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Updated on Monday, May 3, 2021
If you carry balances on your credit cards and want to buy or refinance a house, you can still qualify for a mortgage. However, there are some serious drawbacks when it comes to credit card debt and getting a mortgage that you should understand before deciding whether it’s worth it.
- Can you still get a mortgage with credit card debt?
- 5 ways credit card debt affects getting a mortgage
- FAQs about credit cards and getting a mortgage
Can you still get a mortgage with credit card debt?
The simple answer is yes, you can get a mortgage with credit card debt. In fact, using credit cards helps you build a credit history that may boost your scores, as long as you keep the balances low and make monthly payments on time.
On the other hand, if your balances and monthly payments are too high, credit card debt may reduce your homebuying power and limit the amount you can borrow.
5 ways credit card debt affects getting a mortgage
Lenders typically look at five factors related to your credit card debt when they consider your loan application, including:
- Your debt-to-income ratio. To make sure you can repay your loan, lenders calculate your debt-to-income (DTI) ratio by dividing your total monthly debt by your gross monthly income. The Consumer Financial Protection Bureau (CFPB) recommends a DTI ratio of 43% or less. If you have high credit card payments due to a large outstanding balance, you might not qualify for the loan amount you need to buy a home.
- Your credit score. A good portion of your credit score is based on your total revolving debt compared to your available credit. This is called your utilization ratio, and anything above 30% can push your credit scores down. In other words, if you have $10,000 of available credit, charging more than $3,000 could negatively impact your scores.
- Your mortgage interest rate. The lowest mortgage rates typically go to borrowers with a score of 740 or higher. If your score has taken a hit because of maxed-out credit card debt, you could end up with a much higher interest rate.
- Your mortgage program eligibility. If your credit score is below 620, you may not be eligible for conventional financing. Although loans backed by the Federal Housing Administration (FHA) allow for scores as low as 500, you’ll pay much more expensive FHA mortgage insurance costs to cover your lender against losses for taking on the extra risk that you could default.
- Your home price. You may have to scale back how much home you can buy if your credit card debt is too high. The table below shows how much home you could afford if you earn $5,000 per month with no credit card debt, versus a monthly $250 credit card debt payment.
|Total monthly credit card debt||The home price you might qualify for*|
*Calculations based on $59,500 down payment
The bottom line: The extra credit card debt reduces your homebuying power by $22,078.
FAQs about credit cards and getting a mortgage
If your credit cards are maxed out or you have high monthly payments, your mortgage application could be affected in three ways:
- You could be denied for having too much debt compared to your income.
- Your loan amount could be reduced to meet the lender’s DTI ratio limits.
- Your interest rate and costs could be higher if your credit score is lower.
Although you may be approved for a mortgage with a DTI ratio up to 43%, it’s best to shoot for less. Also remember, high credit card balances could push down your credit scores, leaving you stuck picking a bad credit mortgage program.
Yes, especially if you’re buying a home. Keep in mind it may take a month or two for the balances and your credit scores to adjust on your credit report, so if you’re applying right away, be prepared to document the debt paydown.
Not directly. However, because the monthly payments affect your DTI ratio and high balances can drag your scores down, your credit card limits play a role if you’ve maxed your cards out.
Yes. You can take out a new mortgage for more than you currently owe and use the difference to pay off credit card debt. This is called a cash-out refinance, and in most cases, you can borrow up to 80% of your home’s value. However, military borrowers can tap up to 90% of their home’s value with a cash-out refinance backed by the U.S. Department of Veterans Affairs (VA).