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Credit Cards and Mortgage Applications
Sometimes, it is almost unavoidable to run up credit card debt and accrue commitments throughout the course of your life. It is especially true when you might believe that carrying debt will put you in an unfavourable light to lenders when applying for a mortgage. But in reality, mortgage lenders will look at various factors when analysing your mortgage application, including examining the type of debt you have, the circumstances around it and an overview of your financial history and, of course, your current financial status.
With mortgage applications, most lenders will evaluate the credit file, and the credit score of the applicant; as checking the credit file will reveal how well the applicant manages any credit. It is important to the lender to consider applicants with ongoing credit commitments whether it is unsecured or secured debt, as it affects the success of the mortgage application.
So those with credit card commitments are open to direct impacts such as affordability and how well your finances undergo financial stress. Using the previous 72 months of the applicant’s credit history, lenders will associate a credit score to the applicant. The applicant will then undergo an evaluation which will detect trends, such as credit usage, minimum payments only, balance transfer rollovers, etc. Although buyers can procure a residential property while in debt, it all depends on what percentage of your monthly income goes towards repaying the minimum amounts due to recurring debts like credit card bills, student loans or car loans.
Banks will also consider other principal factors including an individual’s debt-to-income ratio’. It is calculated by how much your accrued debt is, as a percentage of your income. So lenders will oversee and consider an individual’s debt-to-income ratio; however, the level that the ratio is accepted at varies from lender to lender.
An example of calculating debt-to-income ratio would be saying your debts each month are:
- £1000 on your mortgage
- £200 on your car loan
- £300 on your credit card
Then your monthly debts will come to a total of £1500. So if your gross income is £4000 per month, your debt-to-income ratio is 37.5% (£1500 / £4000 x 100 = 37.5%)
Most lenders will not approve you for a mortgage if your debt-to-income ratio exceeds 43%. But the general trend is that the lower your debt-to-ratio is, your chances of a successful mortgage are likely to increase, so it is more favourable to the potential borrower.
It is important to be pre-prepared before applying for a mortgage application. If you have any ongoing credit card commitments, it is best to pay your debt to improve your debt-to-income ratio and credit utilization rate. When consulting a mortgage broker, it is also essential that you are upfront about any loans, this can include student loans, etc., as some mortgage lenders as it is key in their financial assessment of you.
If you are still finding it difficult to procure a mortgage deal due to your credit commitments, specialist lenders may be a better suit of choice. Despite offering higher interest rates on their mortgages, they are more flexible on affordability assessments. But it is always to consult a mortgage broker before embarking down such an avenue.
About the Author
Almas lives in Essex and the owner of Expert Mortgage Brokers London. He loves to update people regarding mortgage and finance.