How Does Your Credit Card Debt Affect Your Mortgage Rate?
Credit card debt is something a majority of Americans have nowadays. Most of the time having a little bit of credit card debt can do wonders for your credit score and that in turn can help significantly when applying for a mortgage loan. There is a point where having too much credit card debt can hurt your chances of obtaining a mortgage loan. Since buying a home is the goal for most Americans, getting credit card debt under control early on will alleviate any issues that should arise later on. Here are a couple ways your credit card debt can affect your mortgage rate.
- Having a high credit card balance – If you have a higher balance on your credit cards, your mortgage lender will want to see that you have the available funds to pay off the balances. If not, you could be subject to higher interest rates. If your credit history is strong, however, and you have a good payment history this will help. If you have defaulted in the past this may cause your rates to be higher. Keep in mind, most lenders check your credit in the final stages of loan approval, so it is important that you don’t run up credit card debt right before closing even if you have already been approved for a favorable loan rate. This could cause a red flag and delay the closing.
- Lacking any credit at all – You may be on the opposite end of the spectrum and not have any credit at all. There are options for securing a mortgage loan with having credit. You can apply for a government-backed mortgage loan or an FHA Loan. There is usually more paperwork involved as you will likely have to prove that you’ve paid rent and other bills. You will also likely have to put down a larger down payment. Another route to take would be to have someone co-sign on your loan who has more favorable credit. If you do not prefer to use either of these methods, it is best to wait six months or more, establish some credit and remember to keep your credit card balances under 20% utilization.
By paying down or even paying off your credit card debt, you are helping to secure a better interest rate for your mortgage loan. There is no right or wrong way to pay off the debt but there are different approaches. You could consolidate your debt by transferring balances from a high interest card to a lower interest card. Keep in mind, there are usually fees involved, between 3% – 5% of the transfer balance. This will help you to pay down the debt quicker. It is also important to control unnecessary spending on your credit cards, by making the small changes you will start to see savings add up. Finally, if you pay more than your minimum payment this will help your credit score more than you probably can imagine! If you have questions about obtaining a mortgage loan contact us today. We would love to help you with any questions you may have.
