Does Credit Card Debt Affect Getting a Home Loan?

If your cards are maxed out, a mortgage is harder to get.

If your cards are maxed out, a mortgage is harder to get.

When you apply for a mortgage, your credit card debt -- how much you have and how well you manage it -- matters a lot. Along with your other debts, credit cards may determine how big a mortgage you can land, and how good the interest rate is. If your credit history isn't perfect, you can take steps to improve things.

Debt-to-Income Ratio

Part of qualifying for a mortgage is figuring out how big a monthly payment you can afford. Even if you have a good income, lenders will look at how much of that goes to debt. When you add your monthly debt payments -- credit cards, student loans, car loans -- to your monthly housing payment, the total should be no higher than 36 percent of your income to get a good interest rate.

Credit Score

Credit card debt also affects your credit score. The Fair Isaac credit-scoring corporation says your credit history -- whether you pay what you owe on time -- counts for 35 percent of your score. The amount you currently owe counts for another 30 percent. It's not simply the raw amount of debt that lenders look at, but how much of your available credit you use. If you carry a $2,000 balance and a $2,500 limit, your score is much poorer than if you have the same balance on a $10,000 card.

Effects

If your debt-to-income ratios is higher than 36 percent, that doesn't bar you from buying a house. It does reduce the number of lenders who are willing to give you money, and those who do will charge you a higher interest rate. You also pay a higher rate if you have a sub-prime credit score of 620 or less.On the other hand, if you manage your cards and other debt well enough to score 720 or better, your credit card history might lead to the best rates available.

Solutions

If your debt-to-income ratio stinks, work to pay down your monthly debt before you go mortgage shopping. Whether you pay off your credit card balance, your auto loan or any other debt, the less you owe, the better your prospects. If you have a bad credit history, you can't erase it, but forcing yourself to get current and stay current in your payments prevents further damage. Don't cancel cards, which reduces your available credit, but don't open a lot of new ones either: Lenders find that worrisome.

 

About the Author

Author of two film reference books, "Cyborgs, Santa Claus and Satan" and "The Wizard of Oz Catalog." Published in Air & Space, Backpacker, Newsweek, The Writer, and multiple trade journals (can fax samples if requested, don't have them available digitally)

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