Many Americans want to buy a home. But many Americans also carry credit card debt. You may wonder if you can have credit card debt and get a mortgage. In most cases, the answer is yes, but you should understand how consumer debt can affect your ability to get a mortgage. Borrowers want to know if you can roll credit card debt into a mortgage?
Qualifying for a Mortgage Loan with Lots of Credit Card Debt Can Be Challenging
Keep reading to learn more. If you are ready to apply for a mortgage, speak to one of our loan professionals today. We can review your finances and determine which program could be the best fit based on your credit, income, and debt. Many borrowers want to know how long after paying off their debt can they get a mortgage.
How Does Credit Card Debt Affect Your FICO Score?
If you have credit card debt, you have many others in the US in the same situation. As of March 2024, there is more than a trillion in credit card debt held in the US. While many Americans get a mortgage with credit card debt, it will have a certain effect on your credit score, which ultimately affects your ability to get approved for a mortgage.
Your credit score reflects what is contained in your credit report and gives the mortgage lender an idea of how creditworthy you are. The higher the credit score, the better risk you are. Your credit score is based on five categories:
• History of on-time payments: 35%
• Amount you owe: 30%
• How long credit history is: 15%
• Credit mix: 10%
• New credit: 10%
Your credit card debt is in the amount owed section, meaning the amount of debt owed. The most critical factor in the amount owed is the amount of credit that is being used. So, if you have $20,000 in credit available and are using $2,000, you have a 10% credit utilization ratio. For the best rate, your credit utilization should not be more than 30%. If your rate is higher, you could be overextending yourself, which could affect your ability to get a mortgage.
While paying down credit card debt is smart in many cases when getting a mortgage, be careful of paying everything off and closing the cards. Doing so before getting a mortgage could actually reduce your score. Closing accounts could affect your credit mix and that could make your score drop.
How Credit Card Debt Influences Mortgage Approval
Getting a mortgage with existing credit card debt is common. It depends on how much credit card debt you have and if you are making on-time payments. Can you get a mortgage with credit card debt? Yes, you can qualify for a home mortgage loan with debt but it may make it more challenging. Your credit card debt may affect your ability to obtain a mortgage in three ways:
• Debt-to-income (DTI) ratio: Mortgage lenders rely on your DTI to determine if you can afford a mortgage. DTI is your gross monthly income compared to your monthly debt payments. It is recommended to keep your DTI no higher than 43% to obtain a mortgage. However, some lenders could allow a DTI of up to 50%, if you have a high FICO score or large down payment.
• Credit score: Conventional lenders generally want to see a 640 or higher credit score to get a mortgage. Having a 700-credit score or higher is important for the lowest rates. However, an FHA-approved lender may approve your application with a 580-credit score. Second mortgages enable borrowers to consolidate credit card debt directly from the loan. Find out if you qualify for debt consolidation.
• Down payment: Saving money for a down payment is difficult for many first-time buyers without equity in a current property. There are conventional loan programs available with a 3% down payment with a suitable credit score. FHA offers 3.5% down with a 580 minimum credit score.
Your amount of credit card debt and DTI will also affect your mortgage rate. For example, if you have a 760-credit score, you might qualify for a 6.1% 30-year mortgage. But someone with a 680-credit score may have to pay 6.5%.
Those who apply for an FHA mortgage usually get the same rate regardless of credit score. But if you have a lot of credit card debt and have missed payments, even getting an FHA loan could be challenging. Try to pay down as much of your credit card debt as you can in the year before getting a mortgage, and don’t miss any payments at least a year before applying.
Getting a Mortgage With a Bad Credit History
According to FICO, approximately 15% of American consumers have credit scores between 500 and 599 on an 850-point scale, which is considered poor to fair credit. Another 10% fall within the 600 to 649 range, classified as fair credit. If you have a below-average credit score, you’re not alone. The right mortgage lender can assist you in securing a mortgage or provide guidance on how to get approved in the future.
Sometimes mortgage brokers make exceptions for borrowers with credit scores below the minimum due to insufficient credit history, rather than a bad credit history. This option is available only if the limited credit history contains no derogatory items and the borrower can demonstrate creditworthiness with verifiable payments that do not appear on traditional credit reports, such as rent or utility payments.
It’s possible to obtain a mortgage with bad credit. You only need a 580-credit score to get a 3.5% down mortgage from FHA. However, just because you carry a lot of credit card debt doesn’t always mean you have bad credit. You could have thousands in credit card debt and still have a good credit score, assuming you manage your debt responsibly and haven’t missed any payments in the last one or two years.
Can you get a mortgage with a credit score of 500?
Obtaining a mortgage with a credit score of 500 is uncommon, but not impossible. Your most viable option is to inquire with lenders about FHA home financing, as it often permits a minimum score of 500 with a 10% down payment. Smart Lending will help you locate lenders that accommodate a credit score of 500 for home loans. If you already have a mortgage and are looking to consolidate debt, this could save you money. If you already have a low first mortgage rate, consider a home equity loan to consolidate debt. Many homeowners have benefitted with lower monthly payments when you roll credit card debt into a mortgage.
What is the Easiest Mortgage to Qualify for?
An FHA mortgage typically offers the most accessible path to homeownership. Eligibility can be achieved with a credit score as low as 580, requiring a down payment of 3.5%, or even a score of 500 with a 10% down payment. Furthermore, FHA mortgages often accommodate higher debt-to-income ratios compared to conforming mortgages.
What Is the Maximum Debt to Income Ratio to Qualify for a Mortgage?
As a general guideline, a borrower’s DTI ratio should not exceed 43% to qualify for a mortgage. Ideally, lenders prefer a DTI ratio below 36%, with 28%–35% of that allocated to servicing a mortgage. The maximum allowable DTI ratio can vary between mortgage lenders. According to the RefiGuide, If you have a debt to income ratio above 43%, you may need to get a private-money loan from a non QM mortgage lender.
Mortgage Options for Borrowers with Low Credit Scores
If your credit score falls below 600, it may be wise to focus on improving your score before pursuing a loan. Nonprofit credit counseling services can assist with this process.
Loan eligibility is typically contingent on individual circumstances. Factors such as the size of your down payment, your credit history, and the option of having a co-signer on the mortgage application all influence lender decisions.
Based on these considerations, the suitable paths into the housing market include:
- FHA Mortgage
- Conventional loans
- VA Mortgage
- USDA Loans
- Hard Money
Summary on Qualifying for a Mortgage with Debt
You can get a mortgage with credit card debt that is managed responsibly. Smart Lending will help you shop for the best mortgage lenders that meet your needs and goals financially. That said, the less debt you are carrying when applying for your mortgage, the better. Having more credit card debt may result in a higher interest rate and more scrutiny of your application. Keep your DTI as low as you can, which factors in your amount of credit card debt. If you do that, you should have an attractive mortgage application that is easy to approve!
