Houston Homebuyers: Should You Pay Off Your Credit Card First?

If you’re a first-time homebuyer in Houston, having credit card debt should not stop you from purchasing a new home. Even better is paying down your credit card debt to decrease your debt-to-income ratio (DTI) and boost your credit score. A good credit score may help you qualify for a home mortgage and potentially give you a lower interest rate.

Deciding whether to pay off your credit card debt before purchasing a home depends on many factors, like how much debt you owe, your available savings, and your income. Several guidelines can help you make the right decision. Here’s what you need to consider before you proceed.

How Does Credit Card Debt Affect Your Credit?

Paying off your credit card debt can boost your credit because you’ll be using less of your available credit, which decreases your credit card utilization. Your credit card utilization accounts for 30% of your FICO score, showing lenders that you’re in control of your spending habits. An exceptional credit score is always good for getting a desirable interest rate. 

Suppose you have a credit score of at least 670 and qualify for a private mortgage (the minimum credit score requirement for FHA loans is 580). In that scenario, you can typically purchase a “point” for an additional one percent of the mortgage value to decrease the interest rate from 3 percent to 2 percent. In the long run, it could be a good investment.

Speaking of credit scores, if you want to know what credit score is needed to get a home loan, you’ll need at least 620 to qualify for a home loan. 

When is Paying Off Credit Card Debts a Great Idea?

In many instances, paying down credit card debt is the right move. You’ll be able to lower your debt-to-income ratio and, hopefully, boost your credit score and qualify for a desirable interest rate on your loan.

You can compute your DTI by adding all your current monthly debt obligations, including your likely loan payments, and dividing them by your monthly pre-tax income. The ideal debt-to-income ratio — which will grant you access to the most desirable loan terms — is 36% or lower. Certain types of loans have more lenient DTI requirements, but you should still try your best to keep your DTI less than 43%. 

Key Takeaways

One of the ways to get in an advantageous position to take on a home loan is by paying off your credit card debt. Paying off your debt has plenty of benefits, such as lowering your DTI & improve your credit score. 

Credit card debt shouldn’t prevent you from purchasing the house of your dreams, and it shouldn’t be an ongoing obligation holding your budget down, either.

If you’ve paid down your debt and are ready to apply for a home loan, call or message our mortgage brokers for more information. 

Reliance Financial Group can help you realize your dream of homeownership and reduce the stress in the homebuying process.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.