Getting a mortgage these days can be tough, particularly as housing prices and mortgage rates continue to remain elevated. Plus, there are plenty of hoops to jump through when you apply for a mortgage, including undergoing the mortgage stress test, coming up with a sizable down payment, and having a healthy income.
But in addition to all that, there are lesser-known factors that could impact your ability to secure a mortgage, including the credit limit on your credit card.
How Does Credit Card Debt Affect Mortgage Approval?
Your debt-to-income ratio is an important factor lenders use when approving mortgages. Lenders won’t just look at your credit card debt when assessing your ability to secure a mortgage. Instead, they’ll look at your debt relative to your income to see how much you have available to pay your current bills. This will give them a better idea of how much income will be left over to comfortably cover mortgage payments.
When calculating your debt-to-income ratio, lenders will consider all types of debts including credit card debts. According to the CMHC, lenders should factor in a monthly payment of 3% or more of your credit card balance when calculating your DTI. While each lender may have their own specific requirements, the general consensus is that this ratio should not exceed 44%. Anything higher than this level could make it more difficult for you to afford a mortgage and may paint you as a riskier borrower.
Does Your Credit Card Limit Affect Mortgage Approval?
Does your credit card limit affect mortgage approval?
Interestingly, your lender may look at your credit card limit when considering how much you may be approved for on a mortgage. A very high credit limit might be viewed by your lender as a potential risk, as there’s the temptation for you to spend more against your available credit. Lenders may calculate your borrowing power based on the possibility that you may spend up to your credit limit at any time, even if you have no intentions of doing so
As such, some lenders may consider your credit card limits when determining how much to lend to you. In some cases, it may affect your mortgage approval. However, generally, this will usually only affect you if your total credit card limits combined are significantly higher compared to your income.
How To Stop Your Credit Card Debt From Affecting Your Mortgage Application
Debt plays a major role in your ability to secure a mortgage. Not only can it pull your credit score down, but it can also reduce your borrowing power. The more debt you have on your plate, the more difficulty you may have in juggling an additional bill payment in the form of a mortgage.
If your credit card debt is getting in the way of securing a mortgage, consider taking the following steps:
Pay Down Your Credit Card Debts
One of the first things you should do is pay down your credit card balances. Carrying a balance from one month to the next is not only very expensive given the high interest rates that come with credit cards, but it can also negatively affect your credit score.
Paying off your balances can improve your credit score and increase your borrowing power. The less debt you have, the better your chances of getting approved for a mortgage. Plus, you may be able to secure a higher mortgage amount if you’re carrying less credit card debt.
Consolidate Your Credit Card Debts
If you carry outstanding balances on multiple credit cards, consider consolidating this debt into one credit card or loan, preferably at a lower interest rate. Not only can this help simplify your finances, but it can also help you save money in interest.
One way to consolidate your debt is to take out a debt consolidation loan. The money from this loan can be used to pay off all your high-interest credit card debt. If you can snag a much lower interest rate on this loan, you can potentially save hundreds or even thousands of dollars in interest payments.
Alternatively, you may consider taking out a balance transfer credit card that offers a low or 0% interest promotional period. You can then transfer your current balances to a lower interest rate. During the introductory period, your payments will go towards paying down the principal instead of interest.
Reduce Your Credit Card Limits
As mentioned, very high credit card limits can reduce your borrowing power when you apply for a mortgage. To offset this, consider having these limits reduced.
Some lenders consider minimum monthly payment amounts relative to your credit card limit, which means a lower credit limit translates into lower minimum payment amounts. This matters when lenders crunch the numbers to determine your financial strength and borrowing power. So, you may want to have your credit limits lowered to boost your borrowing potential on a mortgage.
Use Your Credit Card Responsibly
No matter what your credit card limit is, always keep your expenditures far from the limit and pay your bills on time, preferably in full. This shows lenders that you’re financially responsible and likely capable of managing mortgage payments.
Other Ways Credit Cards May Affect Your Mortgage Application
Credit cards can impact your credit health and your ability to secure a mortgage in other ways besides a high credit limit:
Credit Card Applications
Applying for a new credit card could result in the creditor pulling your credit report to verify your creditworthiness. This is known as a “hard inquiry“, which can knock a few points off your credit score. However, this is usually temporary, and your credit score should bounce back shortly after, as long as you continue to be responsible with your finances.
Debt-To-Credit Ratio
It’s also important to consider your debt-to-credit ratio, whether your credit limit is high or not. This ratio also known as your ‘credit utilization ratio‘, represents how much of your available credit you spend. The more credit you use, the higher your ratio, which in turn may have a negative impact on your credit score. Ideally, keeping your ratio below 30% would be best.
For instance, spending $7,500 with a $10,000 credit card limit will give you a credit utilization ratio of 75%, which is generally considered to be high. It’s best practice to keep your debt-to-credit ratio to no more than 30%. Anything higher than this may affect your ability to get a mortgage. And if you can get approved, you may be stuck with a higher rate to offset the lender’s risk.
Final Thoughts
When it comes to getting a mortgage, you need to make sure that all aspects of your financial and credit profile are strong. But while it may be more obvious that you’ll need a good income, minimal debt, and a decent down payment, you might also want to consider the credit limit on your credit card. If you’re looking to tip the odds in your favour, not only should you make sure your credit card expenditures are low, but you may even want to consider reducing your credit limit. Speak to your mortgage lender to see what exactly you need to do to boost your odds of loan approval.
