The Affects of Credit Card Debt on Mortgage Approval

As a home buyer, you should be concerned with the amount of credit card debt you have as it can directly affect your ability to get a home loan.

In fact, having too much debt can hurt you in two ways during the mortgage process:

• It can lower your credit score, which in turn reduces your ability to qualify for a loan. 
• It increases your overall debt-to-income ratio, which also reduces your chances of getting the loan amount you desire. 

Lenders today will turn you down cold if they feel you have too much debt in relation to your income, as they are most concerned with your total debt load. How much is too much you ask? That depends on the type of mortgage loan you’re trying to obtain. Suffice it to say that if your combined debts eat up more than 50% of your gross monthly income, you’ll probably have trouble qualifying for a home loan.

The bottom line is that credit card debt definitely affects your chances of getting a mortgage loan. It’s all about risk. Borrowers with heavy debt burdens represent a larger risk to the lender; therefore, they have a more difficult time qualifying for financing. And if they do get loan approval, they typically end up paying a higher interest rate due to the higher risk associated with all of that debt.

The smart way to use a credit card is to make occasional purchases with your card and pay the balance down each month, it creates a pattern of responsible usage. It shows lenders that you know how to use credit wisely, which is exactly what they want to see. Here’s what is says about this subject on the FICO website (the people who developed the scoring model that is used by most lenders):

“Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.”

The key word in this quote is “responsibly.” By keeping your balance(s) low, relative to your limit(s), you can create a long pattern of responsible usage. In turn, this will help your score causing it to be easier to get mortgage loans and other types of financing. This can also save you a good bit of money, as you’ll qualify for better interest rates.

On the other hand, if you rack up a lot of credit card debt, you are creating a pattern of irresponsible usage and over-reliance. This can lower your FICO score. You are also increasing your total debt in relation to your gross monthly income, which raises your DTI ratio. Both of these things will make it harder to get approved for a home loan.