This 1 Move Could Boost Your Credit Score and Help You Qualify for a Mortgage
- There are different factors mortgage lenders look at when evaluating applicants.
- Paying off credit card debt could make it easier to get a mortgage for multiple reasons.
Buying a home? There's one financial move that could benefit you a lot.
Most people can't afford to pay for a home outright. That's why they take out mortgages. If you're worried about qualifying for a home loan, you should know that paying off some existing credit card debt could be your ticket to getting approved, and at a favorable mortgage rate. Here's why.
A dual impact
There are different factors that mortgage lenders look at when determining whether you qualify for a home loan, and the rate you're eligible for. And two of the biggest factors are your credit score and your debt-to-income ratio.
Your credit score is a measure of how responsible a borrower you are. If you have a strong history of paying bills on time and not carrying too much debt, it'll reflect favorably on you. But the lower your credit score, the more hesitant a lender may be to take a chance on you (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 goes toward debt obligations. A lower ratio indicates that you're not overextended, while a higher one could be a red flag that you already have too much debt and can't afford to take on another loan.
If you're gearing up to apply for a mortgage and have debt on your credit cards, paying it off could benefit you in two ways. First, one factor that goes into calculating your credit score is your credit utilization ratio, or the amount of available revolving credit you're using at once. If you pay down some credit card debt, that ratio should shrink and your score should improve.
Meanwhile, if you pay off some of your credit card balances, you won't owe as much money on a monthly basis. And that could, in turn, result in a lower 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 that regard.
First, you could simply pay off that debt in order of highest interest rate credit card to lowest. Or, you could consolidate your debt with a balance transfer. To do so, you'll generally need a decent credit score to begin with. But if you qualify, you can move your various credit card balances onto a single card with a lower interest rate, making it less expensive to pay off. You may even qualify for a credit card with a 0% introductory rate.
Increase your chances of getting a mortgage
The amount of credit card debt you have isn't the only factor that will impact your mortgage application. But the less you have, the better your chances of getting approved for a home loan.
Besides, paying off credit card debt will help you avoid racking up costly interest on your outstanding balances. And when you're taking on the expense of owning a home, every little bit of savings really helps.
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