It is possible to buy a home if you have credit card debt. However, lenders will want to make sure that it doesn’t interfere with your ability to make a mortgage payment on time each month. Let’s look at what you need to know about buying a home if you owe money to credit card companies.
Be Aware of Debt-to-Income Rules
To have the best odds of obtaining a home loan, keep your debt-to-income (DTI) ratio at 28% or less before accounting for the mortgage. Furthermore, your DTI should be no more than 36% after adding the mortgage to your budget. It is worth noting that you could still get a loan even if you don’t fall within these guidelines.
In many cases, homebuyers seeking FHA or USDA loans can be approved with a DTI as high as 50%. However, this will depend on how much money you make, how long you have been employed and other criteria that a lender feels is relevant when making a loan decision.
Credit Card Debt Can Influence Your Credit Score
Your credit score is partially determined by your credit utilization rate. Ideally, you will use no more than 30 to 35% of your overall available credit, and it is also a good idea to use no more than 30 to 35% of any individual line of credit. When you go above this threshold, lenders may start to doubt your ability to manage debt properly.
Therefore, your credit score will likely be lower than it could be assuming that you make your payments on time and have a sufficient credit history. If you don’t make payments on time, it could have a serious impact on your credit score. In some cases, a missed payment can reduce your score by 100 points or more.
Interest Payments Can Hinder Your Ability to Save for a Down Payment
Financial professionals such as those at Interstate Associates know that credit cards come with high-interest rates. If you have average to poor credit, you could be paying an interest rate as high as 29.99%. This can result in hundreds or thousands of dollars being paid to lenders each year without making much a debt in the principal balance.
If you didn’t have credit card debt, you could put that money away to make a down payment on a home. Although you can get a mortgage without making a down payment, it can cost more to do so. Most borrowers have to purchase private mortgage insurance (PMI) if they don’t put at least 20% of the purchase price down at closing.
Monthly PMI payments are equal to about 1% of the home’s value on an annualized basis. Therefore, if your home was purchased for $100,000, you will pay about $1,000 a year in mortgage insurance. The good news is that someone from Interstate Associates or another financial firm may be able to help you pay off your credit card debt faster and avoid this extra payment.
Credit card debt can make it harder to afford the home that you really want or get approved for a loan at all. In some cases, it can make a home more expensive than you anticipated. Therefore, it is important to take such debt seriously and make a plan to pay it off before looking for homes or applying for mortgages.