It’s a decision that can benefit you in more ways than one.
- Mortgage lenders consider different factors when evaluating loan applicants.
- A specific move could improve both your chances of being approved and your finances.
- Paying off your credit card debt can improve your credit score, making you a more attractive loan candidate.
Most people who want to buy a house can’t just buy one. This is especially true today, given that home prices are rising nationally.
If you need a mortgage loan to buy a house, you may know that this loan is unsecured. Instead, you’ll need to convince a mortgage lender that you’re a reputable borrower to get that home loan approved. And a gesture from you could make it easier for a lender to say yes.
A key step to take on the road to buying a home
The less credit card debt you have when you apply for a mortgage, the more likely you are to be approved. And so, if you’re eager to buy a home, it’s worth working on reducing or eliminating your credit card debt before applying for a mortgage.
There are various factors that mortgage lenders consider when evaluating home loan applicants. And paying off credit card debt can help with two of them. First, there’s your credit score. A higher credit score sends the message that you are good at handling bills and paying them on time. But if you have a lot of credit card debt relative to your spending limit on your various cards, that could drive your credit utilization rate into unfavorable territory.
This ratio measures the amount of revolving credit you use at one time, and too high a ratio can negatively affect your credit score. Specifically, you don’t want this ratio to exceed 30%. So if you have a total credit limit of $10,000 and your card balance exceeds $3,000, it could hurt your score. This is true even if you are timely with your minimum monthly payments.
Additionally, mortgage lenders look at your debt-to-equity ratio to decide if you qualify to borrow money for a home. This ratio measures your monthly debts compared to your income.
Generally, an initial ratio above 28% and a final ratio above 36% will make it harder to get a mortgage approved. Your initial ratio is the amount of your housing debt to your income, and your final ratio is the amount of your total debt (including housing, credit card, and other debt) to your income.
If you owe a lot on your credit cards, your back-end ratio could exceed the 36% mark. So if you manage to pay off some of your credit card debt before applying for a home loan, you will increase your chances of getting your mortgage approved.
A smart financial move, no matter what
Even if you’re not trying to buy a home, paying off credit card debt is a smart financial move that could save you money on interest and make it easier for you to achieve various goals. But if you’re considering applying for a short-term mortgage, there’s a particular benefit to trying to eliminate some of that unhealthy debt. This could not only increase your chances of getting approved, but also make it easier to manage your mortgage payments once you become a homeowner.
The Best Mortgage Lender in Ascent in 2022
Mortgage rates are rising – and fast. But they are still relatively low by historical standards. So if you want to take advantage of rates before they get too high, you’ll want to find a lender who can help you get the best rate possible.
This is where Better Mortgage comes in.
You can get pre-approved in as little as 3 minutes, without a credit check, and lock in your rate at any time. Another plus? They do not charge origination or lender fees (which can reach 2% of the loan amount for some lenders).
Read our free review