Last Updated on 07/20/2017 by GS Staff
[otw_shortcode_dropcap label=”Q:” size=”large” border_color_class=”otw-no-border-color”][/otw_shortcode_dropcap] Can I get a mortgage with credit card debt?
[otw_shortcode_dropcap label=”A:” size=”large” border_color_class=”otw-no-border-color”][/otw_shortcode_dropcap] Many Americans have some level of credit card debt that they are working to pay off. Mortgage lenders understand this and do not expect all borrowers to be free and clear of credit card debt. Lenders are not so much concerned that you have credit card debt, but that you have the ability to at least make the minimum payments on this debt and other potential debts.
Debt-To-Income Ratio
Most mortgage lenders will evaluate how much total debt you have in relation your income. They will do this by calculating your debt-to-income (DTI) ratio using your total debt and dividing it by your total income. This ratio is a good way for lenders to measure a borrower’s ability to pay their monthly mortgage payment.
Let’s take a look at an example of how a DTI ratio is calculated:
Assume your salary is $5,000 per month. Also, assume that you have the following monthly debts:
- Discover card $100/month
- Student Loan $75/month
- Bank of America Visa $125/month
- Car Lease $350/month
- Child Support $500/month
- New Mortgage that you applied for $1,200/month
Based on the above information, your total monthly debts are $2,350 and your monthly gross income is $5,000. Your debt-to-income ratio would be 47 percent ($2,350 debts ÷ $5,000 income). The lower the DTI ratio the better. Lenders prefer the ratio at approximately 35 percent but will commonly approve loans above this DTI.
If you plan on calculating your own DTI ratio, be sure to consider all potential debts. People tend to forget about some debt payments such as including the whole principal, interest, taxes, and insurance (PITI) of their mortgage or not including deferred student loan debts.
Maximum Debt-To-Income Ratio
As a generally rule, 43 percent is the maximum DTI ratio to qualify for a mortgage. However, there are exceptions to this rule depending on the lender. A mortgage professional will help you determine your maximum DTI ratio for a loan approval. However, remember that the DTI ratio is only one factor in determining if you able to obtain a mortgage.
Decreasing Your DTI
The lower your DTI ratio, the better, in the eyes of lenders. You can improve your DTI by either increasing your income or by paying off debt.
In regards to income, lenders often require that the borrower has a history (at least 12 to 24 months) of receiving some sources of income like a second job. Therefore, you cannot take on a second job right before you apply for a mortgage and expect to use that income for qualification.
If you have the means to do so, paying off debt can be a way to reduce your DTI. However, the lender may question the source of funds used to off this debt if it is paid around the time of the mortgage qualification process. You may want to consider paying off the debts with the highest monthly payments if you decide to pay off debt. This will have the greatest impact on lowering your DTI.
Late Payments
Remember that is not only about having a low DTI, but also that you pay your bills in a timely manner. Payment history on credit cards and other debts is a key factor in determining the eligibility of a mortgage. A history of late payments can signal to the lender that you may have difficult paying your mortgage in the future. Be sure to do your best to pay your bills on time if you plan on obtaining a mortgage in the near future.
Other Factors
There are several other factors in addition to DTI and credit history that the mortgage lender (underwriter) may consider before approving your loan. Some of these factors are as follows:
- Collateral (appraisal): Making sure the appraisal adequately represents the value of the subject property and that there are no issues with the property.
- Assets: The lender may verify that you have sufficient reserves and/or funds in the bank to cover the cash needed to close the loan.
- Stable Employment History: Showing a solid history of employment.
- Down Payment: The amount you put down for a down payment will often have an impact on your loan approval. The more money you put down will mean less risk for the lender since you are not borrowing the full value of the property. Lenders like to see low loan-to-value (LTV) loans. The LTV is determined by taking the loan amount and dividing it by the lower of the appraisal value or the purchase price.
- Mortgage Amount: Obviously most people are limited to the size of a mortgage that they can afford. The last thing a lender should want to see is a borrower defaulting on a mortgage that they really couldn’t afford. At least we hope this is the case.
Final Thoughts
Yes, you can get a mortgage with credit card debt. Mortgage loans are approved every day for people with credit card and other debts. However, a mortgage can be denied based on a person having excessive credit card payments in relation to their income. Prior to applying for a mortgage, you should do your best to pay your bills on time and pay off debts if you do not think you will qualify with your existing payments. Contact a mortgage professional or loan officer if you have questions. They will be able to assist you in answering questions and will guide you to an appropriate lender for your needs.
