Can You Get A Mortgage With Credit Card Debt?

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Having some credit card debt is not unusual, and ordinarily it is still possible to get a mortgage if you have debt on your credit card. When it can be a problem is when your credit card debt is large and repayments are taking up a significant chunk of your income, leading some lenders to be concerned about whether you’ll be able to afford the mortgage repayments. That said, credit card debt doesn’t have to end your home owning ambitions as it’s still possible to get a mortgage with credit card debt if you go to the right mortgage lenders.

How much does credit card debt affect a mortgage application?

When applying for mortgages, lenders will take into account a number of factors such as your credit score, affordability and levels of debt, including credit cards. Part of their assessment looks at the amount you are paying out each month servicing debts as a percentage of your gross income.

Mortgage lenders calculate a debt-to-income (DTI) ratio to inform their decision about whether to lend to you. Generally the higher the DTI, the greater the difficulty you might have getting a mortgage, as the lender might consider you less able to afford the size of mortgage you are seeking.

In some instances, credit card debt may not have any impact on a mortgage application whatsoever. Lenders have their own criteria, and if you are someone who regularly pays your credit card in time, this could help you make a better impression and actually enhance your credit score.

How is the debt-to-income ratio calculated by mortgage lenders?

DTI makes a comparison between your gross (before tex) income each month and your monthly outgoings on debt repayments. This includes all types of debt repayments including credit cards, loans, car loans etc plus also the potential monthly cost of your mortgage payments. 

Your DTI ratio is a good indicator of how you’re currently managing your level of debt and therefore if any mortgage is going to be affordable.

Debt-to-income ratio is easy to calculate:

  1. Add up all your monthly debt repayments.
  2. Divide the total by your gross monthly income.
  3. Multiply the amount by 100 to get a percentage.
  4. This figure will be your DTI. 

Debt-to-income ratio calculation example:

  1. Credit card repayments (£150), car finance (£175), potential mortgage repayment (£750) = £1075 total
  2. Divide £1075 by £2,550 (monthly income before tax) – 0.42.
  3. Multiply 0.42 x 100 = 42%.
  4. DTI is 42%. 

Most mortgage lenders would consider someone with a DTI of 42% to be a moderate risk borrower and might expect to see a good credit history or larger deposit before being willing to approve a mortgage application.

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What is considered an acceptable debt to income ratio by mortgage lenders?

The following are how borrowers would be viewed by lenders based on their DTI and will affect the deals they might be offered:

  • 0-19% – very low risk
  • 20-29% – good borrower
  • 30-39% – acceptable risk
  • 40-49% – moderate risk
  • 50-74%- high risk
  • 75-99% – very high risk
  • 100% or higher – huge risk (likely to be rejected for mortgage)

What to do if my debt-income ratio is high because of credit card debt?

Credit card debt has the potential to impact not only on your credit score but also your DTI. Some lenders may only be willing to lend to you if your credit score is at a decent level or you can put up a larger deposit. Mortgage terms may also be less favourable if your debt causes you to be viewed as a higher risk.

Talking to a mortgage broker can prevent you from being denied a mortgage because your situation can easily be compared with the lending criteria of various lenders first. This process filters out the mortgage providers who are likely to reject you because of credit card or other debt, leaving you with lenders who have criteria more suited to you.

I have high credit card debt – what are my chances of getting a mortgage?

Having high credit card debt does not automatically bar you from getting a mortgage. While your credit card balance may be taken into consideration, most lenders are more concerned with your affordability and whether your income is sufficient to meet your mortgage repayment alongside your debt repayments.

Each lender has different criteria, but if you have displayed an ability to make your monthly payments regularly, and your gross income is at a level that high credit card debt is unlikely to be a major issue, there are lenders willing to help people like you. Some lenders are more willing than others to help people with outstanding credit card debt, though you might face higher interest rates, so it is worth taking the time to find the best deal.

It is when you have large credit card debt that is recent, and you have missed payments, that this might be a red flag to lenders. For this reason, don’t apply for a mortgage with high credit card debt without first checking that you are eligible.

Is there a limit with credit card debt where it is considered too much for a mortgage?

High credit card debt can limit your lending options, but there is no ceiling or set debt figure in a lender’s criteria that would rule you out of getting mortgage approval. The level of debt , how recently it occurred, and your ability to pay it back alongside mortgage payments will be of more concern to lenders.

A person could have a much higher level of credit card debt (say £10,000) and still get approved where a person with just £1,000 of debt might get rejected. This could be because the person with the higher credit card debt has a much higher income to cover their mortgage repayments on top of their card debt repayments.

