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Summary: This article explains how credit card debt can affect you when trying to get approved for a mortgage loan. As a home buyer, you should be concerned with the amount of credit card debt you have, because it directly affects your ability to get a home loan. It increases your overall debt-to-income ratio, which also reduces your chances of getting a loan. Lenders today are much more concerned with your total debt load, and they will turn you down cold if they feel you are carrying too much debt in relation to your income.
The bottom line is that credit card debt definitely affects your chances of getting a mortgage loan. There’s nothing wrong with carrying a small and manageable amount of credit card debt. Mortgage lenders use credit scores and debt-to-income (DTI) ratios to measure the potential risk a borrower carries. So yes, credit card debt can affect you during the mortgage process — and in a big way. When you apply for a home loan, the lender will review every aspect of your financial background. As you can see from the chart below, the amount owed on your various credit accounts (including those cards) drives 30% of your overall FICO score. This is one of the ways in which credit card debt can affect you during the mortgage process. There’s another ratio we need to talk about, because it too can affect your chances of mortgage approval. When you apply for a mortgage, one of the first things the lender will do is check your debt-to-income ratio, or DTI. This is another reason why you should consider reducing your credit card debt before buying a home. There are plenty of companies out there that would gladly take your money in exchange for their debt-management services.
But there are also legitimate non-profit organizations that can help you create a debt-reduction plan. Using a credit card can actually help you improve your credit score, which makes it easier to get a mortgage loan.
If you make occasional purchases with your card and pay the balance down each month, it creates a pattern of responsible usage. On the other hand, if you rack up a lot of credit card debt, you are creating a pattern of over-reliance and irresponsible usage.
See how your debt stacks up against the average American on credit cards, student loans, autos, and housing. But consumers aren't just borrowing more on their credit cards; they're also taking on more student loan, auto, and mortgage debt, too.
If we look at total debt divided by the total number of accounts outstanding for that debt, we get a slightly different picture. People who have higher than average debt should consider doubling their monthly minimum payments or doing an extra monthly payment over the course of the year. Todd has been helping buy side portfolio managers as an independent researcher for over a decade. Credit card debt, a burden in and of itself, can become even more troublesome if it prevents you from getting a mortgage.
The first thing a mortgage underwriter sees when he runs your credit report is your payment history.
If your score is acceptable and your payment history is good enough, the underwriter will calculate your debt-to-income ratio. Another red flag on your credit report is the proportion of your credit card balances to your limits. Student debt is the only kind of household debt that continued to rise through the Great Recession, eclipsing credit card debt to become the second largest type of debt owed by American households, after mortgages. 1 College-educated households with student loans to repay have a lower net worth than those with no student debt. 2 While taking on debt to finance a college education is associated with lower net worth, it doesn’t seem to have an impact on income.

3 Young households with student debt are much more likely to have car loans and credit card debt, too. And their typical total indebtedness (including mortgage debt, vehicle debt, credit cards, as well as student debt) is almost twice the overall debt load of similar households with no student debt. Debt-to-income ratios have increased for young student debtors, even as they have declined for other young households since 2008.
5 Young households that borrowed for college are less satisfied with their personal financial situation than those who didn’t and are less likely to say their education has paid off. Having achived 3 degrees without debt I am sad to see how todays graduates have been sold the need to pile on the debt and spend years paying it back.
I question the implied causality between the amount of student debt and the resulting financial problems. Part of the problem with the student loan issue is that many applicants are using the money to live on rather than for education.
Post student debt is directly impacted by whether or not the same student took economic related classes.
Net worth figures might be available for those with bachelor’s degrees versus advanced degrees, but that is about as detailed as they get.
A borrower with a relatively low score and a high amount of recurring debt represents a bigger risk to the lender. Or you might get approved with a much higher mortgage rate, making the loan less affordable in the long run. If your card balances are extremely high in relation to your card limits, it will lead to a reduction in your overall FICO credit score.
This ratio is a comparison between the amount of credit you have available to you (your limit) and the amount you are actually using (your balance). As the name implies, this is a comparison between the amount of money you pay toward your debts each month, and the amount of money you earn.
If you’re carrying too much, it can drag down your credit score as well as your DTI ratio.
It shows lenders that you know how to use credit wisely, which is exactly what they want to see. This will boost your score and make it easier to get mortgage loans and other types of financing.
After a brief respite following the Great Recession, shoppers are increasingly embracing credit again, and monthly debt payments are piling up. However, before you get too excited, the above calculations have one big problem: they reflect the average across all Americans, not just the average across Americans who actually have debt.
The New York Fed reports that there are 410 million credit card accounts, which suggests that the average balance on the average credit card in the average American's wallet has a $2,151 balance on it.
Those payments will go a long way toward helping you reduce those balances, especially on high interest credit cards. When you apply for a mortgage, the underwriter runs your credit report and examines your debt. Too many late payments of 30 days or more lower your credit score to a point where your mortgage lender will not be comfortable approving your request. Not only does it lower your score, it also says to the underwriter that you essentially live on credit. The first and best move you can make to keep your debt under control is to simply not use credit cards. In college-educated households, the median income is roughly the same, regardless of whether the household head has outstanding student debt.
The typical young, college-educated student debtor household has debts equivalent to two years of income. But when you have an excessive level of debt in relation to your monthly income, it can hurt your chances of getting approved for a mortgage loan. For example, if you have a card with a $5,000 limit, and your balance is $4,400, then you have a very high utilization ratio. This is one of the most important qualification criteria for borrowers who are applying for a home loan. You are also increasing your total debt in relation to your gross monthly income, which raises your DTI ratio. As you can see in the following chart, growth in the dollar amount of student loans outstanding has ultimately remained pretty constant over the past five years, but the trend in borrowing for student loans, vehicles, and housing has climbed.

