How Does Credit Card Debt Affect Getting a Mortgage?

If you’re feeling unsure about how credit card debt could change your chances of getting a mortgage, this article is for you. Every month, over 170,000 people come to our site for help with worries just like yours. This guide will help you understand:

• How credit card debt might change your mortgage plans.
• What mortgage lenders look at when they see your application.
• The rules that mortgage providers must follow.
• How much credit card debt can change your application’s success.
• Other kinds of debt and how they might affect your application.

We know that dealing with credit card debt can be hard, and it can feel even harder when you’re not sure how it might change your plans for a mortgage. We understand your worries and are here to help you understand the process and make the best choices for your situation.

Let’s dive in.

What Factors do Mortgage Lenders Look at when Reviewing a Mortgage Application? 

If you have credit card debt, this could affect your chances of getting approved, as an outstanding credit card balance indicates to a lender that you’re having financial difficulties.

Of course, they’re going to be apprehensive about giving you a mortgage loan if they feel you’ll have difficulty paying them back.

However, this isn’t the only factor they’re going to be looking at.

One of the factors they will look at is your monthly income. This not only includes your monthly salary but all other forms of income as well, such as money you may be getting from investments or properties you may have rented out. 

This will help them get an estimate of how much money you receive on a monthly basis.

Once they have information about how much you earn, they will start looking at your monthly expenditures. This includes your basic living costs as well as any monthly payments you’ve been making towards the outstanding balance on your credit card.

Always remember that if you’re making regular payments towards your credit card debt, this will work favourably towards your chances of having your mortgage approved.

Once a lender has a rough estimate of your monthly income as well as your monthly expenditure, they will run what’s called an ‘affordability assessment’.

This will help them determine how much you can afford to pay back towards your mortgage loan every month.

They will also ‘stress test’ this by estimating if you’ll be able to handle the mortgage monthly payments if the interest rate were to increase or if your monthly income were to decrease, etc. 

Your debt-to-income ratio is also something that a lot of lenders will look at.

Your debt-to-income ratio, as the name suggests, looks at how much of your income goes towards your debt. The lower this ratio, the higher the chances that a lender will approve your mortgage application. 

Another thing that lenders will consider is your credit utilisation rate. This is the amount of credit you are using compared to the amount of credit that is available to you.

You want your credit utilisation rate to be as low as possible (below 30%). 

You must also keep in mind that too many rejected credit applications also reflect poorly on a lender assessing your application.

A high number of rejected credit applications may suggest to lenders that you’re in serious financial trouble or that you’re often not punctual with your payments.

For this reason, I always suggest that you do your research and apply to mortgage providers carefully. You should always apply to mortgage providers where you feel there’s a high chance that your application will be approved.

This is because, as I mentioned above, too many rejected applications may drop you down into a hole from where it could be very difficult to get out of. 

Legal and regulatory framework for mortgage providers

The legal and regulatory framework governing mortgage lending in the UK is stringent and is designed to protect both consumers and the financial system. The Financial Conduct Authority (FCA), the regulatory body in the UK, sets out guidelines and regulations that lenders must adhere to when considering mortgage applications to ensure fair, transparent, and responsible lending.

Lenders must also bear in mind that customers have the right to refer their complaints to the Financial Ombudsman Service if they feel they have been treated unfairly, and therefore, all processes, decisions, and documentation should be robust, fair, and transparent to stand up to potential scrutiny.

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How much Influence does Credit Card Debt have on the Success of an Application? 

Obviously, having debt has a negative impact on your chances of securing a mortgage. All types of debt show up on your credit history and bring down your credit rating.

However, what’s more important is the type of debt you have and the circumstances surrounding the debt.

The types of credit cards you have, as well as the outstanding balance on each of these credit cards, could have a major effect on your chances of getting a mortgage. 

Oftentimes, the most important factor is the circumstances leading up to how you accumulated your credit card debt.

Lenders are more favourable towards you if you can pinpoint a significant event that caused you to end up in so much debt, such as an accident or an illness.

They will be more understanding if this is the case, especially if you tell them what you’re doing to take care of the credit card debt in the present as well. 

Of course, mortgage lenders will not be favourable towards you if you accumulate debt only because of reckless spending. 

