How Much Credit Card Debt is Okay When Buying a Home?

A pile of money, glasses, and a little wooden house

The following is for informational purposes only and is not intended as credit repair.

So, you’re thinking of buying a home, but you have some credit card debt. How will that debt affect your mortgage application process? There are a few things you’ll want to consider before filling out your first application that can make the process a little easier.

Your Debt-to-Income Ratio is What Really Matters

The first thing you need to know is your debt-to-income ratio. This is your monthly debt payments (all of them) divided by your gross monthly income. It's one of the key number lenders will use to determine your ability to manage your monthly payments. A 45% debt ratio is about the highest ratio you can have and still qualify for a mortgage.

Based on your debt-to-income ratio, you can now determine what kind of mortgage will be best for you.

  • FHA loans usually require your debt ratio to be 45 percent or less.
  • USDA loans require a debt ratio of 43 percent or less.
  • Conventional Home Mortgages usually require a debt ratio of 45 percent or less.

It's Not the Debt, It's the Risk

In any situation when a financial institution is considering giving you money, it all comes down to risk. How likely is it that you're going to pay that money back? If you've already got a lot of debt that could make it more difficult for you keep up with new loans or lines of credit. It's all part of the complicated calculations lenders need to make when considering your application.

When applying for a mortgage, lenders will look at your application with three priorities:

  1. Debt-to-income ratio
  2. Credit score
  3. Assets (if you need them for a down payment)

Your unsecured debt (credit card debt) plays a big role in how much a lender is willing to write a mortgage for. If your unsecured debt is $250 a month, it could reduce your potential purchase price by approximately $50,000. $500 a month could reduce your potential purchase price by around $100,000.

In other words, you can have unsecured debt, but the more unsecured debt you have, the less a lender may be willing you give you to buy your new home.

Take Steps to Improve Your Odds with Lenders

To improve your chances of getting a mortgage, or even just getting a better interest rate, there are a few things you can do.

A lender may even ask you to roll your debt into your mortgage. This will reduce your overall debt-to-income ratio and possibly even lower your interest rate, but keep mind that your new home will now be collateral for that debt and defaulting on it could mean foreclosure. If a lender does ask you to do this, you may want to take some time to think about it and determine if you can hold off on getting a mortgage until you’ve paid down your debt.

One last factor to keep in mind is your it will lower your credit score and your chances for a mortgage.

When it comes to applying for a mortgage, some credit card debt is good, it shows you have credit and use it well. But too much credit card debt is bad because it shows you may not be responsible with your debt, which suggests you may struggle with your mortgage payments. Determine your debt-to-income ratio, review your credit score, and debt and budget counselor. Counseling is free and available 24/7.

Article updated July 2020

Tagged in Mortgages and foreclosure, Debt strategies

Emilie writes about overcoming debt, while balancing trying to eat healthy, stay fit, and have a little fun along the way. You can find more of her work at BurkeDoes.com.

  • Better Business Bureau A+ rating Better Business Bureau
    MMI is proud to have achieved an A+ rating from the Better Business Bureau (BBB), a nonprofit organization focused on promoting and improving marketplace trust. The BBB investigates charges of fraud against both consumers and businesses, sets standards for truthfulness in advertising, and evaluates the trustworthiness of businesses and charities, providing a score from A+ (highest) to F (lowest).
  • Trustpilot Trustpilot
    MMI is rated as “Excellent” (4.8/5) by reviewers on Trustpilot, a global, online consumer review platform dedicated to openness and transparency. Since 2007, Trustpilot has received over 116 million customer reviews for nearly 500,000 different websites and businesses. See what others are saying about the work we do.
  • Consumer Federation of America Consumer Federation of America
    MMI is a member of the Consumer Federation of America (CFA), an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • Department of Housing and Urban Development Department of Housing and Urban Development
    MMI is certified by the U.S. Department of Housing and Urban Development (HUD) to provide consumer housing counseling. The mission of HUD is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD provides support services directly and through approved, local agencies like MMI.
  • Council on Accreditation Council On Accreditation
    MMI is proudly accredited by the Council on Accreditation (COA), an international, independent, nonprofit, human service accrediting organization. COA’s thorough, peer-reviewed accreditation process is designed to ensure that organizations like MMI are providing the highest standard of service and support for clients and employees alike.
  • National Foundation for Credit Counseling National Foundation for Credit Counseling
    MMI is a longstanding member of the National Foundation for Credit Counseling® (NFCC®), the nation’s largest nonprofit financial counseling organization. Founded in 1951, the NFCC’s mission is to promote financially responsible behavior and help member organizations like MMI deliver the highest-quality financial education and counseling services.