Yes, you can qualify for a home loan and carry credit card debt at the same time. But before you start the homebuying process, you’ll need to understand how credit card debt impacts your creditworthiness — this can help you decide whether it makes sense to pay down your credit card debt before buying a house.
If you’re carrying credit card debt, you’re far from alone — as of this writing, American consumers owe $986 billion in credit card debt. But your outstanding credit card balances, as well as any other debt you still owe for that matter, will impact your credit score.
Your credit score is a reflection of what’s on your credit report and gives mortgage lenders an idea of your creditworthiness; the higher your score, the less risky lenders perceive you.
One big change worth noting: The credit score benchmark to get the best rate on a conventional loan was raised from 740 to 780 in 2023, meaning the best rates will be given to borrowers with a credit score of 780 or higher.
Don’t know your score? Get your free credit score on LendingTree Spring today.
How your credit score is determined
Your FICO credit score, which is used by most lenders, is made up of five different categories:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
Credit card debt falls under the “amounts owed” category, which simply means the total amount of debt you owe. The most important factor in this category is your credit utilization ratio, which measures the percentage of your available credit currently being used. For example, if you have $20,000 in available credit and you owe $3,000, then your credit utilization ratio is 15%.
→ Ideally, your ratio shouldn’t exceed 30% — individually and collectively — on your credit cards.
A higher ratio tells mortgage lenders that you’re overextending yourself and may be more likely to fall behind on loan payments.
However, don’t be so quick to pay down all your cards to a zero balance or close your paid-off accounts to get a higher credit score. Your credit mix — the variety of credit types you have — also matters, and completely ditching debt can negatively impact your score. Instead, keep your balances low and pay them in full each month.
Learn more about how to pay off credit card debt.
Understanding how credit card debt affects getting a mortgage
Getting a mortgage with existing debt is possible, depending on how much debt you have and how well you’re managing it. Credit card debt affects three main factors that matter greatly in your ability to get a mortgage:
1. Debt-to-income (DTI) ratio
Lenders use your DTI — the percentage of your gross monthly income used to make monthly debt payments — to decide if you can afford a mortgage. It’s best to keep your DTI ratio at a 40% maximum to qualify for a mortgage, though some lenders make exceptions for DTI ratios up to 50% — especially if borrowers have high credit scores or large down payments.
Higher DTI ratios can lead to higher rates or closing costs
You’ll want to shoot for a DTI ratio less than 40% if you’re applying for a conventional loan. Lenders may add an extra charge ranging from 0.25% to 0.375% of your loan amount if you’re above 40% DTI, and could raise your closing costs or a interest rate because of this.
2. Credit score
You typically can’t get a mortgage with a credit score lower than 500. As mentioned above, credit utilization measures how much of your available credit is in use, and it’s an important factor in your credit score. So if you have a lot of credit card debt, your credit score will suffer.
Fees for lower credit scores are lower than previous years
It’s always best to keep your credit card balances as low as possible, but there is some good news for lower credit score borrowers. Even if your score is in the 640 to 679 range and you don’t have a lot of down payment money saved up, the fees you could pay are lower now compared to prior years, which could lead to a slightly better rate.
3. Down payment
For many, saving for a down payment is one of the biggest hurdles on the path to buying a home, and your credit score can either shrink or raise the height of that bar. With a loan backed by the Federal Housing Administration (FHA), for example, you can get away with only a 3.5% down payment if your credit score is 580 or higher. But if you have credit card debt that is dragging your credit score down below 580, you’ll have to put down at least 10%.
Carefully consider your down payment amount, rate, and monthly payment
Borrowers with credit scores between 639 and 679 may get a better rate with a down payment between 3% and 25%.
If you make a down payment between 5% and 20% and your credit score is between 680 and 779, you may be quoted a higher rate. However, may be able to get a slightly lower if you make less than a 5% down payment with this same credit score range. Use a mortgage calculator to estimate how your monthly payment could change and help you decide which option could be best for you.
How your credit score impacts your mortgage interest rate
Another important thing to know about how mortgages work with your credit score is that, in general, the higher your credit score, the better rates you can access. The table below shows how your credit score impacts the mortgage rate you’re quoted and what your monthly payments could be. For the purposes of this example, which is based on FICO data, the mortgage offers are for a 30-year, fixed-rate $400,000 loan.
| FICO Score range | APR | Monthly payment (principal and interest) |
|---|---|---|
| 760-850 | 6.149% | $2,437 |
| 700-759 | 6.371% | $2,494 |
| 680-699 | 6.548% | $2,541 |
| 660-679 | 6.762% | $2,598 |
| 640-659 | 7.192% | $2,713 |
| 620-639 | 7.738% | $2,862 |
The main takeaway here is that your credit card debt isn’t isolated as a major component on your mortgage application; rather, it’s one of several key factors lenders consider. How that debt relates to your income, along with your credit score, is what lenders care about.
Can you buy a house with bad credit?
Yes, you can buy a house even if you have bad credit. Low-credit home loan options are also offered by Fannie Mae and Freddie Mac, the FHA and the U.S. Department of Veterans Affairs (VA).
However, trying to buy a house with bad credit is slightly different than buying while carrying credit card debt.You can carry a high amount of debt fairly responsibly (for instance, with on-time payments and a decent credit score). But if your financial picture has slipped into “bad credit” territory, you almost certainly have some significant dings against you, like late or missed payments, that need to be corrected.
Learn more about getting a VA loan with bad credit.
If you meet other minimum mortgage requirements for your chosen loan type, you can buy a house with credit card debt. But you should keep the following tips in mind to stay on track for a loan approval.
1. Review your credit report
The last thing you want when applying for a mortgage is to be caught off guard by surprises in your credit history. Pull your free credit report from AnnualCreditReport.com and review it for accuracy. If you do come across an error, dispute it directly with the three credit reporting bureaus (Equifax, Experian and TransUnion).
2. Pay more than the minimum
The best way to tackle credit card debt, whether or not you’re applying for a home loan, is to pay more than the bare minimum. Your mortgage lender may have access to your trended credit data, which shows how much you’re paying toward your debts each month. If you pay more than what’s due, it demonstrates your commitment to handling your debt responsibly.
3. Consolidate your credit card debt
Remember, if your credit utilization ratio is higher than 30%, your credit score will suffer. Consolidating your debt using an unsecured personal loan could help you better manage and pay off your balances, as well as boost your credit score. Unlike credit cards, a personal loan is an installment loan that you (or your creditors) receive in a lump sum. Just be sure to consolidate your debt six months to a year before applying for a mortgage, or even earlier. Doing so in the middle of the homebuying process could derail your loan approval.
Read more about our picks for the best debt consolidation loans.
4. Don’t rack up more debt
Resist the urge to swipe those credit cards to buy furniture for your new home, or to take out a new car loan. More debt will raise your DTI ratio, and may hurt your chances of getting to the closing table on schedule.
