Should You Pay Off Credit Card Debt Before Buying a Home?

Can You Get a Mortgage With Credit Card Debt?

You can get a mortgage with credit card debt. But before you apply, it's important to make sure your DTI falls within certain parameters so you have the best shot at qualifying for a loan.

For example, mortgage lenders typically want to see that prospective borrowers have a DTI of 43% or less, meaning no more than 43% of your pretax income goes toward debt payments each month. The maximum DTI some lenders want to see could be as low as 36%. This includes all debts, such as auto loans, student loans and personal loans, not just your minimum credit card payments.

So while it's possible to meet a lender's DTI requirements while carrying credit card debt, you may find it wise to reduce your DTI—potentially by paying down credit card balances—to qualify for the best loan for you.

Why Is Credit Card Debt a Factor When Buying a Home?

Credit card debt influences your mortgage application on multiple levels. Here are three ways having credit card debt will end up being a factor in whether you're eligible to buy a home:

• Credit card debt increases your DTI. One of the most important elements of your mortgage application is your DTI, including your projected monthly mortgage payment. More credit card debt often means a higher DTI, which can make it more likely your mortgage application is denied.
• Credit card debt impacts your credit score. Lenders look closely at your credit score and at the details in your credit report, including the types of debt you owe and their balances. Paying down credit card debt lowers your amounts owed, which is a major factor in your credit score.
• Credit card debt limits the mortgage payment you can afford. If you're making a substantial credit card payment each month, taking on a mortgage could be a strain. Not only will lenders take this into account when evaluating your application, but your budget could be overburdened. Use a home affordability calculator to see how much flexibility you have to add a mortgage payment to your monthly expenses.

When Is Paying Off Credit Card Debt a Good Idea?

In most cases, paying off credit card debt—or paying it down as much as you can—is the right move. You'll be able to lower your DTI and, hopefully, both increase your credit score and qualify for a lower interest rate on your mortgage.

Here's why: The amount of credit card debt you carry relative to your credit limit (across all your cards and for each individual card) makes up your credit utilization rate. Amounts owed on your debt accounts is the second most important factor in your FICO^® Score^Θ, and credit utilization is a big part of that calculation. Aim to keep your credit utilization rate below 30% at all times; the lower, the better.

Getting rid of credit card debt could also make a big impact on DTI. If you'd like to ensure your DTI is below 36%, which will likely get you access to the most favorable mortgage terms, paying down any of your debts before applying will help you get there.

Learn more: How to Calculate Credit Card Utilization

When Is It OK to Leave Your Credit Card Debt Alone?

In some circumstances, it may not be entirely necessary to pay off all your credit card debt before buying a home. You can consider leaving your credit card debt as it is, or paying it down slowly, when:

• You have good to excellent credit. If your credit score is currently in good shape—700 or higher on an 850-point scale—you may not have to prioritize paying down credit cards, at least in order to bolster your credit.
• You have flexibility in your budget. Depending on your income and your current debt balance, you may be easily making your credit card payments (and even reducing your balance). If you're able to pay down debt while saving money each month for emergencies, retirement and other financial goals—such as your down payment—your credit card debt is likely manageable.
• You have a concrete plan for paying off your debt. Homeownership will mean adding lots of new expenses to your budget: not just the home loan itself, but property taxes, insurance, maintenance and more. You can safely get a mortgage with some credit card debt if you have a concrete plan in place for how to bring your credit card balances to $0 within, say, a year or two. That way, your budget is less likely to be overwhelmed by the various costs of owning a home.

How to Pay Off Credit Card Debt Before Buying a Home

If you've decided to focus on paying off credit card debt before applying for a mortgage, take these steps:

• Increase your income. Making more money will not only lower your DTI to start with, but it'll give you more resources to allocate to debt payoff. When you start making more money, do your best to avoid lifestyle creep, or an increase in your expenses that can impact how much extra income is available to go towards savings and debt repayment.
• Start budgeting. No matter your income, you can likely benefit from making a budget—whether it's highly detailed and structured, like the zero-based budget, or something more flexible like the pay-yourself-first method. Establishing and sticking to a budget helps you identify expenses you can cut and stay accountable to your debt payoff plans.
• Consider a balance transfer credit card. Particularly if you have good or excellent credit, you may be able to pay off debt interest-free for a period of time by doing a balance transfer. You'll apply for a new balance transfer credit card with a promotional 0% APR period. You can then move existing balances to the card and pay them off without incurring interest charges if you get rid of the debt before the promotional period ends.

Tip: Avoid applying for new credit right before or during the mortgage application process; mortgage lenders view applications for new credit as a red flag, and it could hurt your chances of approval or of getting a competitive interest rate.

The Bottom Line

Paying off credit card debt is one way to put yourself in the strongest position possible to take on a mortgage. On the other hand, if your credit and budget are in solid shape and you're hoping to buy a home quickly, you may not have to focus on getting rid of credit card balances. But it's still crucial to understand how a mortgage will impact your ability to afford your expenses and save for the future.

Get your credit score for free with Experian and see how much outstanding credit card debt is affecting it. Credit card debt shouldn't stand in the way of getting your dream home, and it shouldn't be an ongoing obligation weighing down your budget either.