(income after paying all monthly debts) . If you are paying a major part of your earnings towards debt payments, mainly credit card debts, then you will surely face difficulties while applying for mortgage.
How much credit card debts can affect your creditworthiness
Most of the homebuyers are well aware of the fact that for a better chance of qualifying mortgage, they will need a decent credit history. It is true that building and maintaining a good credit score is not very tough job. But you need to focus on your habits of using credit over a period of time. . However, if you are not paying credit card payments within due date, the results may be horrible for your finances as well as it will have a deep impact on your credit history.
Your monthly payment towards mortgage is a big factor while deciding your mortgage affordability as well as eligibility. . You cannot exceed this limit or else your application will not be entertained.
Let's check some credit card scenarios and try to sort out possible ways that will increase the chances of mortgage approval.
1. Divide your debt
The relation between mortgage application and credit cards is very complicated. In most cases, , than you can imagine. The lender will verify your balances through credit history and determine a monthly income slab which will be able to cover up credit card payments as well as the new mortgage payment.
Suppose your balance on credit card is $20,000 and monthly you'll have to pay $400 towards it. To give you approval on the mortgage application, the lender will determine your income slab $600 more to offset that debt per month.
However, that scenario only described your debt on a single card. If you spread your debt balance in 3 or more different cards with low interest rate, then monthly payment you will owe towards credit card will be much lower. It total you will be paying less as the total interest rate will be getting lower than one single card.
2. Paying off credit debt
For qualifying a mortgage, you might be thinking of pay down some of your credit card debts. Before taking that decision you might want to use any credit card payoff calculator to calculate the duration. But you'll need to decide which credit card account must be dissolved first. It is wise to pay off the credit card debt first which has the highest monthly payments. In order , . Whether the interest rate is high or low, you should always target the higher monthly amount. Practically, those mostly affect your ability to qualify for a mortgage.
For an example, suppose you have two different credit cards with balance $4000 and $6000 respectively. For the first card you have 2% interest with monthly payment of $250. The later one has 5% interest with $150 payment each month. So, as per the discussion above, you should choose to pay off the 1st card with higher payment ($250 per month).
3. Credit cards consolidation
The main purpose of credit card is nothing but using it instead of cash. So, . By this way you can save money from getting the low interest rate. If you want to make pre payments to pay off debts quickly, it will have less difficulties to handle a single card rather than many.
In most cases, , . But if you are willing to take a new mortgage and you are totally able to pay it down, it can also be helpful to re-build a good credit score.