Credit cards are useful tools for building credit and spending money you may not have at the moment. However, their convenience, accompanied by financial hardship, can make it easy to rack up significant credit card debt that may be challenging to pay off quickly. This debt may have an impact on your ability to buy a house.
Buying a house is a massive milestone for many people, and it takes a lot of planning, research, and money. Applying for a home loan is a fundamental step in the home-buying process. And if you’re someone carrying credit card debt, you might be a bit worried about your chances of moving away. So that begs the question, “Can you buy a house with credit card debt?”
Your ability to obtain a loan is affected by your creditworthiness and any existing debt. But it varies from person to person. If you’re worried about your existing credit card debt preventing you from buying a house, consider discussing your debt situation with an experienced debt settlement lawyer and let us guide you through how credit card debt affects your chances of getting a home mortgage loan.
How Does Buying a House Work?
Buying a house is a long and expensive process that requires a lot of planning and forethought. Before buying a house, you must first consider what you can afford. People rarely have enough money on hand to purchase a house outright. Instead, they save up for a down payment and obtain the rest by applying for a mortgage loan.
As with any loan, a critical factor determining whether you will be approved for a mortgage is your creditworthiness. Before applying for a mortgage, check your credit score to see whether it is in a good enough range to get the loan amount you require at a reasonable interest rate.
Your Credit Card Debt Can Impact Your Credit Score
Having a high credit score improves your mortgage application approval odds. A good credit score is also the best way to earn a lower mortgage interest rate. Existing debt can drag down your credit score if not appropriately managed, reducing your loan approval odds.
Having a significant amount of credit card debt likely means your credit score is not the best possible for securing a suitable mortgage. If that is the case, it may be wise to delay buying a home until you can pay down your debt and improve your score. Once your score is in a good range, you can begin looking for the type of mortgage that best suits you and your homeownership goals.
Credit Card Debt Can Affect Your Home-Buying Power
Although having a good credit score is a crucial aspect of the home-buying process, it is still possible to buy a house with credit card debt. Even with significant credit card debt, you still might be able to secure a mortgage. However, you might not get the best rate or be approved for the amount you want.
Ultimately, significant credit card debt reduces your home buying power. To determine your home-buying power, you must compare your income to your current debts and expenses. Lenders typically look at your debt-to-income ratio to determine if you will be a reliable borrower and see how much additional debt you can take on without being financially overwhelmed. Having a low debt-to-income ratio makes you look more appealing in the eyes of lenders, so you will be more likely to get your desired rate and loan amount.
Consolidating Your Credit Card Debt to Buy a House: Is it a Good Idea?
Credit card debt consolidation involves combining multiple credit card balances into a single loan, often with a lower interest rate. For potential homebuyers, this strategy can be a smart move. By consolidating, you might lower your monthly payments and potentially improve your credit score. This could make you more attractive to mortgage lenders. It’s particularly beneficial if you’re juggling high-interest credit card debts. Consolidation can simplify your finances, making it easier to budget for a down payment and mortgage payments. However, it’s not a one-size-fits-all solution. If you’re close to paying off your debts or have a very low interest rate already, consolidation might not be necessary.
Making Sure You Don’t Rack Up More Debt
When you’re aiming to buy a home and dealing with credit card debt, it’s important to avoid adding more debt to your plate. This might seem obvious, but it’s often easier said than done. Cut back on non-essential expenses and resist the urge to use your credit cards for new purchases. If possible, switch to a cash-only system for daily expenses. This can help you stay aware of your spending and avoid the temptation of easy credit. Every dollar you don’t spend on unnecessary items is a dollar that can go towards your debt or your future home. Develop good financial habits that will serve you well as a homeowner.
Pay Above the Minimum on Your Debt
Paying more than the minimum on your credit card debt is a powerful strategy when you’re working towards homeownership. By doing this, you’ll reduce your debt faster and pay less in interest over time. This approach can significantly improve your credit utilization ratio, a key factor that a mortgage lender will consider when evaluating mortgage applications. Even smaller monthly debt payments can make a big difference over time. For example, if you have a $5,000 balance with an 18% APR and only make minimum payments, it could take over 15 years to pay off and cost thousands in interest. But by paying just $50 extra each month, you could be debt-free in a way shorter period of time. This faster debt reduction can put you on a quicker path to homeownership.
What About Renting With Credit Card Debt?
Credit card debt affects a mortgage payment, but does it also affect your renting prospects? Renting with significant credit card debt can present challenges, but it’s not impossible. Landlords and property management companies often check your credit report as part of the application process. High credit card balances can lower credit scores, potentially making you appear risky to landlords. Some may require a larger security deposit or a co-signer if your credit is poor due to high debt. In competitive rental markets, applicants with less debt might be chosen over those with high balances.
However, many landlords also consider factors like income stability and rental history. If you’re struggling with credit card debt but have a solid income and good rental references, be upfront about your situation. Explain the steps you’re taking to address your debt. Some landlords may be willing to work with you, especially if you can demonstrate responsible financial behavior in other areas.
Consult a Debt Settlement Attorney to Begin Increasing Your Home-Buying Power
Buying a home is an important milestone for many people and an impressive financial investment. Don’t let credit card debt hold you back from building the future you want. Work with an experienced debt settlement lawyer to determine the best strategy for reducing what you owe, improving your credit, and increasing your ability to buy the home you want.
McCarthy Law is composed of highly skilled legal professionals experienced in debt negotiations. We know how stressful it can be to deal with the financial burden of significant credit card debt, and we have helped numerous clients explore their options for lowering the amount of their debt. To schedule a consultation with our firm, call us or complete the contact form on our website.
