Will Credit Card Debt Affect My Mortgage Application?

The short answer is: YES.

Credit card debt will appear on your credit bureau so the banks will see it. How will credit card debt affect my mortgage application? In a few different ways: it will influence your credit score for sure. Credit card debt that has been paid well and whose balance is well below the limit will actually help your credit score. It shows that you pay your bills. However, the balance will indicate to the bank that some of your monthly income must be allocated to the credit card debt. That results in less disposable income. Thus, you will qualify for a lesser mortgage amount.

How Will Credit Card Debt Affect My Mortgage Application Positively?

As long as you keep outstanding balances low, it can be useful or even necessary to use credit cards. Banks want and need to see that you are responsible with your money. Often times we will have clients who think they have good credit because they don’t have any loans. The opposite is true. If you don’t use credit, you will have bad or non-existent credit. When our clients have bad credit and can’t even get a credit card, sometimes we will even advise them to get a pre-paid one. There is no risk to the bank so they are happy to provide them and they help our clients rebuilt their credit.

How Will Credit Card Debt Affect My Mortgage Application Negatively?

You don’t decide if you can afford a mortgage; the bank does. If they see credit card debt (unsecured debt), they reduce your disposable monthly income by an amount equal to 3% of the balance of the of the debt. In other words, if you have $10,000 worth of debt, they will take your monthly income and reduce it by $300. The remaining income will be used to qualify you for a mortgage. So you might be making minimum interest only payment, but that’s not the payment they look at!

The Bottom Line

Make sure you have credit cards and that you use them strategically. It is easy to let them get out of control but managed well, they can help you qualify for a mortgage.

Robert Floris is a Mortgage Broker. His office is located at 651 Fennell Avenue East in Hamilton, Ontario. If you would like to speak with Robert, he can be reached at 905-574-9200 #215. Alternatively, you can contact Robert here.

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