It pays to check it off your list if you’ll be applying for a home loan.
- There are different factors mortgage lenders consider when assessing home loan candidates.
- Paying off credit card debt could make it easier to qualify for a mortgage in more than one regard.
If you’re looking to buy a home, you’re probably well aware that getting approved for a mortgage isn’t guaranteed. Rather, there are different factors that mortgage lenders look at when evaluating loan candidates. These include your:
- Credit score
- Existing level of debt relative to your earnings, known as your debt-to-income ratio
- Funds available for a down payment
There are different steps you can take to make yourself a more appealing mortgage candidate. But if there’s one move it pays to make on the road to getting a mortgage, it’s paying off credit card debt.
How eliminating credit card debt can help you buy a home
Reducing or eliminating your credit card debt could help you qualify for a mortgage in several ways. First, it could help your credit score improve. The higher that number is, the more likely you’ll be to qualify for a home loan.
Of the various factors that go into calculating your credit score, your credit utilization ratio carries a lot of weight. That ratio measures the amount of your available revolving credit you’re using at once. The less of a total credit card balance you have outstanding, the lower that ratio will be — and the higher your score will be.
Furthermore, paying off credit card debt could help your debt-to-income ratio improve. That ratio measures your existing level of debt relative to your income, and the higher it is, the more difficult getting a mortgage becomes.
If lenders see that a large chunk of your earnings are already monopolized by debt payments, they’ll be less likely to want to add to that debt by granting you a mortgage. But if you reduce your credit card debt, your debt-to-income ratio should shrink.
How to pay off credit card debt
If you have a bunch of nagging credit card balances, consolidating your debt could make it easier and less expensive to pay off. To do so, look at doing a balance transfer, where you move your various balances onto a single credit card (ideally, one with a 0% introductory interest rate).
Another option is to consolidate your debt with a personal loan, which lets you borrow money for any reason. You’ll generally get a much lower interest rate on a personal loan than you will with a credit card that doesn’t have a 0% introductory APR period.
Of course, you’ll also need to free up cash to chip away at your balance. It’ll help to put yourself on a strict budget where you track your spending carefully. You may also want to consider getting a second job to come up with the money to rid yourself of that debt.
Carrying credit card debt won’t necessarily stop you from getting a mortgage, but it could make it more difficult. And if you have other factors working against you, you may see your application denied. Rather than run that risk, do your best to pay off your credit card debt before applying for a mortgage this year. Not only might that improve your odds of getting approved, but it’ll also work wonders for your general financial picture.
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