The amount of credit card debt you have affects your chances of getting approved for a mortgage loan. Having too much debt can lower your credit score and increase your overall debt-to-income ratio – both outcomes make you less qualified for a loan.
Lenders are concerned with your total debt load, and they will either turn you down altogether or you might get approved with a higher mortgage rate.
From a lender’s perspective, your credit score is an indicator of how much risk you bring to the table. Credit scores hugely depend on your borrowing history.
The credit utilization ratio is largely based on your card limits and it is among the top two factors that influence your credit score. This ratio is the differentiation between your credit card limit and the amount that you are actually using. If you frequently hit, or nearly reach, your credit card limit, then it will indicate a high utilization ratio.
Debt-to-Income Ratio (DTI)
The most common question is: How much debt is too much?
If your total debt adds up to 50% of your monthly gross income, then you definitely are in too much debt and will have trouble qualifying for a loan. It’s all about the debt to income ratio – which is the comparison between the amount of money you pay for liabilities and the money you earn on a monthly basis.
Typically, it will be challenging to get a mortgage approval if your DTI ratio is above a certain level. Fifty percent is the common limit. It implies that your combined debt load – including the mortgage payment – uses more than 50% of your gross monthly income.
Ultimately, debt can either make or break your chances of getting approved for a mortgage loan. But it all boils down to how you manage your debt.