Can You Buy a House With Credit Card Debt?
You can — but it may make it more expensive.
August 15, 2022
One obstacle preventing millennials and Gen Z from homeownership is not fully understanding the income and credit requirements that come with the home-buying process. Luckily, it’s not too difficult once you grasp what mortgage lenders are looking for.
When it comes down to it, lenders want to make sure you’re both willing and able to buy a house that you can reasonably afford. This may leave you wondering, “Can you buy a house with credit card debt?” The answer: You can, but it can be a major contributing factor in how much you can spend on a home and how much you pay in interest.
Here’s what you should know about how lenders evaluate your mortgage application and what you can do to help strengthen your application, even with credit card debt.
Can you buy a house with credit card debt?
Yes, you can buy a house with card debt, but it can create challenges by making your mortgage more expensive and lowering your purchasing power. Your credit card debt is shown on your credit report, which will then be reflected in your credit score.
Ultimately, this means your credit card debt can affect the interest rate on your mortgage, the amount of mortgage you can be approved for, and your down payment.
How does your credit card debt affect your mortgage interest rate?
Your credit card debt affects your credit score, and your credit score is one of the factors that can affect your mortgage rate. Because mortgages last so long (they often have 30-year loan terms), securing the lowest interest rate possible can save you thousands of dollars in the long run.
Any time you apply for a loan, lenders will look at your FICO® Score. However, it’s important to note that lenders will pull your FICO Score from all three major credit bureaus (Experian, Equifax and TransUnion) to determine what mortgage loan, if any, you qualify for. This is why it’s a good idea to check your credit score with all three bureaus, so you understand what information they’re providing to the lender.
If there are factors hurting your credit score, you can try to maximize the highest-impact areas. Nothing is a guarantee, but you can try to minimize harm to your credit score by:
Reducing your credit utilization ratio: Your credit score suffers when you have a lot of credit card debt. The general rule is to keep your credit utilization under 30%, which means your outstanding balances should be no more than 30% of your total credit limit. This applies to each specific card as well as your overall credit limit. Try to avoid maxing out your credit cards to optimize this component of your score.
Making payments on time: Late credit card payments can also lower your credit score because credit bureaus value a solid payment history. It’s still possible to get a mortgage with credit card late payments on your credit history, but you may have to write a letter of explanation and give a reason for each late payment. If you have time before starting the process to buy a house, make it a priority to pay your bills on time to build a solid credit history.
Minimizing credit inquiries: If you know you want to buy a home soon, this might not be the time to refinance a debt, apply for a car loan, or take out another line of credit. That’s because multiple credit inquiries can have a negative effect on your credit score.
How does credit card debt affect purchasing power?
All of your collective debt, including credit card balances, affects another important number in your mortgage application: your debt-to-income ratio. Also called your DTI, this is an important number that can directly affect your purchasing power if you want to buy a house.
Lenders use your DTI as a quick way to assess whether you’ll be able to afford to pay for a mortgage long term. While lenders consider debt to be normal, they don’t want to see excessive debt. They use DTI to calculate whether your debt is “excessive” and if it makes sense for the company to give you a mortgage loan.
Calculating your DTI ratio
If you want to buy a home but aren’t sure if a mortgage lender would qualify you for a loan, you can calculate your DTI to see where you stand.
First, add up all your monthly debt payments, including:
Minimum payments toward your credit cards.
Then, divide that number by your gross monthly income, which includes the total amount you earn pre-tax, including health care and any other deductions.
For example, if you earn $2,500 a month and make $1,000 in monthly payments for debt, your DTI would be 40%.
But DTI can be a little tricky. When you apply for a mortgage, your lender also includes your future house payment as part of your total monthly debt — and not just your principal and interest. It also includes your estimated property taxes and homeowners insurance, divided for each month of the year.
In this case, if you earn $2,500 a month and your house payment now increases your debt to $1,800 a month, your DTI would be 72%.
Each lender has its own DTI limit, but experts agree 43% is a good target to aim for. Your monthly mortgage payment must fit within the ratio that your lender uses or they won’t extend you a loan. If you have excessive credit card debt, it can limit how much you can afford to spend on a house, no matter how much you make. This is why many homebuyers try to reduce their credit card debt before house-shopping.
How does credit card debt affect down payments?
As we mentioned earlier, your credit card debt affects your credit score, which may in turn affect the down payment you need to make when buying a home.
Many mortgages require a minimum down payment, which is determined as a percentage of the home price. Depending on the type of home loan you choose, you may need a higher down payment if your credit score is too low.
For example, an FHA loan requires a 3.5% down payment if your credit score is at least 580. That means a $200,000 home requires a $7,000 down payment.
However, with a lower credit score of 500-579, you’d need to make a 10% down payment. For that same $200,000 house, you’d need a $20,000 down payment. FHA loans may also require you to pay mortgage insurance, which would increase your monthly payments. (As a side note, you won't be able to get approved for an FHA loan if your credit score is below 500.)
The upside is that paying more money upfront means you end up borrowing less. That can save you money on your monthly mortgage payments as well as the amount you spend on interest over time. Even if a loan type has a minimum required down payment, you can always pay more upfront to reduce how much you borrow.
How to pay down credit card debt before buying a new home
While you can buy a house with credit card debt, your debt influences many aspects of the home-buying process. That’s why it can be a good idea to get your credit card debt under control before you start your home search.
It’s entirely possible to buy a home if you have credit card debt, but lowering your amount of debt can help you qualify for better interest rates, can give you more options when it comes to house pricing and can lower your down payment.
You can try to pay down your credit card debt by:
Making a repayment plan: Start by determining how much money you can reasonably put toward paying off your credit cards each month. If possible, pay more than the minimum payment so you can expedite the process.
Paying off your credit cards in a specific order: Get strategic and determine the best order to focus your extra payments. Once all of your minimums are met, apply any leftover money toward the credit card balance with the highest interest rate. This is known as the debt avalanche method.
Using a credit card payoff app: Credit card payoff apps like Tally† help you combine your credit card payments into one simple monthly bill.
A mortgage is a long-term commitment, so it’s best not to rush. Anything you can do to decrease your amount of credit card debt, while also boosting your credit score, can work in your favor.
Minimize debt to buy the home of your dreams
Can you buy a house with credit card debt? Yes, but credit card debt can influence your home-buying expenses and approval terms. It could have an impact on:
Mortgage interest rates.
To qualify for the mortgage you want, consider reducing your credit card debt by creating a repayment plan, by prioritizing your high-interest debt payments and by using a credit card payoff app, like Tally.
Download the Tally app now to manage your credit cards all in one place. Tally also offers a lower-interest line of credit to help you pay off higher-interest credit cards.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.