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This is How Credit Card Debt Might Affect Your Mortgage

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Getting your first credit card can be an exciting time. You are now deemed responsible enough to pay with credit and provided you pay the balance at the end of the pay period; you will not incur additional fees. However, paying the balance every single month is not always an option. Things come up. Emergencies, unexpected expenses, and just wanting to spend a little extra than your on-hand funds can rack up credit card debt quickly.

This may not seem like a significant issue for the single person renting an apartment with stable finances, but when it comes time to own your own place, and getting a mortgage, things can get a bit trickier.

What is the Big Deal? Everyone Has Credit Card Debt.

It seems as though every person has a credit card these days. They help us get out of a jam and reward us with helpful perks, but too much can drastically impact your ability to get a mortgage. Mortgage companies look at your debt to income ratio.

Typically, and this is general of most mortgage firms, a good debt to income ratio is 36% debt with the remaining 64% free. The top cap off for the typical mortgage firm is 43%, so by keeping your debt to income ratio within that spectrum, you will better qualify for a home loan. Essentially, the firm loaning you money wants to ensure that your credit card payments will not create an inability to pay back the loan.

Higher Interest Payments

Having a substantial amount of credit card debt is not an end-all for mortgage lenders, but it does send up some red flags about your ability to repay the loan you are applying for. During the process, the firm will perform a credit check on each individual.

Mortgage firms who do not perform this check are cause for alarm and should be avoided. The credit check reveals everything about you and if you believe something will be hidden, you are fooling yourself. Your credit check shows any and all debt you may have along with any late payments that were reported to credit bureaus.

Your credit score will be reported to the mortgage firm as a guideline for if and how they can give out the loan. The higher the score, the better your chances of acquiring a loan. However, it is still possible to get a loan with these firms if your credit is less than perfect and you have some abnormalities on your credit report. Like when buying a car, mortgage companies gage your payments against your proposed credit score.

If your credit score is lower due to excess credit card debt, but your debt to income ratio remains within the workable range, you will simply pay higher interest. Even a small percentage of increase in your mortgage rate can drastically impact the length of your loan and individual monthly payments.

Make sure to check your credit score before applying for any loans or a mortgage. You can check your credit score here for only $1.

But I Already Have a Home

For those that have already completed the mortgage process and are happily living in their home, you are not completely home free. Credit card debt can impact your ability to do repairs on your abode or provide routine maintenance that is not covered by your homeowner’s insurance.

Homeowners who manage their debt and maintain little credit card debt have the option to refinance their home should the need arise. Upgrades and some maintenance such as roof repairs can costs a lot and you will be happy to know that you can turn to refinancing as a means of keeping everything as it should be in your home.

What Can You Do if You Have Credit Card Debt?

A little credit card debt is not a problem, but if your debt is making it difficult to procure a mortgage or refinance your current home, there are some steps that can be taken.

Credit Card Manager

The world is technology-driven and a credit card manager is an excellent way to make technology work for you. These tools are simply apps that can be downloaded to your smartphone or other device to help manage debt.

They provide a continually updated view of your debt and allow you to steadily watch your credit score grow. Having everything in one convenient place in an app will ensure that payments are never missed helping your further grow your credit future.

One such service we reviewed is called Tally Advisor and is basically a robo advisor for automating your credit card debt. This is a great tool that can help get out from under overwhelming debt easily. They even offer a service that consolidates your debt, giving you a low-interest loan to reduce your high-interest debt allowing you to pay it off even faster. We highly recommend Tally for paying off debt – check it out here.

Debt Consolidation

Consolidating your debt is an excellent way to reduce monthly expenses and make your debt to income ratio look better. Debt consolidation allows all payments to be lumped into one lower interest payment, so instead of paying 20% interest on one card and 29.9% on another, you can find a consolidation medium in which your payments are drastically reduced, yet you are still able to pay down the debt in a much more manageable fashion.

Tally (mentioned above) offers a consolidation service, or you can go with a more traditional debt consolidator.

Debt Counselors

For some people, understanding their debt is easy, but for most people, we could use a little help. Understanding how to utilize finances correctly and manage debt responsibly can be very helpful. A debt counselor can be a significant part of getting your finances in order for the purpose of procuring a mortgage. They will be able to offer you personalized advice for your situation.

Your credit future can be very bright if you are willing to put in the work and find helpful resources to assist you along your journey. Your dreams of homeownership or the need to refinance your existing home is within reach!