October 28th, 2014 8:51 AM by Jackie A. Graves
Your ability to buy a home with a mortgage depends on how much net
income you have after all monthly debts. If your debt payments absorb your
income—particularly credit card payments—you may have to put the brakes on the
Most home buyers realize in order to purchase a home, they need at least
good credit—and a better credit score means a better chance of qualifying.
One of the ways to build and maintain a healthy credit score is the
ability to use and manage credit over a period of time. Using three to five
credit cards actively and paying them off in full each month is a fantastic way
to support a good credit score, a benchmark factor in
qualifying for the prize.
However, credit cards are not something to be taken lightly, and you
should exercise caution with them—especially if they are not paid off in full
When it comes to qualifying for a mortgage, it’s not what you owe in
total that counts—it’s what you pay each month. Most lenders allow a maximum
debt-to-income ratio of approximately 45%, meaning they allow up to 45% of your
monthly pretax income for a proposed new mortgage payment and any other debts.
Let’s take a look at the various credit card scenarios and what you can
do to help your chances of qualifying for a mortgage.
1. Spreading Out Your Debt
When it comes to getting a mortgage, the key with carrying a balance on
any one credit card is the monthly payment. In most circumstances, the larger
the balance on any one credit card, the larger the monthly payment. The higher
the monthly payment on any individual card, the more likely you will not be
able to purchase as much house.
(You can see how much house
you can afford here.)
Let’s say you owe $10,000 on a credit card, and the monthly payment
associated with the obligation is $200 per month. To maintain your ability to
qualify, a lender would require $400 per month of additional income to offset
However, if this balance could be spread out over two or three credit
cards with lower interest rates that would result in lower payments totaling
less than $200 per month, you come out ahead.
2. Credit Card Payoff
If you’re looking to attack your credit card debt and pay it down (you
can use the credit card
payoff calculator to see how long it will take you) in
preparation for qualifying for a mortgage, you might wonder which of your cards
you should target.
If you’re trying to buy a home, paying off the higher-rate credit cards
first might be a good move if the monthly payment is higher than the cards you
have that are 0%. In other words, for buying a house, you’ll want to pay
down the cards that have the highest monthly payment regardless of the interest
rate—because those are the ones that will affect your qualifying ability the
So which card should you focus on paying down? Let’s say you have a 0%
interest credit card with a $2,000 balance and a $150 monthly payment. You also
have a 6% interest credit card with a $5,000 balance and a $50 monthly payment.
You’ll get a bigger bang for your buck paying off the credit card with the
higher payment despite the fact that it’s 0%.
The idea here is that you’ll want to cherry-pick the cards with the
higher monthly payment in order of priority to maximize your buying potential.
A good mortgage lender can assist you tremendously with this task.
*As a good rule of thumb for financial planning, it does make sense to
tackle the higher interest rate credit cards first because of the additional
interest expense you’ll pay over time, but that is not necessarily the case
when it comes time to qualify for a mortgage.
3. Consolidating Your Cards
Let’s face it, people carry credit card debt because they don’t have the
cash to make the purchase outright. Consolidating any 0% interest credit
cards or even other credit cards into one credit account
containing a total new lower payment can help you qualify to buy a home.
Why? It has to do specifically with the minimum monthly payment. Even if
you choose to make a pre-payment each month in an effort to accelerate the debt
payoff, it’s about the minimum obligation per credit card the lender will use
in determining whether or not you’ll be able to buy that house—so consolidating
If you have the cash, or are trying to decide whether to use the cash
for the down payment or paying off debt, talk to a lender. If you do plan
to pay off the
credit cards to qualify, this can be accomplished as a special
lender exception (not all lenders allow paying off debt to qualify).
For example, if you’re in contract to buy a home and your loan gets
rejected by the underwriter because your debt-to-income ratio is too high, one
way to reduce the ratio to get your loan approved is to pay off your credit
card balances in full. This route entails one additional step in order to
remove the obligation: You would have to pay off the credit card in full and close
the credit account.
In most cases, closing credit card accounts can adversely affect your
credit score. However, a new mortgage loan in your name—paid on time every
month—can also be instrumental in building a good credit rating. You can find
out how your debts affect your credit scores by checking them
for free on Credit.com.
By Scott Sheldon and
originally appeared on Credit.com.
To view the original article click here