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Most people cannot afford to pay for a house. That’s why they take out mortgages. If you’re worried about being eligible for a home loan, be aware that paying off some existing credit card debt could be your ticket to getting approved and at a great mortgage rate. Here’s why.
A double impact
Mortgage lenders look at different factors to determine if you qualify for a home loan and what rate you qualify for. And two of the most important factors are your credit rating and your debt-to-income ratio.
Your credit score is a measure of your degree of responsibility as a borrower. If you’ve already paid your bills on time and don’t have too much debt, it will do you good. But the lower your credit score, the more reluctant a lender may take a chance (and you need a minimum credit score of 620 to qualify for a conventional mortgage).
Meanwhile, your debt-to-income ratio measures how much of your monthly income is spent on debt. A lower ratio indicates that you are not overloaded, while a high ratio could be a red flag that you already have too much debt and cannot afford another loan.
If you are preparing to apply for a mortgage and have debt on your credit cards, there are two ways you can benefit from paying off. First of all, a factor that goes into calculating your credit score is your credit utilization rate, or the amount of available revolving credit that you are using at a time. If you are paying off some of your credit card debt, this ratio should decrease and your score should improve.
Meanwhile, if you are paying off some of your credit card balances, you won’t owe that much money on a monthly basis. And that could, in turn, lead to a drop in the debt-to-income ratio.
The Best Way To Pay Off Credit Card Debt
Getting rid of credit card debt could be your ticket to getting a mortgage. And there are several approaches you can take in this regard.
First, you can simply pay off that debt in order from the highest to lowest interest rate credit card. Or, you could consolidate your debt with a balance transfer. To do this, you will usually need a decent credit score to get started. But if you qualify, you can transfer your various credit card balances to a single card with a lower interest rate, making repayment less costly. You can even benefit from a credit card with an introductory rate of 0%.
Increase your chances of getting a mortgage
The amount of your credit card debt is not the only factor that will affect your mortgage application. But the less you have, the better your chances of getting a home loan.
Additionally, paying off credit card debt will help you avoid accumulating costly interest on your outstanding balances. And when you cover the expense of owning a home, every little savings really goes.
A historic opportunity to potentially save thousands on your mortgage
There is a good chance that interest rates will not stay at multi-decade lows any longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger to buy a new home.
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