Can You Refinance Your Mortgage with Credit Card Debt?

Mortgage rates are low and banks are loosening credit. Refinancing may seem attractive, but maybe you're wondering what impact having credit card debt will have on refinancing your home, and what you can do to raise your chances of qualifying to refinance your mortgage. Let's find out...

How Do You Handle Debt?

Having credit card debt won't stop you from refinancing. But how you handle your debt could.

When lenders look at your financial history, they want to know you are responsible with your debt. In general, they're looking for a history of on-time payments, as well as credit lines that aren't maxed out. In general, it's best to keep credit card balances below 30 percent of your credit limit to show responsible spending. Having too many credit cards can also be an issue, since having so many open lines of credit available could easily allow you to overextend your credit.

Your Credit Score

One of the major indicators of responsible financial decisions is your credit score, and it carries great importance when refinancing your mortgage. There are many factors that go into your credit score, including payment history, length of credit history, amount of debt owed, and credit mix. Your credit score impacts your ability to qualify, as well as the interest rate you will qualify for. Essentially, it answers the question: Are you a reliable payer of your debts you carry?

Your credit score and report and going to carry one vital piece of information that lenders are going to be looking at most when weighing to approve or deny your refinance application— your debt-to income-ratio (DTI). Your DTI answers the question: Will you be able to afford the new payment and mortgage?

So having a credit card balance will affect your refinance application if it results in a high debt-to-income ratio.

Pay Off Credit Cards to Improve DTI

2016 FHA guidelines have changed the way credit cards affect mortgage applications.

First, if you're an authorized user of a credit card, you must now include the card's monthly minimum payment in your DTI. The only way around this is if you can show that the last 12 payments have been made by the primary cardholder.

Credit card balances are also treated differently. If your credit card balance is paid in full at closing, lenders will exclude it from your DTI calculation. So paying off your credit cards in full will help reduce your DTI when you're looking to refinance.

4 things to Avoid When Refinancing Your Mortgage

Avoiding these four things will enhance your chances of approval for a mortgage refinance.

  1. Over-using your credit cards (revolving balances over 50 percent of your credit limit)
  2. Missing a credit card payment or falling behind on payments
  3. Becoming an authorized user on a credit card account
  4. Opening a new credit card account

Why Refinance Your Mortgage?

When you refinance your mortgage on your home, you are doing two things:

  1. Paying off the home loan you currently have
  2. Exchanging your current mortgage for another mortgage

Replacing your old mortgage with a new one can be financially sound if it results in a lower payment through any one of these three things :

  1. A lower interest rate: Knowing the current market's refinance rates will help you see if you could take advantage of paying less in interest each month.
  2. Switching mortgage types: Refinancing an ARM into a fixed-rate mortgage could help you lock into a rate before your ARM interest rate changes.
  3. Cash out on home equity: Many reasons exist for for tapping into equity. Calculating your equity in your home will help you see if cashing out equity while refinancing your mortgage is a good financial move.

Use a refinance calculator to see if refinancing is going to financially benefit you.

Is Refinancing the Best Choice for You?

If you are a homeowner with a high credit score and low debt-to-income ratio, you'll be in an advantageous position with banks, despite your credit card debt, and refinancing shouldn't be an issue for you.

If you are a homeowner with a low credit score, and a high debt-to-income-ratio because of your credit card debt, then it is advisable that you work on raising your credit score and reducing your debt-to-income ratio before applying for a refinance loan.

If you need some help calculating your DTI, use our calculator.

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