Think of credit card debt and mortgage approval like using a handheld map to reach a destination. You can still get somewhere with a handheld map, but a GPS navigation system would make it a hell of a lot easier.
You can still apply for a home loan with credit card debt, but it will definitely be more challenging. Before you start the homebuying process, it’s important to have an understanding of how debt impacts your credit, and what that means for your mortgage.
So, what aspects of my credit card debt can affect my ability to receive a mortgage loan?
#1: Credit Score
When you have outstanding credit card balances, your credit score is impacted. Your credit score is one of the biggest aspects mortgage lenders look at when determining your eligibility to receive a loan. It’s a direct reflection of your creditworthiness — the higher the score, the less risky lenders will perceive you.
Your credit score is made up of five different categories: payment history, amount owed, length of credit score, credit mix, and new credit. Any credit card debt will fall under the amount owed, and within that category lies a factor called the credit utilization ratio. This is the percentage of your available credit currently being used. So for example if you have $30,000 in available credit and you owe $3,600, your ration would be 12%. The general rule of thumb is to keep your ratio below 30% to show mortgage lenders that you can stay on top of your payments.
#2: DTI (or debt-to-income ratio)
Like we’ve said before, it’s still possible to receive a loan with credit card debt. It just depends on how you manage it and how much debt you have. Mortgage lenders pay close attention to what’s called a DTI, or debt-to-income ratio. This is the percentage of your gross monthly income used to make monthly debt payments. You want to keep your DTI around a 43% max to qualify for a mortgage. Although sometimes lenders can make exceptions for borrowers with ratios up to 50%, particularly if they have high credit scores or large down payments. Unsure on what your DTI might be? This DTI overview is a great resource.
In conclusion, your credit card(s) have a huge impact on your credit score, which makes it easier to get a mortgage loan. So by no means are we saying to get rid of them! It all boils down to how you use the credit you’re given. Making payments on time will show lenders that you know how to use your credit wisely.
If you’re looking to consolidate debt and/or looking to receive a mortgage loan, Equity Mortgage can help! We are locally owned and operated which means we don’t have the overhead of national firms. This allows us, in most cases, to save you money. And because we are the lender, it allows us to close your loan faster. Please call Ken Venick at (443) 471-4310 or contact us online today to start your loan.