Owing money on credit cards can be stressful. It can also be costly, since the more you owe, the more interest you might accrue.
If you’re able to make your minimum credit card payments on time every month, you won’t be considered delinquent on that debt. And that’s a good thing from a credit score perspective.
But even so, owing a lot of money on your credit cards could make it harder for you to get a mortgage. Here’s why.
1. Your credit score could still take a hit
The minimum credit score to qualify for a conventional mortgage is 620. Certain loan programs, like FHA loans, make it possible to get approved with a lower score than that. But ultimately, the better shape your credit score is in, the more likely you are to qualify for a mortgage.
The problem with owing too much money on your credit cards, though, is that a large balance could damage your credit score. If your credit utilization, or the amount of revolving credit you’re using relative to your total limit, is high, your score might take a dive, dropping it below the 620 mark (which is a problem if you want a conventional loan).
Also, just because 620 is the minimum credit score for a conventional loan doesn’t mean that every lender will accept applicants with that score. You may find a lender that insists on a minimum score of 640. So if your large credit card balance drags your score down below that point, it could compromise your ability to borrow for a home.
2. Your debt-to-income ratio could rise
Your debt-to-income ratio measures how much debt you have relative to your income. And as you might imagine, if that ratio is high, a lender might hesitate to write you a giant loan for fear that you won’t be in a position to pay it back.
Meanwhile, the more money you owe on your credit cards, the higher your minimum payments are apt to be. And those, combined with other debts you might have, like car payments, could lead to a debt-to-income ratio that mortgage lenders aren’t comfortable with.
For the most part, lenders like to see a debt-to-income ratio of 36% or less. But many will accept a debt-to-income ratio of 43% or less. Once you go beyond that point — meaning, your total debts eat up more than 43% of your income — you risk being denied a mortgage.
It’s good to pay off debt before applying for a mortgage
As you can see, a large credit card balance has the potential to hurt your chances of mortgage approval. It’s a good idea to try to pay off your credit cards before applying for a mortgage.
One thing you may want to do is pick up a temporary side hustle. The extra money could be instrumental in chipping away at your balance.
Remember, too, that once you put a mortgage in place, you’re going to have another large expense to pay every month. So let’s say you’re currently paying $600 a month toward your credit cards. Wouldn’t it be better to knock your minimum monthly payments down to $200, or, better yet, $0, before taking on another large bill?
All told, you might manage to qualify for a mortgage with a large credit card balance. But a better bet is to do what you can to pay off your credit cards before submitting that home loan application.
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