That means that if we divide the total revolving credit outstanding by the number of households, the average family has $7,630 in revolving debt. Consumers should also be aware that payments that are made above and beyond the minimum payment on a credit card are applied to the highest interest rate on the card. It compares your debt to your monthly income to calculate your debt-to-income ratio -- DTI for short. When you show a trend of not paying your obligations, the lender will come to the conclusion that it will be no different with your mortgage. He will then add this total to your proposed mortgage payment and your other payments, such as payments for cars, personal loans, student loans and equity loans. It raises the concern that if you get another credit card, you will max it out, eventually to the point where you have trouble repaying the loan and end up in default. The median student debt owed by these young households was $13,000. Here are 5 key findings about young households with student debt.
Young, college-educated households with no student debt and less-educated households with student debt carry half this debt load, or the equivalent of one year of income. The Western Govenors University is a non-profit program for online degrees that is at a price point that can also be done with no to low debt. Suffice it to say that if your combined debts eat up more than 50% of your gross monthly income, you’ll probably have trouble qualifying for a home loan. It can lower your FICO score and increase your DTI ratio, thereby reducing your chances of getting approved for a loan. This is why it’s so important to check these numbers before you start shopping for a loan or trying to buy a house.
If you have a lot of debt already, relative to your income, you’ll probably have a hard time getting approved for a loan.
This means that if your total debt load (including your future mortgage payment) uses up more than 50% of your gross monthly income, you could have trouble qualifying for a mortgage. For starters, look into the National Foundation for Credit Counseling, a respected nonprofit organization.
According to the Kansas City Federal Reserve Bank, the average person carrying student loan debt owes $25,745, and dividing total auto debt and mortgage debt by the total number of open accounts for those types of debt, as reported by the New York Fed, indicates that the average American with this type of debt owes $10,392 on their car and $100,197 on their home, respectively. So if you have a card with a 0% rate on a balance transfer and a 13% rate on purchases, money paid above the minimum payment will go toward the 13% balance, not the 0% balance. If you have too much credit card debt, it will push your ratio above the lender's acceptable limit.
He will then use your tax returns, pay stubs and W2 forms to calculate your monthly income.
Non-college educated households with outstanding student debt are in the worst position in terms of wealth accumulation. And if they do get a loan approval, they typically end up paying a higher interest rate due to the higher risk associated with all of that debt. Census also reports that in 2010 there were 234.56 million people over the age of 18 years old, which suggests that the average adult owes $3,761 in revolving credit to lenders.
Also, keeping a little cash in your wallet to pay for everyday items can keep those expenses from offsetting the headway you're making. That way, when you go to apply for a mortgage, your credit card debt won't be an obstacle to approval.
They lag behind their fellow student debtors who graduated from college, and they also trail young adults without a college degree who are free of student debt. Lenders know that borrowers with higher debt ratios have a higher probability of delinquencies (missed payments) and defaults (ceased payments) down the road.
Those suggestions won't eliminate your debt overnight, but they will go a long way toward stopping debt from piling up. Acceptable limits vary by lender, but typically if more than 40 percent of your monthly income goes toward debt, you will have a hard time getting approved.

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