Сan you buy a house with a credit card and Can I pay mortgage with credit card
Can I Buy a House With Credit Card Debt?
Credit cards, and how you use them, are a large part of your overall credit history and score. Responsible use of a few cards shows that you handle credit well, and can earn you a higher score. Irresponsible or excessive use of credit cards demonstrates that you may not handle money or financial obligations well, and can earn you a lower credit score. Credit card debt in itself will not keep you from owning a home; how you manage your credit card debt can.
Several things influence your credit score: your credit account balances versus your credit limit, how many credit accounts you have, your payment history on those accounts and how long your credit accounts have been open. Credit reporting agencies and lenders want to see that you have a long record of accomplishment on your credit history as an indication of how you handle credit over time. They look for prompt payment on all accounts and for balances kept below 50 percent of the credit limit–preferably in the 20 to 30 percent range, according to Ask Mr. Credit Card. Lenders also do not want you to have so many accounts that you could easily overextend yourself with available credit. A maximum of two to three credit cards, along with a car payment and a mortgage, is ideal.
With credit card debt, carrying a balance that is a large percentage of your credit limit is frowned upon because it shows that you may spend more than you can easily repay. This is especially true if it is a recurring pattern over a long period, if you pay only your minimum amount or if you have several cards that are running high balances. The dollar amount of the balance is not as important as the percentage of the available balance. Three maxed-out cards with $500 credit limit hurt you more than carrying a $1,500 balance on a card with a $5,000 limit. Your credit score will suffer until you pay those balances down, and you will have trouble getting a mortgage with the best terms.
Lenders not only use your credit score as an indicator of your overall creditworthiness, but they also use your debt to determine your approval as well. Every lender uses a debt-to-income ratio as part of the loan approval process. This ratio compares your new monthly mortgage payment to your gross or pre-tax monthly income, to get a percentage called the “front end ratio.” Lenders also take your set monthly debts, including all installment loan payments, credit card minimums, additional rent or mortgage payments, and obligations such as child support, and add them to the new mortgage payment. They then compare that amount to your monthly income to get what they call the “back end ratio.” These numbers must fall within certain parameters, which vary according to the loan program.
Conventional loans typically require ratios of 28 on the front end and 36 on the back end, while the FHA requires 29 on the front and 41 on the back. What that means is that your new mortgage payment cannot be more than 28 to 29 percent of your monthly gross income. Your total debt cannot be more that 36 to 41 percent of your income. Any amounts over those percentages could disqualify you from getting a mortgage loan–though there are subprime lenders that will accept higher debt ratios, but charge significantly higher interest rates.
Paying down credit cards that have balances above 50 percent of the credit limit–and keeping them there–will help improve your credit score within six months. Paying off credit cards to eliminate or lower minimum payments from your debt-to-income ratio will help with loan approval. The higher your credit score and the lower your debt-to-income ratio, the better loan terms you will be able to get. You will save money on your mortgage over the long term, and find that getting credit becomes easier in general.
Be Careful With Credit Cards When Buying A House
Here’s what you must know as a home buyer if you carry credit card debt, when qualifying for a mortgage
Your ability to purchase a home with financing is predicated on how much net income you have after all monthly debts. If you’re consumer liabilities absorb your income, particularly in credit card payments, you may have to put the brakes on the home search. Following is how even 0% interest credit cards may affect your home buying chances…
Most realize in order to purchase a home you need at least good credit and understand that the better the credit score the better the qualifying chances will be. One of the ways to build and maintain healthy credit score is the ability to use and manage credit over said period of time. Using 3 to 5 credit cards actively, paying them off in full each month is a fantastic way to support a good credit score, a benchmark factor in qualifying for the prize. However, credit cards are not something to be taken lightly. Do exercise caution especially if they are not paid off in full by month’s end.
How Credit Cards Can Limit Your Ability To Buy A Home
Carrying a balance-this, depending on the terms of your individual card services agreement may limit how much house you can buy. The key with carrying a balance on any one credit card is the payment. In most circumstances the larger the balance on any one credit card, the larger the monthly payment. The higher the monthly payment on any individual card, the higher the chances you will not be able to purchase as much house. For example let’s say you owe $10,000 on a credit card, the monthly payment associated with the obligation is $200 per month. $400 per month of your income is needed to offset that debt to not hurt your qualifying ability. If this balance could be spread out over say 2 to 3 credit cards each with a lower payment totaling less than $200 per month, you come out ahead as the lender is going to use the minimum monthly payment that’s due each month.
*Always remember it’s not what you owe that counts it’s what you pay…
O% credit cards- The question comes up regularly ” The card is 0% interest, it just makes sense to keep it right?” No, not if you’re trying to buy a home- paying off the higher rate credit cards first might be a good move if the monthly payment is higher than the cards you have that are 0%. In other words for buying a house, you’re going to want to focus on the cards that have the highest monthly payment despite the interest rate because those are the ones that will your qualifying ability the most. Lenders are required to use a debt to income ratio in determining how much of a house payment you can take on. Most lenders work with the debt to income ratio of approximately 45%. Meaning 45% of your monthly pretax income is allowed for a proposed new mortgage payment plus any consumer obligations. Consider the following approach: if you have a credit card that has a $2000 balance with 0% interest with the monthly payment at $150 per month compared against another credit card that has a $5000 balance with an interest rate that say 6% with payment $50 per month, you’ll have larger bang for your buck paying off the credit card that has a has the higher payment despite the fact that it 0%. The idea here is the you’ll want to cherry pick, the cards with the lowest balance with the higher payment in order of priority to maximize your buying potential. A good mortgager lender can assist you tremendously with this task.
*As a good rule of thumb for financial planning, it does make sense to tackle the higher interest rate credit cards first because of the additional interest expense you’ll pay over time, but that is not the case necessarily when it comes time to qualifying for a mortgage.
Consolidating Cards- Let’s face it, people carry credit card debt because they don’t have the cash to make the purchase outright. Consolidating any 0% interest credit cards or even other credit cards into one credit account containing a total new lower payment will help you qualify to buy a home. Why? It has to do specifically with the minimum monthly payment. Even if you choose to make a pre-payment each month in an effort to accelerate the debt payoff, it’s about the minimum obligation per credit card the lender will use in determining whether or not you’ll be able to buy that house- so consolidating may help.
If you have the cash are are undecided on using the cash for the down payment or paying off debt, talk to a lender. If you do plan to payoff the credit cards to qualify, this can be accomplished as a special lender exception (not all lenders allow paying off debt to qualify). For example if you’re contract to buy a home and your loan comes back from underwriting your debt to income ratio is too high, one way to reduce the debt to income ratio so your loan can be approved is to pay off the credit cards in full. This route also entails one additional step in order to remove the obligation, you would have to pay off the credit card in full and close the credit account. In most cases while this might adversely affect your credit score in the short term, a new mortgage loan in your name should far offset from a credit score perspective any adverse credit score drop as nothing has the ability to move your credit score up or down the way a favorable mortgage rating does.
Scott Sheldon is Senior Loan Officer and consumer advocate based in Sonoma County. Scott has been originating home loans for nearly a decade.