It is a good idea to cross it off your list if you are going to apply for a home purchase loan.
the main points
- There are various factors that mortgage lenders take into consideration when evaluating home loan candidates.
- Paying off credit card debt may make it easier to qualify for a mortgage in more than one area.
If you are looking to buy a home, you are probably well aware that getting approved for a mortgage is not guaranteed. Instead, there are various factors that mortgage lenders look at when evaluating loan candidates. These include:
- Balance level
- The current level of debt relative to your earnings, known as the debt-to-income ratio
- Funds available for down payment
There are various steps you can take to make yourself a more attractive candidate for a mortgage. But if there’s one step to take on the path to getting a mortgage, it’s paying off credit card debt.
How canceling credit card debt can help you buy a home
Reducing or canceling your credit card debt can help you qualify for a mortgage in several ways. First, it can help improve your credit score. The higher this number, the more likely you are to qualify for a home purchase loan.
Among the various factors that go into calculating your credit score, your credit utilization ratio carries a lot of weight. This ratio measures the amount of available revolving credit that you use once. The lower your total outstanding credit card balance, the lower this percentage will be — and your score will be higher.
Furthermore, paying off credit card debt may help improve the debt-to-income ratio. This ratio measures your current level of debt in relation to your income, and the higher it is, the more difficult it is to get a mortgage.
If lenders see that a large portion of your earnings are already monopolized by debt payments, they are unlikely to want to add to that debt by giving you a mortgage. But if you reduce your credit card debt, the debt-to-income ratio should shrink.
How to pay off credit card debt
If you have a bunch of troublesome credit card balances, consolidating your debts may make paying off your debt easier and less expensive. To do this, look at the Balance Transfer procedure, where you transfer your various balances to one credit card (ideally, one with a 0% introductory interest rate).
Another option is to consolidate your debt with a personal loan, which allows you to borrow money for any reason. You will generally get a much lower interest rate on a personal loan than you would with a credit card that does not have an introductory APR of 0%.
Of course, you will also need to free up cash to reduce your balance. It will help you to put yourself on a strict budget as you can keep track of your spending carefully. You may also want to consider getting a second job to come out with money to rid yourself of this debt.
Carrying on credit card debt won’t necessarily prevent you from getting a mortgage, but it can make it more difficult. And if you have other factors working against you, you may see your application rejected. Instead of taking the risk, do your best to pay off your credit card debt before applying for a mortgage this year. Not only will this improve your odds of getting approved, but it will also work wonders for your overall financial picture.
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