Pay Off Credit Card Debt Before Applying For A Mortgage

A home is one of the single biggest purchases the average American will make. With the median sale price of a U.S. house at $404,400 (as of Q4 2024), your mortgage rate really matters..

According to Experian, the average credit card debt in the U.S. was $6,730 in 2024. For people applying for a mortgage loan, credit card debt can pose a problem. If your credit score doesn’t qualify you for the lowest possible rate, you’ll owe thousands of extra dollars in interest over the life of the loan. The difference between a 6.5 percent and 7 percent rate means $107 dollars a month on a $400,000 mortgage.

With this in mind, it’s important to reduce your credit card debt and increase your creditworthiness as much as possible before applying for a mortgage to help you save money while paying off your home.

Can you buy a house with credit card debt?

In general, you can buy a house with credit card debt. But it depends on how much credit card debt you have and how it affects your credit score. You can also be denied a mortgage loan if your credit card balances and other debt are too high, or your payment history lowers your credit score beneath the required threshold.

How does credit card debt affect your credit score?

Paying off your credit card debt can raise your credit score, since you will be using less of your available credit and lowering your credit utilization ratio (which accounts for about a third of your credit score). Lenders can see that you have more of your income available to make mortgage payments. However, it’s not always necessary to have an excellent score to get a competitive interest rate.

If you have a good score (at least 670) and qualify for a private mortgage loan (a fair credit score of 580 is enough for an FHA loan), you can usually buy a “point” for an additional 1 percent of the loan value in order to reduce the interest rate from, say, 5 percent to 4 percent.

Another option is to hold your mortgage for a few years, allow your home equity to build and then refinance to a lower rate. This can be a riskier strategy since mortgage rates could climb, the price of real estate could drop or both.

How does credit card debt affect getting a mortgage?

Having credit card debt isn’t going to stop you from qualifying for a mortgage unless your monthly credit card payments are so high that your debt-to-income (DTI) ratio is above what lenders allow. Banks and other mortgage lenders obtain your debt-to-income ratio by dividing your monthly debt by your gross (pre-tax) income.

There are actually two different DTI ratios a mortgage lender may consider:

• The front-end ratio divides your monthly housing outlay — including the mortgage payment, insurance, tax and any homeowner association payment — by your gross income. You typically need to stay below 28 percent to be approved.
• The back-end ratio takes your total debt payment into consideration, including your credit card payment. You should aim to stay below 36 percent.

Lenders generally consider the back-end DTI ratio more significant, since it provides a better picture of your ability to make your mortgage payment. And if it’s above 36 percent, you’ll have a hard time qualifying for a loan. Sometimes, lenders don’t even consider installment debt that is almost paid off in their DTI calculations.

Tips for paying off credit card debt

There are a few ways to pay down credit card debt before you apply for a home mortgage loan, but there could be an impact on your credit score in the short term.

Use a balance transfer credit card

You can use a balance transfer credit card to pay down your card balances. While you’ll see a slight hit to your credit just for having a hard inquiry on your account, you can use the card’s 0 percent introductory offer on balance transfers to quickly pay off the debt without added interest.

Borrow from friends and family

Another way to pay off debt is to get a loan from friends or family members. Just remember that lenders calculate DTI based on your monthly payment amounts, not your credit card balance. Paying off part of a credit card loan won’t affect your DTI that much — though it could be just enough to put you below 36 percent.

Get a debt consolidation loan

You could also use a debt consolidation loan to combine all of your credit card debt into one monthly payment and, usually, a lower interest rate. This would typically help lower your monthly debt payments, boosting your DTI ratio.

Use a debt payoff strategy

Set a debt payoff plan and stick to it. Two popular methods are the snowball and avalanche methods. These strategies require you to organize your debts by amount or interest rate and allocate extra payments on one debt at a time. As you pay off one debt, you’ll roll the monthly amount you were paying into the next one and continue as you gain momentum toward eliminating debt.

The bottom line

Credit card debt is costly and should be the first thing you target in a debt-reduction strategy. But if you’d like to buy a house right away, it won’t necessarily be an impediment to loan approval provided that your DTI percentage is low enough and you have good to excellent credit.

Finding the best mortgage rates you qualify for is the first step of your journey. Once you own a home, you’ll be able to build equity and net worth, which can lead to even more debt-reduction options.