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Getting a Mortgage with Credit Card Debt

Credit card debt can make getting a mortgage more difficult, but certainly not impossible. Mortgage lenders look at numerous factors when looking over your application, so any debt you have won’t necessarily ruin your chances of getting a loan. There are things you can do that can improve your mortgage application. These will be discussed below to give you the best chances of successfully securing a loan.

In this guide:

What factors do lenders consider when I apply for a mortgage?

Unfortunately, credit card debt can imply to mortgage lenders that you may be in financial difficulty. From their point of view, there could be a risk that you will struggle to repay your loan so they will need to thoroughly review your credit history.

They will look at your income, which includes your wage but also extra income from things like investments and rental properties. Any company will require a regular monthly income so they can be guaranteed your monthly repayments. From your income information, they make affordability calculations to see how much you would feasibly be able to pay towards your mortgage each month.

In these affordability calculations, they will take into account how much of your debt you have managed to repay and whether these repayments were made on time. Your debt repayments and your spending each month will be compared to your income and this will allow your lender to determine how much you can borrow.

Your debt to income ratio is also considered - this is the amount of debt you have compared to the amount you earn. The lower this ratio is, the lower the proportion of your income is debt. Therefore, the more likely the lender is to let you borrow money.

However, bear in mind that too many rejected credit applications can mean you are more likely to be refused credit in the future. Lenders may think there is a risk that you are in serious financial trouble if other companies have rejected your application already.

How will my debt affect my mortgage application?

The amount and type of debt you have is important, as well as the reasoning behind why you have built up the debt and how you have dealt with your debt so far. The types of credit cards you have and how much debt you have accumulated on each one could affect the success of your loan as some types of loans or debts are lower risk than others.

Often the most important factor in your application is how you accumulated the debt in the first place. It is likely that they will be more lenient of debt acquired due to a significant event that needed urgent payment such as car repair after a breakdown. But if it was due to careless spending on non-essential things, then banks are less likely to trust that you will be able to make repayments on time.

Will my debt affect how much I can borrow for my mortgage?

When affordability calculations are made, most lenders will presume that you can pay back around 3-5% of your credit card debt each month. They will consider the repayment amount on your credit card debt when they calculate how much you will be able to pay towards your mortgage each month.

The lender will want you to feel comfortable about being able to afford your mortgage payment each month. Therefore, if you have lots of credit card debt and your monthly expenses are high, your loan is likely to be smaller.

From the affordability calculations, they will work out your loan to income ratio. Your income will be multiplied by a certain amount to determine the amount to lend you. It can be multiplied up to a maximum of 4.5 times, so if your income is £25,000 then the maximum loan you could possibly obtain is £112,500.

Bear in mind that if you apply for your mortgage with another person, it can increase the amount you can borrow due to your joint income. However, if they are in debt too then this can negatively impact your application.

Is there anything I can do to boost my mortgage application?

Offer to repay your debt in full before you buy your property (if you can)

If you know you will be able to afford to pay back your debt before you buy your property, then some banks may consider this in your affordability calculations. They will often disregard this, as your promise to pay back your debt in full is no guarantee for them. However, there is a possibility they will subtract a certain amount from your total credit card debt to increase the amount you can borrow.

Close all your unused credit card accounts

The amount of credit you are using compared to the amount of credit available to you is important. You need your credit utilisation rate to be as low as possible - below 30% is ideal. Keeping multiple accounts open, even if they are not being used, increases your total credit limit across all your cards. This may negatively affect your mortgage application. Close any unused credit card accounts and keep the balances low on the ones you need to keep open.

And stay out of your overdraft!

Ensure all your repayments are made on time

Make sure you try to pay back your credit card repayments on time. This will raise your credit score and increase the likelihood of your mortgage loan being accepted. Even payments on utility bills and other outgoings are important. Consider setting up a direct debit to ensure the payments are always made on time.

Pay back more than the minimum monthly payment required, when you can. This way, your debt will be paid back faster, you will save money on future interest charges and your lender will be able to trust that you are capable of keeping up with payments. 

Start budgeting: minimise your monthly outgoings

Your spending will be thoroughly reviewed by your lenders. Try and set yourself a tight budget to stick to in the months before you apply as the lenders will likely ask you for bank statements to prove your outgoings.

Increase your deposit

Paying more than the minimum required deposit for your property will act in your favour. If you can borrow under the maximum loan offered for the value of your property, this can also boost your application.