It is worth checking it off your list if you are applying for a home loan.
- Mortgage lenders take a number of factors into account when evaluating mortgage candidates.
- Paying off credit card debt could make it easier to qualify for a mortgage in more than one way.
If you’re looking to buy a home, you probably know that mortgage approval isn’t guaranteed. Rather, mortgage lenders look at different factors when assessing loan applicants. These include your:
- Credit score
- Level of debt you have in relation to your income, called the debt-to-income ratio
- Funds available for down payment
There are a number of steps you can take to become a more attractive mortgage candidate. But if there’s one thing worth doing to get 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 this number, the more likely you will be to qualify for a home loan.
Among the various factors that go into calculating your credit score, your credit utilization rate carries a lot of weight. This ratio measures the amount of your available revolving credit that you are using at one time. The less your total credit card balance is, the lower this ratio will be and the higher your score will be.
Plus, paying off credit card debt could help improve your debt-to-income ratio. This ratio measures your current debt level to your income, and the higher it is, the harder it becomes to get a mortgage.
If lenders find that a large chunk of your income is already monopolized by debt payments, they will be less likely to want to add to that debt by giving you a mortgage. But if you reduce your credit card debt, your debt-to-income ratio should go down.
How to pay off credit card debt
If you have a bunch of nagging credit card balances, consolidating your debt could make paying off easier and cheaper. To do this, consider doing a balance transfer, where you transfer your various balances to a single credit card (ideally, one with an introductory 0% interest rate).
Another option is to consolidate your debt with a personal loan, which allows you to borrow money for any reason. You will generally get a much lower interest rate on a personal loan than with a credit card that does not have a 0% introductory period.
Of course, you will also need to free up some money to reduce your balance. This will help you put yourself on a tight budget where you will carefully track your spending. You may also want to consider getting a second job to find the money to get rid of this debt.
Having credit card debt won’t necessarily stop you from getting a mortgage, but it could make it more difficult. And if other factors work against you, your request may be refused. Rather than take that risk, do your best to pay off your credit card debt before you apply for a mortgage this year. Not only could this improve your chances of getting approved, it will also do wonders for your overall financial situation.
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