Buying a home is a bucket list item for many of us, but we often find it difficult to finance such a massive purchase. Especially if you have credit card debt — or no credit at all — you may struggle to convince a bank officer to sign on the dotted line.
Here, we answer a few questions relating to credit, credit card debt and mortgage loan applications.
Does my credit card balance affect my ability to get a favorable mortgage loan rate?
Yes. Depending on your bank, most mortgage loan officers will want to know that you have the assets/cash to pay off your outstanding credit card balance. If you don’t, you may be subject to a higher interest rate.
Worried that you won’t get a loan at all? This comes down to your credit history. Credit history is the largest factor in determining your credit score, so if you’ve paid off card balances in full for some time, you should be OK. But if you’ve historically defaulted on your credit card debt, you may have a more difficult time getting a loan.
Note: Most lenders will check your credit in the final stages, so don’t run up card debt right before your closing date. Even if you’ve already been approved for a favorable loan rate, this can cause the lender to cancel your loan or delay closing.
Will a lack of credit affect my future mortgage opportunities?
Maybe. This question is worth asking because, according to a recent study by Bankrate.com, 63 percent of young persons — ages 18 to 29 — do not have a credit card, compared with 35 percent of adults over 30.
There are ways for you to secure a mortgage loan even without credit. You can apply for a government-backed mortgage, or an FHA loan, designed for low income, first-time homebuyers. There is quite a bit of paperwork involved (you’ll have to prove that you’ve paid rent, bills, etc.), and you’ll most likely be required to put down a larger down payment than is required with a traditional loan — 20 percent down compared to as low as 3.5 percent down.
You could also ask someone with good credit to co-sign on a loan for you. If you don’t have any credit at all, the co-signer can help. Just make sure she understands that the payment of the loan will affect her credit report for years to come.
If you’d rather not ask a friend or family member to co-sign, and an FHA loan isn’t right for you, consider waiting six months to a year and start establishing good credit on your own. Keep your balance to less than 25 percent of your card’s limit and pay it off monthly.
What is the best way to pay off credit card debt?
There is no one right way; multiple approaches can prove effective. Consider consolidating your debt by transferring balances from your high-interest credit cards to a low-interest card. Be aware that transfers include fees, usually around 3 percent to 5 percent.
Then, control your spending. Cut out unnecessary purchases. Even the smallest savings (skipping your daily latte purchase, for example) can really add up.
Finally, pay more than your minimum fees. This will keep your credit score healthy, which can help you land a mortgage loan in the future.