Paying Down Credit Card Debt Could Be Your Ticket to Getting a Mortgage for These 2 Reasons

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Owe money on your credit cards? Read on to see how paying off your balance could increase your chances of mortgage approval. 

Mortgage lenders look at different factors when determining whether you qualify for a home loan or not. A big one is your credit score. The higher that number is, the more likely you are to get approved.

Your existing debt relative to your income, also known as your debt-to-income ratio, is another big factor that’s accounted for when you apply for a mortgage. Lenders want to see that you’re not already overloaded with debt before loaning you a large sum of money.

If you’re hoping to finance a home in the near term, you may be worried about getting approved for a mortgage. But you should know that paying off your credit cards to at least some degree could increase your chances of approval in a really big way. Here’s why.

1. Less credit card debt means a lower utilization ratio

One factor that goes into calculating your credit score is your credit utilization ratio. It speaks to how much of your available revolving credit you’re using at once.

Let’s say you owe $4,000 across a bunch of credit cards with a $10,000 spending limit. That puts you at 40% utilization.

Usually, your credit score will start to suffer once your utilization ratio exceeds 30%. But if you’re able to whittle your $4,000 balance down to $2,500, that’ll put you at 25% utilization. That might, in turn, lead to a nice improvement in your credit score. And that could make a lender more comfortable with the idea of extending a mortgage loan to you.

2. A lower debt-to-income ratio could make you a more viable mortgage candidate

When you apply for a mortgage when you’re already in debt, it can make a lender nervous that you won’t be able to keep up with your payments. So if you can lower your debt-to-income ratio, you can put yourself in a stronger position to get approved for a mortgage. And paying off some credit card debt could shrink your debt-to-income ratio nicely.

Rocket Mortgage says that lenders are generally looking for a debt-to-income ratio of 43% or less. Beyond that point, a lender might think you have too much debt to take on more of it. On the other hand, Rocket says that if your debt-to-income ratio falls below 36%, you might end up in a really strong position to get a mortgage (or another loan or line of credit).

It pays to shed that debt

Paying down credit card debt can clearly improve your chances of mortgage approval. It can also save you money on interest.

Take a look at your spending and see if you can cut back on some expenses temporarily to free up money to apply to your credit card balance. And if not, consider taking on a side hustle on a shorter-term basis to knock that debt out.

You can also look at transferring your existing balances to a new card with a 0% introductory APR. That way, you’ll avoid having more interest pile on as you work to whittle down your balance.

Having credit card debt won’t necessarily ruin your chances of getting a mortgage. But it could make it more difficult to get approved. So if you’re able to pay some of that debt down before submitting a mortgage application, you might be able to approach the process with less worry.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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