Other types of debt

In the UK, lenders scrutinize your credit history and various types of debts to ascertain your financial management skills and repayment capacity when evaluating your mortgage application. Here’s how credit card debt is perceived in comparison to other types of debt:

Student Loans:

• Perception: Generally, student loans are viewed somewhat differently than other debts because they are seen as an investment in your future and are often not required to be paid back until a certain income threshold is met.
• Impact on Mortgage Application: Lenders might be more lenient towards student loans in comparison to credit card debt. The monthly repayments will be considered during the affordability check, but it’s often not viewed with as much concern unless repayments are missed.
• Lender’s Consideration: As student loan repayments are typically deducted directly from your salary (once you’re earning above a certain threshold), they are considered more stable and less risky in comparison to credit card debt.

Personal Loans:

• Perception: Personal loans, especially if used for appreciating assets or value-building purposes like home improvement, are considered more favourably than credit card debt used for consumption.
• Impact on Mortgage Application: A personal loan with consistent, on-time payments can reflect well on your credit report. However, missing payments or defaulting will substantially impact your mortgage application negatively.
• Lender’s Consideration: The purpose of a personal loan and the regularity in repayments is crucial. If it’s utilised wisely and being paid back responsibly, lenders may view this as responsible financial management.

Comparative Impact on Mortgage Applications:

1. Debt-to-Income Ratio: Regardless of the type of debt, lenders assess your Debt-to-Income (DTI) ratio, which indicates the portion of your income consumed by debt repayments. A lower DTI is preferable as it suggests a balanced financial condition.
2. Payment History: Consistency in repaying any kind of debt is crucial. Lenders typically look for patterns in your payment behaviour to gauge your reliability in adhering to repayment schedules.
3. Total Outstanding Debt: While the type of debt is significant, the total outstanding debt across all categories will also be thoroughly evaluated to understand your overall financial stability and obligations.
4. Your Intent and Management: The purpose behind acquiring and managing various debts also informs lenders about your financial decision-making and management skills.

In a nutshell, while each debt type is perceived differently, the underlying theme is that lenders seek assurance of your repayment capability and financial management.

Does My Credit Score Affect My Chances of Securing a Mortgage? 

Of course. When you apply for a mortgage, your credit score is one of the first things that a mortgage provider looks at.

As I mentioned earlier, having debt isn’t too big of an issue as long you’ve been making regular payments towards those debts each month.

Being punctual with your payments can actually boost your credit score by a lot.

Even if you have a poor credit score, you can explain to the mortgage provider why it’s in that state.

Again, as I mentioned earlier, if you can point to a specific event that caused it to become this poor, this will most likely work in your favour. 

Let’s take a look at some of the credit score bands:

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What are Some Things I can Do to Improve My Chances of My Application being Approved? 

Before applying for a mortgage, here are some things you should definitely think about doing: 

Pay Your Credit Card Debt Entirely

If you can afford to pay off your credit card debt entirely, then you should definitely do so before looking for a mortgage.

You can also opt for a ‘full and final’ settlement offer if your credit card company agrees. 

Close any Credit Card Accounts You Don’t Use

As I briefly mentioned earlier, your credit utilisation rate is something that a mortgage provider will most certainly look at when trying to determine whether you should be approved or not.

Having multiple credit cards, even if you’re not using them, increases your total credit limit across all of your credit cards. 

This can have a very negative impact on your mortgage application.

Thus, when you’re looking for a mortgage with credit card debt, it’s a good idea to close any unused accounts you may have and keep your outstanding balance low on the ones you’re using. 

Minimise Your Monthly Spending 

As I mentioned earlier, lenders will look at your monthly expenditures when reviewing your request.

Thus, it’s a good idea to set a strict budget for yourself and stick to it in the months leading up to your review.

Remember that lenders will ask for your bank statements in order for you to prove your monthly expenditures.

Pay More than the Minimum Deposit 

If you can afford it, you should pay more than the minimum initial deposit for your property. This will definitely act in your favour and raise the chances of you being able to secure a mortgage. 

Expert Advice and Resources

For more information on what you can do to improve your chances, you can visit an independent debt charity such as StepChange or National Debtline. Organisations like Shelter or Citizens Advice offer advice and support for individuals looking to buy a home, including helping them understand and navigate the various schemes and initiatives available.