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Military Veterans Association of Real Estate Professionals

Can I qualify with credit card debt?

Many people having substantial credit card debt qualify for a mortgage every day. The question isn't the existence of credit card debt. It's the magnitude of that debt relative to your income. We call this your debt ratio.

To get a better feel for this, let's look at an example of purchasing a $250k home using a 5% down payment. Assuming our applicants want a 30-year fixed-rate mortgage, the estimated housing payment would be $1775. (I'm using 4% for the interest rate.)

In order to qualify, we consider our applicants' total monthly debts versus their income. The total monthly debts include their new housing payment, their car loans, their student loans, and the minimum monthly payments on their credit card accounts. Their monthly car payments are $350 and $450, and they have monthly student loan payments of $250.

We'll assume our loan applicants make $72k/year. For a conventional loan, they may be able to qualify with total monthly debt that is 50% of their income, or $3000. Thus, if the total minimum monthly payment on their credit card accounts is $175 or less, they may qualify.

(For an FHA loan, the total monthly debt may be as much as 57% of income, but for a USDA loan, the limit is 48%. VA actually doesn't set a limit, but the practical limit is 60% of income.)

Remember that we're looking at the minimum monthly credit card payments, which typically are 2% to 3% of the account balances. (The minimum payment may be even lower if you've transferred a balance to an account with 0% interest.) If you're paying more than the minimum each month, that makes good financial sense, but we don't use that higher amount for qualifying. Using this rubric, our applicants may be able to qualify for a conventional loan even if they're carrying $8000 of credit card debt.

I have a couple other points you should consider:

  • If you're close to qualifying, and you have more money than you need for your down payment and closing costs, you can pay off or pay down credit card accounts to lower your debt ratio. If you pay off an account, we can exclude its minimum monthly payment immediately. If you pay down an account, we would have to wait for the creditor to recalculate your minimum monthly payment.
  • The bigger issue with carrying credit card debt may be its effect on your credit score. Cards that are maxed out can hurt your score significantly. If you have several cards, and one has a high balance, you might consider transferring some of the balance to one or more of the other cards. Generally, you want your credit card balances to be less than 30% of the cards' limits for the best credit score.