Buying a home can often be a very stressful time, especially if you are a first time buyer. Suddenly, you are surrounded by terminology that you have never heard before, and every financial interaction that you make is important.
If you are thinking of buying a home, then you have probably contacted a financial advisor. Your financial advisor will be able to give you lots of information regarding mortgage eligibility, and they will ask you lots of questions to ensure they find the mortgage that is right for you.
But one thing that might come up in conversation, which could cause you stress or anxiety, is credit card debt.
Debt generally isn’t a good thing when you are applying for additional credit, so you might find yourself nervous about the implications of this debt. However, credit card debt doesn’t mean that you will be unable to get a mortgage.
In this guide, we’ll be taking a look at how credit card debt affects your mortgage eligibility, and how much credit card debt is ok when buying a home. So with no further ado, let’s dive right in.
First things first, let’s take a look at how debt may affect your ability to buy a home. There are a lot of misconceptions when it comes to debt and buying a home.
Some people believe that you have to be completely clean of debt, with absolutely no outstanding loans, bills, etc. to your name in order to buy a home.
Likewise, some people believe that you have to have a perfect credit score in order to buy a home. Both of these things help your mortgage eligibility, but they are not a make-it or break-it when it comes to getting a mortgage.
It is ok to have debt when buying a home, it is not ideal, and it is best to keep debt to a minimum. But, in most cases, it will not prevent you from buying a home.
That is assuming that you are not in mountains of debt. When you apply for a mortgage, then you will be asked about your debt, and this will impact your eligibility.
A small amount of debt will likely not be a problem, but a large amount of debt could prevent your application from being accepted. With that in mind, let’s take a look at how banks decide if the debt is an issue.
Yes, in most cases, you will be able to buy a home, even if you have credit card debt. When you are applying for a mortgage, banks will not reject you just because you have debt.
The only reason that your credit card debt will impact your eligibility to buy a home is if the payments for this debt take up a lot of your monthly income.
Additionally, you could run into issues with mortgage eligibility, if you have credit card debt combined with another kind of debt, and these take up a lot of your monthly income.
However, in most cases, credit card debt alone will not be enough to prevent you from getting a mortgage. So, yes, you can usually buy a home, even if you have credit card debt.
When banks are deciding whether, or not, to offer mortgages to people, they are calculating risk. Houses are not cheap, so when a bank offers a mortgage, they are handing a lot of money over, based on the trust that you will pay that back.
So, it is understandable that they ask a lot of questions before offering you a mortgage. These questions, especially the ones regarding any debts that you have, allow them to calculate the risk surrounding you being unable to pay back your loan.
In order to decide if your credit card debts are enough to make you ineligible for a mortgage, banks calculate your debt-to-income ratio.
They basically do this by working out your monthly income, and comparing this with your monthly outgoings that are required to cover your debts.
So, the mortgage lender will take your monthly income, and then calculate how much of this goes to covering your debts (student loans, car loans, credit card bills, etc.).
The calculation of your monthly debts is then divided by your gross monthly income to calculate your debt-to-income ratio. This is a figure that matters a lot to lenders.
Now that we have taken a look at the debt-to-income ratio, let’s take a look at how much credit card debt is deemed ok when buying a home.
As we have said, banks calculate what an acceptable amount of credit card debt is based on your debt-to-income ratio. Due to this, there is not an exact amount of credit card debt that is deemed unacceptable when buying a home.
Instead, there is a percentage which your overall debt should remain under if you want to buy a home. Generally speaking, the maximum debt-to-income ratio that you should have in order to buy a home is 45%. But, this will differ depending on the lender that you use.
As we have said, to calculate your debt-to-income ratio, you must divide your overall monthly outgoings and divide this by your gross monthly income to calculate your ratio.
So, if you only have credit card debt, this is the only monthly outgoing that you will use to calculate this ratio, in which case this debt should measure less than 45%.
But, if you have credit card debt, alongside other debt, it is impossible for us to say exactly how much credit card debt is ok. Your overall debts should simply be lower than 45% when it comes to your debt-to-income ratio.
Summary
In short, the amount of debt that is acceptable when buying a home is calculated using something known as a ‘debt-to-income ratio’. Assuming that the only debt that you have is credit card debt, you will be able to get a mortgage as long as your ratio is below 45%.
