Image by Getty Images. Illustration: Austin Krege/Bankrate
If you’re using credit cards to cope with rising prices, you’re not alone. Some consumers have maxed out their credit cards or are getting close to them since the Federal Reserve began raising interest rates in 2022, according to Bankrate’s recent Credit Utilization Survey. Having credit card debt can reduce your chances of qualifying for a mortgage and buying a home, especially if you’re utilizing a lot of your available credit.
Can you buy a house with credit card debt?
To be clear, credit card debt does not prevent you from applying for a mortgage, and credit cards can help you establish and build a credit history.
The key is to make payments quickly and avoid being overcharged against your credit limit (a factor known as your credit utilization ratio). Your credit utilization makes up about one-third of your credit score and is one of the most important variables that mortgage lenders evaluate your application.
Problems arise when you use too many credits. This can increase your credit utilization rate, negatively impacting your credit score, increasing your debt-to-income ratio (DTI) and preventing you from saving for a down payment. Without a good credit score, DTI ratio, and down payment, you may not qualify for a mortgage. Or, you may qualify but have higher mortgage rates and end up paying more interest in the long run.
| minimum credit score | DTI Max* | Minimum down payment amount | |
|---|---|---|---|
| *Maximum DTI ratios vary depending on underwriting (automated or manual), lender, borrower, and other factors. | |||
| conventional loan | 620 | 45% | 3% |
| FHA loan | 580 | 43% | 3.5% |
| VA loan | There is no minimum value, but 620 is recommended | 41% | none |
| USDA loan | There is no minimum value, but 640 is recommended | 41% | none |
Among respondents to the Bankrate Credit Utilization Survey, 88% of those who maxed out or approached their credit card limit said it negatively impacted their personal finances in some way. This includes 41% who said their credit score had decreased.
Should I pay off my credit card debt before taking out a mortgage?
If your current credit score makes it difficult to get a mortgage, we recommend paying off or paying off any credit card debt before you apply. Reducing the amount of available credit you use will lower your credit utilization rate, improve your DTI ratio, and ultimately improve your score.
However, if your credit utilization rate is not very high and the minimum payments on your credit cards are relatively low compared to other debts, it may make more sense to focus your funds on other debts, namely down payments. there is.
In either case, consult your mortgage loan officer before applying for a mortgage. They will help you decide how to get in shape to qualify.
Tips to resolve credit card debt before buying a home
According to credit reporting company Experian, here’s how to improve your credit utilization.
- Pay off your credit card balance early. Credit card issuers typically report account balances to credit bureaus at the end of each statement period, but charges are not due several weeks later. Because of this timing, usage may be high even if you pay your bill in full on time. If possible, pay on time to reduce usage.
- Request a limit increase. Let’s say you charge your card $2,000 every month and pay it off every month. If your credit limit is $5,000, your credit utilization ratio may seem a little high at 40%. If the issuer increases the limit to $10,000, the ratio drops to 20%, assuming no other changes in your financial situation. (One note: When your credit limit is increased, you may be subject to a so-called credit check, which will temporarily lower your score.)
- Reporting price increases. Along with requesting an increase, be sure to update your financial information on file with your issuer, especially any increases in income. If the issuer knows you have more money coming in, they may encourage you to increase your credit limit.
- Don’t close old credit cards. You may be tempted to dump your old credit card, especially if it has an annual fee or if you’re worried about overspending. However, keeping these cards open increases your available credit, which helps keep your utilization rate low and the length of your credit history, another factor that affects your score .
- Open a new card. Opening a new line of credit increases your overall credit availability. However, please be careful. Don’t open a new credit card and max it out right away. Additionally, don’t apply for a new card if you’ve already applied for an unfinished mortgage. This can cause underwriting problems and loan failures.
