You can buy a house with credit card debt. However, they will want the minimum payment amount for each debt. Then they will look at your income per month and determine your debt to income ratio. If it's over a specific threshold it could make it harder. I would focus on paying off as much debt as you can first.
High-interest credit card debt can devastate even the most thought-out financial plan. U.S. consumers carry $6,501 in credit card debt on average, according to Experian data, but if your balance is much higher—say, $20,000 or beyond—you may feel hopeless.
To be clear, credit card debt doesn't bar you from applying for a mortgage, and credit cards can help establish and build your credit history. The key is to make payments promptly and avoid charging too much against your credit limit, a factor known as credit utilization.
Can you get a mortgage with student loans? It's not uncommon for a first-time home buyer to have anywhere from $30,000 to $100,000 in student loan debt and still qualify for a mortgage, Park says.
What's a good debt-to-income ratio? Ideally, your front-end HTI calculation should not exceed 28% when applying for a new loan, such as a mortgage. You should strive to keep your back-end DTI ratio at or below 36%.
If you make $3,000 a month ($36,000 a year), your DTI with an FHA loan should be no more than $1,290 ($3,000 x 0.43) — which means you can afford a house with a monthly payment that is no more than $900 ($3,000 x 0.31). FHA loans typically allow for a lower down payment and credit score if certain requirements are met.
Now that we've defined debt-to-income ratio, let's figure out what yours means. Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high. The biggest piece of your DTI ratio pie is bound to be your monthly mortgage payment.
If you have credit card debt, you may find that some lenders will still consider your application because of these other factors. They'll also look at your debt-to-income ratio, which is the proportion of debt that you have in relation to your income.
Your home provides security to the lender that you would pay back the debt. If you owe money for most other debts like credit cards and medical bills, you (usually) did not sign a security agreement. So, the creditors cannot seize your home to pay the debt.
Running up $50,000 in credit card debt is not impossible. About two million Americans do it every year. Paying off that bill?
If your result is less than 36%, your debt load is affordable, according to NerdWallet. If it's between 36% and 50%, consider taking action, such as consulting a nonprofit credit counseling service, to reduce your debt. 50% or more is “high risk,” NerdWallet says and suggests getting advice from a bankruptcy attorney.
If you only make the minimum payment each month, which is typically around 1% of the balance plus interest, here's what you can expect: Time to pay off: Approximately 421 months.
Assessing loan and credit costs
The Rule of 72 is also helpful in evaluating the impact of compounding interest on debt. A credit card debt with an 18% annual interest rate will double in just four years (72 ÷ 18 = 4).
At the close of 2019, the average household had a credit card debt of $7,499. During the first quarter of 2021, it dropped to $6,209. In 2022, credit card debt rose again to $7,951 and has increased linearly. In 2023, it reached $8,599 — $75 shy of the 2024 average.
A DTI of 43% is usually the highest ratio that a borrower can have and still get qualified for a mortgage; however, lenders generally seek ratios of no more than 36%. A low DTI ratio indicates sufficient income relative to debt servicing, and it makes a borrower more attractive.
Mortgage lenders don't use credit card usage against you directly; however, they do if it affects your credit score or DTI, or shows irresponsible use of your finances.
$5,000 in credit card debt can be quite costly in the long run. That's especially the case if you only make minimum payments each month. However, you don't have to accept decades of credit card debt.
There is no set amount that lenders will consider too much credit card debt for you to have. They will instead look at your debt to income ratio to be sure that you will be able to comfortable afford both your repayments of your debts and your mortgage.
Mortgage lenders want to see a debt-to-income (DTI) ratio of 43% or less. Anything above that could lead to the rejection of your application. The closer your DTI ratio is to that percentage, the less favorable your mortgage terms are likely to be. A Home Purchase Worksheet can help you determine your DTI ratio.
To afford a $700,000 house, you typically need an annual income between $175,000 to $235,000, depending on your financial situation, down payment, credit score, and current market conditions. However, this is a general range, and your specific circumstances will determine the exact income required.
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance.
A loan is considered jumbo if it exceeds the maximum loan limits for Fannie Mae and Freddie Mac conforming loans—currently $766,550 for single-family homes in most parts of the U.S. but up to $1,149,825 in certain more expensive areas.