Buying a House With Credit Card Debt: What to Know

If you are carrying credit card debt, you may worry it will affect your ability to buy a home. The reality is that substantial credit card debt can affect how much you can borrow, or whether you can borrow at all.

However, your ability to qualify for a mortgage depends on your overall financial picture, and some credit card debt doesn't disqualify you if you're otherwise eligible for a home loan.

Can You Buy a House with Credit Card Debt?

You can often qualify for a mortgage and buy a home even if you have credit card debt.

Lenders look at your credit score, payment history, and total monthly debt payments to determine if you are eligible to borrow.

If you can easily afford your credit card payments and your home loan, and you generally have good credit and solid financial credentials, loan approval is more likely.

How Lenders Evaluate Credit Card Debt

Credit card debt affects several key factors lenders consider when determining whether you qualify for a home loan, how much you can borrow, and your loan terms. Here's how lenders factor credit card debt into their decisions.

Debt-to-Income Ratio

Your debt-to-income ratio is one of the most important factors in mortgage loan approval, and your credit card debt directly affects it.

To determine your debt-to-income ratio, mortgage lenders compare your monthly debt payments to your gross monthly income. Lenders actually look at two ratios:

• The front-end ratio compares your monthly mortgage payment to income. Ideally, this should be below 28%, though some loan types allow for it to be higher.
• The back-end ratio compares your total debt payments, including your new mortgage and any credit card debt, to your income. The focus is on monthly minimum credit card payments, not total balance. Ideally, your ratio should be below 36%, though some lenders and loan types allow for it to be higher.

Credit Utilization and Credit Score

Your credit score is another important factor that mortgage lenders consider, and it can also be impacted by your credit card debt. The factors that affect your score include your payment history, credit utilization ratio, types of credit, age of credit, and inquiries for new credit.

If you have been late on credit card payments, that will reduce your credit score. Your credit utilization ratio will also be heavily impacted by credit card debt. This ratio measures credit used versus credit available and should ideally be below 30%.

If you have $10,000 in available credit and have $6,000 in debt, you have a 60% utilization ratio which the three major credit reporting agencies consider high. Utilization above 30% may temporarily lower your credit score, which may affect your mortgage eligibility and loan terms.

Overall Financial Picture

Finally, lenders consider your overall financial picture, including your income, assets, and cash reserves, when deciding whether to approve you for a loan.

Since your credit card debt is a liability, lenders may want to see more assets, such as a larger savings account balance, to offset it.

How Credit Card Debt Can Affect Your Mortgage

Now that you understand how lenders may take your credit card debt into account, it's also important to consider how it can actually affect your mortgage. Here are some of the potential impacts.

How Much You Can Afford

Credit card debt can affect the amount you can afford to borrow. If you are spending a lot on credit card debt, including interest costs, you have less room in your budget to pay for a home. A home affordability calculator can help you to understand how much home you can afford given your other financial obligations.

How Much You Can Borrow

Since your total debt payments need to be below a certain percentage of your income to meet your lender's DTI ratio guidelines, the debt payments you owe to your creditors will reduce the amount available to put toward a mortgage payment. This can affect the amount of money you need to buy a home, as you may need to put down more money to lower your payments.

Down Payment Requirements

Lenders generally require a down payment when you get a mortgage, although this isn't the case for all loan programs. If your minimum monthly credit card payments increase your DTI outside of acceptable limits, your lender may ask that you make a larger down payment to reduce your monthly mortgage loan payments.

Buying a Home With Credit Card Debt vs. Bad Credit

Remember, carrying credit card balances can sometimes affect your mortgage, but it is not the same as having bad credit. The table below shows some key differences.

Tips for Buying a House with Credit Card Debt

If you are considering buying a house with credit card debt, these tips could help you make the right choice.

1. Pay down high-interest credit card debt: The more of your debt you can repay, the more interest you save, the lower your DTI, and the lower your credit utilization ratio. This will help you get a more competitive rate.
2. Work on increasing your credit score: Improving your credit score makes you a more qualified borrower and may qualify you for more competitive loan terms.
3. Lower your DTI: Lowering your DTI by repaying other debt or borrowing less on your mortgage loan could help you to become better qualified.
4. Explore different loan options: There are different mortgage types, some of which have easier qualifying requirements and don't penalize you as much for having credit card debt.

Keep in mind that many Americans have credit card debt, and owing money to creditors does not mean you can’t become a homeowner.

Credit Card Debt and Homebuying FAQs

If you still need more information, here are answers to some frequently asked questions about credit card debt and homebuying.

How Much Debt Is Too Much to Buy a House?

If you exceed your mortgage lender's debt-to-income ratio requirements, you likely will not be approved for a loan to buy a house. Your total debt payments, including your new mortgage, generally should be below 36%, although some lenders and loan types offer a little more flexibility. Ask your lender for their maximum DTI ratio.

Should I Pay Off Credit Card Debt Before Getting a Mortgage?

Ideally, you should pay off or reduce credit card debt before getting a mortgage so you can become a better-qualified borrower. However, if you are otherwise qualified and can get an affordable home mortgage, you can borrow without paying off your full balance.

Can I Buy a House With $20K in Credit Card Debt?

You may be able to buy a house with $20,000 in credit card debt. Your eligibility depends on your income, monthly payments, down payment, credit score, and overall financial picture. A lender can help you determine if you're allowed to borrow.

Final Thoughts: Homebuying When You Have Credit Card Debt

Buying a home when you have credit card debt can sometimes be more difficult, depending on your overall financial qualifications. However, it's not impossible, and many people do it every day. Reach out to Freedom Mortgage to find out about your borrowing options and see if there is a loan that's right for you.