Credit card debt, a burden in and of itself, can become even more troublesome if it prevents you from getting a mortgage. When you apply for a mortgage, the underwriter runs your credit report and examines your debt. It compares your debt to your monthly income to calculate your debt-to-income ratio -- DTI for short. If you have too much credit card debt, it will push your ratio above the lender's acceptable limit.
The first thing a mortgage underwriter sees when he runs your credit report is your payment history. Too many late payments of 30 days or more lower your credit score to a point where your mortgage lender will not be comfortable approving your request. When you show a trend of not paying your obligations, the lender will come to the conclusion that it will be no different with your mortgage. With a low score and poor payment history, the underwriter will decline your application without even calculating your DTI.
If your score is acceptable and your payment history is good enough, the underwriter will calculate your debt-to-income ratio. He will take your monthly payments from your credit report and add them up. He will then add this total to your proposed mortgage payment and your other payments, such as payments for cars, personal loans, student loans and equity loans. He will then use your tax returns, pay stubs and W2 forms to calculate your monthly income. He will divide the debt by the income to get your DTI. Acceptable limits vary by lender, but typically if more than 40 percent of your monthly income goes toward debt, you will have a hard time getting approved.
Balance to Limit
Another red flag on your credit report is the proportion of your credit card balances to your limits. Not only does it lower your score, it also says to the underwriter that you essentially live on credit. It raises the concern that if you get another credit card, you will max it out, eventually to the point where you have trouble repaying the loan and end up in default. This will make the underwriter pause before approving your application.
Improving Your Chances
Don't let your credit card debt prevent you from getting a home loan. The first and best move you can make to keep your debt under control is to simply not use credit cards. Get in the habit of paying with cash. This will force you to live within your means and keep your credit report clean. That way, when you go to apply for a mortgage, your credit card debt won't be an obstacle to approval.
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