Why It’s So Important To Pay Off Your Credit Cards Before Applying For A Mortgage
Your goal in obtaining a mortgage should not only be to qualify for a home loan, but also to get the lowest possible interest rate. But if you have too much credit card debt when you apply for a mortgage, you could be in for disaster. Here’s why getting credit card debt as low as possible before buying a home is essential.
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1. Your credit score could suffer
Too much credit card debt could hurt your credit score. And the lower your score, the less likely you are to get a mortgage (or an affordable loan).
One factor that goes into calculating your credit score is your credit utilization rate, which measures how much of your total available revolving credit you are using at a time. A ratio above 30% will hurt your score. So if your total spending limit on your credit cards is $ 10,000 and you have an outstanding balance of $ 4,000, that 40% credit utilization rate would lower your score. That’s why it’s important to get rid of as much of your balance as possible before applying for a home loan.
2. Your Debt-to-Income Ratio Might Get Too High
Another factor that mortgage lenders look at during the application process is your debt-to-income ratio, which measures your monthly debt relative to your income. Too high a debt-to-income ratio sends the message that you are overloaded and perhaps shouldn’t be trusted to get into more debt. But if you pay off some or all of your credit cards, that ratio should go down.
3. You might have trouble paying your bills
The more credit card debt you have, the harder it is to meet your expenses once you add a mortgage to the mix. Imagine you’re currently spending $ 400 per month on credit card payments and signing up for a mortgage that increases your housing costs by $ 400 per month. If you were to clear your credit card balance before finalizing this loan, you would have an easier time absorbing those higher housing expenses.
How to repay your debts effectively
If you want to get rid of your credit card debt before buying a home, the first thing to do is assess your debt and see where it’s coming from. If you owe money on three separate cards, figure out which one charges the most interest and address that balance first. Another option is to consolidate your debt, which could help lower the interest rates you will pay. This can be done through a balance transfer or even a personal loan.
Of course, you’ll also need to be on a tight budget and cut back on spending to build up the money to pay off your debt. And you might want to consider finding a side job temporarily to make decent progress on the debt repayment front.
Paying off credit card debt isn’t always easy. But it will be to your advantage to have as little credit card debt as possible when you apply for a mortgage.