Do You Need to Pay Off All Credit Cards Before Applying for a Mortgage?

by Fraser Sherman, Demand Media Google
    If you hope to buy a house, credit-card debt will make a difference.

    If you hope to buy a house, credit-card debt will make a difference.

    The more credit card debt you carry, the tougher it may be to qualify for a mortgage. Paying down the balance on your cards helps, but you don't have to pay them off completely. While eliminating large credit card balances might seem attractive, you must be careful to avoid draining your bank account when you need money for a down payment and closing costs.

    Ratio

    One of the hoops you have to jump through when you apply for a mortgage is the debt-to-income ratio. The rule of thumb in the mortgage industry is that your housing payment plus your other monthly debts -- credit card payments, student loans, car loans, alimony -- shouldn't be more than 36 percent of your monthly pre-tax income. Paying down your credit cards allows for a larger monthly payment on your mortgage, insurance and property taxes.

    Credit Score

    Thirty percent of your credit score is based on how much you owe. The credit scorer Fair Isaac Corp. says it's not just the dollar amount but how much of your available credit you've used up. If you carry, say, $9,000 on your cards, it will hurt your credit score more if your ceiling is $10,000 than if it's $20,000. Paying down enough of your debt to improve your credit-utilization ratio will make lenders look at you much more favorably.

    Down Payment

    The National Association of Realtors says that in many cases you're better off putting money toward your down payment than your credit cards. For a good deal, you often need 20 percent of the purchase price down, then more money for the closing costs. The association says that paying off $1,000 on your credit cards, for example, won't improve your position as much as having that money in your bank when you close.

    Decisions

    It's up to you to balance the options based on your individual financial situation. If you have a horrible credit-utilization ratio, paying down your balance to improve that might be the best move. If your credit card debt isn't overwhelming and your bank account is empty, saving for the down payment may be a better the better choice. With high balances and no savings, the only option may be waiting until you're in better shape financially.

    About the Author

    Fraser Sherman is a former reporter with the "Destin Log" newspaper and now freelances full-time. His work has been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life," and he's the author of three film reference books, including "Screen Enemies of the American Way." He specializes in finance and tech articles.

    Photo Credits

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