Can I Buy a House With Credit Card Debt?
“I have a balance on my credit cards. Does that mean I can’t get a mortgage?”
No. Credit card debt does not automatically prevent you from buying a house. A lender will look at how the cards affect your monthly debts and credit profile, along with your income, savings, and the payment on the home you want to buy.
I’m Paul Mattos with Refine Mortgage and Carolina Home Financing. When I review a buyer’s cards, I look at two different questions: What payment counts toward qualification? And how are the balances affecting credit?
How do credit card payments affect mortgage qualification?
Mortgage lenders calculate a debt-to-income ratio, or DTI. It compares your qualifying monthly obligations, including the proposed housing payment, with your gross monthly income.
For a credit card, the lender generally counts its required monthly payment, not the entire outstanding balance as a monthly bill. If there is no minimum payment shown or adequately documented, the lender may need to calculate one under the loan program’s rules. Fannie Mae explains its treatment of revolving accounts here.
A few cards with small required payments may affect DTI differently from cards with larger payments. For the full calculation, see What Is Debt-to-Income Ratio?.
Why does credit utilization matter?
Credit utilization compares a card’s balance with its credit limit. A $4,000 balance on a card with a $5,000 limit uses much more of the available credit than the same balance on a card with a $20,000 limit.
High utilization can affect your credit profile even when you make every payment on time. Fannie Mae’s guidance says lenders reviewing a loan manually should look for a pattern of revolving accounts at or near their limits. Read its credit utilization guidance.
That’s why I review both the monthly payments and the balances relative to limits. They can affect different parts of your mortgage options.
Should you pay off your cards before applying?
Sometimes paying a card down helps. But the best use of your cash depends on your situation.
Paying off a revolving balance may remove its monthly payment from the DTI calculation under applicable guidelines. Paying down a balance might also improve your credit profile. At the same time, you need enough verified funds for the down payment, closing costs, and any required reserves. Fannie Mae specifically calls for careful review when debt is paid down solely to qualify. See its payoff guidance.
Before you use a large part of your savings, have your lender compare the scenarios. Paying off a $100 monthly obligation could be useful; keeping that cash available for closing could be more important. The numbers determine the answer.
Can seller credits help?
A negotiated seller credit may reduce eligible closing costs, subject to the loan program’s limits. That may leave you with more of your own cash after closing.
A seller credit is not a direct payment toward your credit card debt. If preserving cash or paying down a card is part of the plan, review the full offer and loan structure with your lender before making assumptions about what the credit can cover.
What if I have a late payment or collections?
Carrying a balance is different from missing payments. A recent late payment, delinquent account, or collection can call for a closer review of your credit and loan options.
Tell your lender about it early rather than relying on an instant online pre-approval. I cover that question in Can I Get a Mortgage After Late Payments?.
What should I do while getting a mortgage?
Keep making required payments on time, and talk to your lender before opening a new card, financing a car or furniture, or making a major change to your balances. A new monthly obligation or change in credit can affect the approval that was based on your earlier financial picture.
A thorough pre-approval should review your income, card payments, utilization, other debts, assets, and available loan options. When you identify a property, I can prepare a Total Cost Analysis when possible before the offer goes out, showing the estimated full payment and cash to close for that specific home.
You do not need a zero balance on every credit card to begin the conversation. You need an accurate review of the numbers and a plan that leaves you comfortable after closing.
I help buyers in Charlotte, Matthews, Indian Trail, Concord, Fort Mill, Indian Land, Rock Hill, and surrounding North Carolina and South Carolina markets do just that.
Paul Mattos
Mortgage Broker | Refine Mortgage
Carolina Home Financing
Phone: 980-221-4959
Email: paulm@refinemortgage.net
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