Here at Interstate Associates, financial advisors regarding issues of debt and credit, we are often asked if people with credit card debt can obtain mortgages. There is not a “yes” or “no” answer to this question because the issues are a bit more complex. Overall, it boils down to your credit score and how much debt you have in relation to how much you will pay on all credit each month. This article will explore this topic in more depth.
Do I Have to Have All of My Credit Card Debt Paid Down? –
This question generates the simple answer of “no.” You can get a mortgage with some credit card debt. According to Fidelity, lenders make decisions about whether you are a good risk to get a mortgage based upon a few factors:
- Credit score
- Debt-to-income ratio
- Down payment
- Work history
- Condition of desired home
The first two of these factors relate to how much credit card debt you carry.
Credit Score: According to Experian, your credit score is, in turn, influenced by five factors:
- Your payment history is 35 percent of your FICO credit score calculation
- Your balance-to-limit ratio is 30 percent of your credit score.
- Your length of credit history is 15 percent of your credit score calculation.
- Your recent activity is 10 percent of your FICO score.
- Your credit mix of different types of credit is 10 percent of your credit score.
Experian states the balance-to-limit ratio, or credit utilization relates to the percentage of your balance limits of all of your combined credit cards you carry. In order to have a good FICO credit score, you will need to have around a 30 percent or less utilization of your credit cards. If your credit cards are maxed out, it will harm your credit score and could preclude you from a mortgage loan.
If you have too much credit utilization, you can obtain a debt consolidation loan. That is a personal loan, often at a lower interest rate than your credit cards, that pays off your cards. Then, you make one payment each month on the debt consolidation loan. Because of the lower interest rate, you will be able to pay down the loan more quickly. Also, if you can restrain yourself from putting more on those credit cards, you will have dramatically lowered your credit utilization, improving your credit score for scrutiny by a mortgage lender.
Debt-to-Income Ratio (DTI): The other factor that credit card debt plays in your ability to obtain a mortgage is your debt-to-income ratio. According to NerdWallet, that is the ratio of all of your monthly payments you make on your debt to your gross monthly income. In order to secure most mortgages, the U.S. government’s Consumer Financial Protection Bureau states that lenders are looking for a
DTI of 43 percent or less.
The reason that DTI is so important is that it is a huge determinant in your ability to make your mortgage payment each month. Thus, the amount of credit card debt you carry will determine your DTI. The DTI, in turn, will help lenders ascertain your ability to pay your mortgage.
If you have a DTI that is too high, you can either pay off your credit card debt in order to not have such large payments each month, negotiate with credit card issuers for lower interest rates, or obtain a debt consolidation loan in order to lower the payments you will be making each month.
As you can see, you can have some credit card debt and still be approved for a mortgage, but your credit score and debt-to-income ratio will determine if you have too much credit card debt in order to obtain a mortgage.
Here at Interstate Associates, we are in the business of providing sound financial advice to consumers regarding credit and debt. Call us with any questions you have. We are here to help