Home Loans – Can You Get A Mortgage with Large Credit Card Debt?
Owing too much on your credit card accounts can negatively affect your credit scores, but it’s not the end of the world. However, as a homebuyer you should be concerned about this. As with other types of loans, if you carry a large sum of credit card debt you may be subject to the higher interest rates that come with poor credit home loans. Therefore, it’s imperative that your credit is in good standing before you apply for your home mortgage. To do so, your goal should be to manage you finances in a way that lowers your debt-to-income ratio (DTI) and ensure that it is generally lower than 45%.
Credit Card Debt Affects Your Mortgage Approval
Because the amount of credit card debt that you carry affects your credit scores, you should be mindful that your credit balances will impact whether your mortgage application gets approved or rejected. Too much debt will lower your credit score and certain loan types have specific credit requirements that you have to meet in order to be eligible. If your credit card debt is too strong of a contributor to a high debt-to-income ratio, this also will reduce your chance of being approved.
Banks that will offer you a home loan are looking for buyers that have low debt burdens because this makes them feel more confident that you will be able to pay them back. If they feel that your other financial obligations are too significant, it is very possible that your loan application will be denied. Of course, the type of home loan that you apply for will determine what levels of risk are acceptable so it is also important to know what loan types you might qualify for in advance.
To lower your risk of being denied, it is important to level the playing field and know exactly what your credit report will be presenting to a mortgage professional.
In some cases, your scores may not be accurate due to inaccuracies on your credit report or for other reasons. Whatever the case may be, it is important that you are educated as a buyer. One of the best ways to start that process is to obtain your credit reports and scores from the three main credit reporting bureaus – Equifax, Experian, and TransUnion.
Once you’ve reviewed the reports and know what your scores are, you can take the next steps to either correct reporting errors or pay off debt balances. The goal, at this point, is to qualify and also to ensure that you get the lowest interest rates possible.
Excessive Credit Card Debt Affects Your Debt to Income
There are a lot of problems that come with large credit card debt. A manageable amount of debt is fine and may even help your credit if managed properly. However, excessive debt as it relates to what your monthly income is will drive up your debt-to-income ratio. If your DTI is at an unacceptable level, you changes at getting approved for a home loan become much more complicated. Before you buy a home, it’s highly beneficial to pay off a high credit card debt as much as possible to raise your credit score and ensure that you get the best rate when it comes time to finance or refinance a home. Just because a home owner or buyer may be eligible for a poor credit mortgage doesn’t necessarily mean that it is a good decision. If you are in these shoes, you should know that you will still be subject to high monthly payments and interest rates. A suggestion here would be to rent, pay off your debt, and then move forward with a more stress free home purchase.
What Does a Lender Look at When Reviewing My Loan Application?
Credit utilization is a term that you will likely see when using a credit monitoring product that shows you both your credit scores and reports. Credit utilization is a percentage that tells you have much credit you are currently approved for in relation to how much you have spent and it is something that lenders look at heavily. Typically, for good credit scores you do not want your credit utilization ratio to be greater than 30%. So in other words, if you are approved for $100 of credit, you would not want to owe more than $30. As a good rule of thumb, try to spend less than 25-30% of what you are actually approved to spend by a credit card company.
Your FICO score is one that a majority of banks will look to when attempting to see how you measure up as a buyer. A higher score will result in a lot more options and of course, a better interest rate. Over time, a lower interest rate could save you a significant amount of money. In contrast, a lower score could end up costing you a lot more money over time depending on how much higher your interest rate turns out to be. This means that you may still qualify for a home loan, but that higher interest rate may actually make the house much less affordable overall.
The tricky thing about credit card debt is that a large amount can prevent you from obtaining even FHA (Federal Housing Administration) mortgages. The FHA requires that those eligible for its loans have debt-to-income ratios of 43% or lower. This means that all your debt payments; including credit cards, mortgage payments, and all other loans; have to be at or below 43% of your monthly income.
How To Improve Your Loan Approval Chances
One way to improve your credit scores is to consolidate your debt by transferring the balance to a new card with no or low introductory rates. However, keep in mind that most card companies require transfer fees and will only offer this special promotion for six months. This may help you avoid high interest rates for a certain period of time though it will not affect your credit utilization ratio. It also won’t affect your debt-to-income ratio but it will make it easier for you to pay things down and prepare yourself for a great home purchase.
If you are already a home owner with a mortgage, you can improve your credit by using a cash-out refinance to pay off your debts. However, it’s highly unadvisable to use your home as collateral like this.
You will also be able to improve your credit score gradually if you plan ahead and set aside a good amount of money each month for your credit card debts. That is, if you make enough to make significant payments so that you are chipping away at the principal balance.