Lending criteria is different between mortgage lenders so while one might reject a person, another may be willing to lend to them. When the Bank Say No will help you find those lenders more willing to lend to you regardless of how much debt you are in with credit cards.

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How can I improve my chances of getting a mortgage?

Starting to improve your credit file can improve your mortgage chances. If you meet your regular monthly repayments on your credit card debt, or look to pay more than just the minimum, this will demonstrate to lenders that you are a more reliable borrower.

Better still, look to repay the debts in full to reduce your DTI rate and credit utilisation rate (worked out by dividing your current debt by your available credit limit), and this will improve your credit scores. If your gross monthly income increases, this will also have a positive impact on your DTI ratio and how you are viewed by a mortgage lender.

If you have unused credit cards, you should think about closing them. It creates a better impression and reduces the risk of fraudulent activity.

Can a first-time buyer get a mortgage with credit card debt?

First time buyers often face difficulties getting their deposit together and it can be tempting to build up credit card debt in order to achieve this. How much credit card debt a first time buyer has will not overly concern most lenders so long as the potential borrower has a decent credit score and patterns of repayments indicate a commitment to reducing debts

If you are a first time buyer facing difficulties with getting a mortgage because of debt, consult a financial expert for help in achieving your mortgage goal.

Do I need to clear credit card debt before applying for a mortgage?

It is certainly advantageous to clear credit card debt before applying for a mortgage, but this is not always possible. If you have outstanding balances on credit cards, these will be accruing interest at a far faster rate than any savings accounts would. Paying off your credit cards by using savings will put you in a better position so that you can access better mortgage loan deals.

My mortgage application was declined – what can I do?

If you’ve previously applied for a mortgage but been declined because of credit card debts, you should look to get your finances in better shape. Try to improve your credit rating by keeping to your credit card payment schedule, and trying to get the debts cleared. This will improve your credit score and open up more mortgage offers to you.

A broker can not only help you with mortgage deals, but may also be able to help you find a loan to pay off your credit card debts. A loan will have a lower interest rate than that applied to your credit cards, so switching your debt to a loan will save you money immediately.

Can a mortgage be used to clear my debts?

It is possible in some instances to use part of a mortgage to pay off your debts, but not every lender offers this.This doesn’t typically apply to first time buyers but is more often used by people who are remortgaging to clear their debts. If you meet all the affordability assessment criteria, remortgaging for debt consolidation and to clear credit cards is a very real prospect.

Using a mortgage to pay off credit card debt can be advantageous as it will normally be a lower interest rate than the unsecured debt and will help you reduce your monthly outgoings. It is worth noting that you will be paying back the debt over a longer period, meaning you’ll likely pay more in interest. Also, the debt will be secured against your property which could be at risk if you were to miss payments.

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Get Started with a Mortgage Broker

If you have a poor credit report due to high credit card debts, other outstanding debts, or even missed payments, getting a mortgage deal can be difficult, but not impossible. Different lenders have different criteria, meaning that even if you have high credit card payments, a payday loan, a personal loan, other outstanding debt, or even a debt management plan, you may still be able to get mortgage approval.

With the right mortgage broker from When the Bank Says No, we can help you despite any bad credit on your file, and help you find specialist lenders more likely to give you the mortgage approval you are seeking despite your financial circumstances.

 

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Emma Jones
Emma Jones
Emma began her career in Lloyds Banking Group, first in the unsecured & secured loans department at Halifax and later as a mortgage advisor at Lloyds. During 9 years in these roles and a further 2 years at Yorkshire Building Society, Emma was able to observe the impact of the recession, and how the banks let their customers down by denying loans and mortgages. Wanting to be a driving force for change, she stepped into a market advice role where she has been able to help clients when others couldn’t. Identifying a gap in the mortgage space, Emma went on to establish When the Bank Says No. As a keen property investor, she has been the focus of features in publications including The Sunday Times and This is Money. Emma’s greatest joy is overcoming the low expectations of their customers, many of whom have all but given up on getting a mortgage due. One thing Emma has learned through her own personal struggles is every client must be treated like a human and understood better by advisors and lenders in the industry. “We all have to navigate life events which can ultimately impact your financial status. It shouldn’t mean dreams of homeownership or business growth should have the breaks applied”. Emma and her team’s passion for helping people overcome the challenges they may face when applying for a mortgage have fuelled the success of When the Bank Says No.