About Missed Payments
Payment history is an important part of the equation when it comes to credit card debt and qualifying for a mortgage. Lenders want to see a history of on-time payments to show you're responsible about paying your debts.
While missing a payment isn't the end of the world, repeated missed payments will significantly lower your credit score and adversely affect your ability to qualify for a low rate on your mortgage. If a missed payment is adversely affecting your score, consider asking the lender to remove it out of goodwill. You may also be able to negotiate its removal by offering to set up automatic payments, ensuring the lender that the payment won't be late in the future.
Getting Additional Cards
If you can avoid it, don't get additional credit cards while you're in the process of applying for a mortgage. If you're planning to take advantage of a 0% balance transfer offer, do it well before you apply, and certainly not during your mortgage application process. If its necessary, work with your lender. A good lender will be able to assist you in the necessary steps to improve your circumstances without putting your qualification in jeopardy.
Having Cash On Hand
Having a reserve of cash at closing isn't just a good idea, it's a requirement for many lenders. Lenders want to know what you've saved up for a down payment, that you have enough money to pay closing costs, and that you can make your mortgage payments every month. As you work on calculating your DTI and paying down your credit cards, be sure to keep enough cash on hand to meet the minimum cash reserve requirements for the type of loan you're receiving.
4 Credit Card Strategies to Help You Buy a Home
Here are four credit card strategies to help you qualify to purchase a home.
- Keep monthly minimum payments to a minimum. Since your DTI is based on your monthly minimum payment amount for each of your cards, it's a good idea to keep this at a minimum.
- Spread out your debt. Spreading your credit card debt across multiple cards could be a strategy to help you keep the minimum payment amount down. In other words, if you're carrying all of your debt on one card, you may have a higher minimum payment then if you spread the debt across 4 cards.
- Pay off your credit cards. Normally, it's a good idea to pay off your credit cards with the highest interest rate first. However, when you're trying to qualify for a mortgage, it may be a good idea to pay off credit cards with a higher minimum payment first. This will help you qualify for more house.
- Consider consolidation. If you can reduce your credit card minimum monthly payment amount by consolidating debt from multiple credit cards into one payment, this too would allow you to qualify for a larger mortgage.
You Can Get a Mortgage with Credit Card Debt
The bottom line is, you can qualify for a mortgage with credit card debt. But you just have to be smart about it. Keep your overall debt-to-income ratio below 43 percent, your revolving line of credit to 30 percent utilization, and minimize the monthly payments on your cards. If needed, pay off your cards in full prior to closing on your mortgage, just make sure you keep enough cash on hand to make the down payment, pay your closing costs, and have the cash reserves required by your lender.
Here are some additional articles to assist you with getting a mortgage: