How Much Credit Card Debt Is OK When Buying a Home?

Credit card debt is a common financial obligation. Its amount and management can significantly influence major financial undertakings, such as securing a home mortgage. Lenders carefully assess a borrower’s financial health to determine their ability to repay a home loan. Understanding how this debt is viewed by mortgage lenders is important for prospective homebuyers.

Credit Card Debt and Your Credit Score

A credit score provides a numerical summary of your creditworthiness, and it is a significant factor mortgage lenders consider when evaluating loan applications. Lenders use this score to determine both your eligibility for a mortgage and the interest rate you will receive. A higher credit score signals a lower risk to lenders, potentially leading to more favorable loan terms.

Credit card debt directly influences your credit score, primarily through credit utilization. This ratio measures the amount of credit you are currently using compared to your total available credit. For instance, if you have $5,000 in credit card debt and a total credit limit of $20,000, your credit utilization is 25%. Maintaining a low credit utilization ratio, ideally below 30%, is recommended for a healthy credit score. High utilization can indicate financial strain to lenders, potentially lowering your score and making you appear riskier.

Other aspects of credit card management also contribute to your credit score. Your payment history, which tracks whether you make payments on time, is the most impactful factor, accounting for about 35% of your FICO score. The length of your credit history, the types of credit accounts you have, and recent applications for new credit also play roles in determining your overall score. Lower credit scores can result in higher interest rates on a mortgage or even lead to loan denial.

Credit Card Debt and Your Debt-to-Income Ratio

Beyond your credit score, mortgage lenders also scrutinize your Debt-to-Income (DTI) ratio, a measure that compares your total monthly debt payments to your gross monthly income. This ratio helps lenders assess your capacity to take on additional debt, such as a mortgage, while still managing your existing financial obligations. A lower DTI ratio indicates a reduced risk for lenders.

To calculate your DTI ratio, you add up all your recurring monthly debt payments, including minimum credit card payments, student loans, and car loans. This total is then divided by your gross monthly income, which is your income before taxes and other deductions. For example, if your total monthly debt payments are $1,000 and your gross monthly income is $4,000, your DTI ratio would be 25% ($1,000 / $4,000). It is important to note that only the minimum required payment for credit cards is included in this calculation, not the full outstanding balance.

Lenders consider two types of DTI: front-end and back-end. The front-end DTI focuses solely on housing expenses, including the proposed mortgage payment, property taxes, and homeowners insurance. The back-end DTI incorporates all monthly debt payments, including housing costs, credit card minimums, and other loans. A higher DTI ratio suggests that a significant portion of your income is already allocated to debt, which can make mortgage approval more challenging.

Mortgage Qualification Thresholds

There is no fixed dollar amount of credit card debt that is universally considered “okay” when buying a home. Instead, lenders evaluate how that debt impacts your credit score and debt-to-income ratio, which are the primary metrics for mortgage qualification. The acceptability of credit card debt depends entirely on its effect on these two financial indicators.

Credit score requirements vary by loan type. For conventional mortgages, a minimum FICO score of 620 is required. Government-backed loans like FHA loans may allow scores as low as 500 with a 10% down payment, or 580 with a 3.5% down payment. VA loans require a credit score of 620. Achieving a higher credit score, 670 or above, can lead to better interest rates and more favorable loan terms.

DTI limits also vary, but lenders prefer a back-end DTI ratio of 36% or lower for conventional loans. FHA loans have a maximum DTI of 43%. Exceeding these thresholds due to credit card payments can significantly hinder mortgage approval. Even if minimum thresholds are met, a lower credit card debt burden, leading to a better credit score and DTI, results in more attractive mortgage offers and lower interest rates over the life of the loan.