Can You Buy a House with Credit Card Debt?
You can carry credit card debt and still qualify for a loan to buy a home. But before you start the homebuying process, you’ll need to understand how credit card debt and getting a mortgage work, as well as how credit card debt impacts your creditworthiness.
How credit card debt affects your credit score
As of this writing, American consumers owe more than $1 trillion in revolving credit debt, which includes credit cards. Your outstanding credit card balances — and any other debt you still owe for that matter — impacts your credit score.
Your credit score is a reflection of what’s on your credit report and gives mortgage lenders an idea of your creditworthiness. The higher your score, the less risky lenders perceive you.
Your FICO credit score, which is used by most lenders, is made up of five different categories:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
Credit card debt falls under the “amounts owed” category, which simply means the total amount of debt you owe. The most important factor in this category is your credit utilization ratio, which measures the percentage of your available credit currently being used. For example, if you have $20,000 in available credit and you owe $3,000, then your credit utilization ratio is 15%.
Ideally, your ratio shouldn’t exceed 30% on each credit card individually and collectively. A higher ratio tells mortgage lenders that you’re overextending yourself and may be more likely to fall behind on loan payments.
However, don’t be so quick to pay down all your cards to a zero balance or close your paid-off accounts to get a higher credit score. Your credit mix also matters, and completely ditching debt can negatively impact your score. Instead, keep low balances and pay them in full each month.
Understanding credit card debt and getting a mortgage
Getting a mortgage with existing debt is possible, depending on how much debt you have and how well you’re managing it. Mortgage lenders pay attention to your debt-to-income (DTI) ratio, which is the percentage of your gross monthly income used to make monthly debt payments.
It’s best to keep your DTI ratio at a 43% maximum to qualify for a mortgage, though some lenders make exceptions for borrowers with DTI ratios up to 50% — especially if they have high credit scores or large down payments.
The main takeaway here is that your credit card debt isn’t isolated as a major component on your mortgage application, but rather one of several key factors lenders consider. How that debt relates to your income, along with your credit score, is what lenders care about. The lowest mortgage rates are reserved for borrowers with at least a 740 credit score.
4 tips for buying a house with credit card debt
Provided you meet other minimum mortgage requirements for the loan type you’re getting, you can buy a house with credit card debt. However, keep the following tips in mind to stay on track for a loan approval.
1. Review your credit report
The last thing you want when applying for a mortgage is to be caught off guard by surprises in your credit history. Pull your free credit report from AnnualCreditReport.com and review it for accuracy. If you do come across an error, dispute it directly with the three credit reporting bureaus (Equifax, Experian and TransUnion).
2. Make more than the minimum monthly payment
The best way to tackle credit card debt, whether you’re applying for a home loan or not, is to pay more than the bare minimum. Your mortgage lender may have access to your trended credit data, which shows how much you’re paying toward your debts each month. If you pay more than what’s due, it demonstrates your commitment to handle your debt responsibly.
3. Consolidate your credit card debt
Remember, if your credit utilization ratio is higher than 30%, your credit score will suffer. Consolidating your debt using an unsecured personal loan could help you more efficiently manage and pay off your balances. Unlike credit cards, a personal loan is an installment loan that you (or your creditors) receive in a lump sum. Consolidate your debt well before applying for a mortgage — perhaps six months to a year in advance, or even earlier. Doing so in the middle of the homebuying process could derail your loan approval.
4. Don’t rack up an additional balance
Resist the urge to swipe those credit cards to buy furniture for your new home, or to take out a new car loan. More debt will raise your DTI ratio and may hurt your chances of getting to the closing table on schedule.