When you are applying for a mortgage, you should make payment to your credit card debts first. There are certain reasons for this logic.
If you are carrying a large amount of credit card debts then there may be less chance of your home loan getting approved. Because before approving a home loan the lender will check your DTI or Debt To Income Ratio. The maximum the debt amount will be to the ratio of your income the less chance for you to get your home loan approved.
But the Debt To Income ratio is not the only important factor you should be concerned about before applying for a mortgage loan. There are other factors also.
You can have a detailed look at all the important factors you should know before applying for a mortgage.
First, take a look at the Debt-to-Income ratio
As we have discussed in the introductory paragraph, the lender can assume the risk factor from the DTI ratio before providing a home loan to a borrower. Because, if the debt amount of the borrower is too high then chances are the borrower can default on the loan amount.
Usually, the lenders follow a rule that the borrower can have a home loan if the DTI ratio is a maximum of 43% of the particular borrower.
So, a borrower who needs a home loan should repay some debt amount first, it will help the borrower to reduce the DTI (Debt To Income) Ratio.
Thus the borrower can qualify for a home loan with a favorable interest rate.
Secondly, you should be aware of the credit utilization ratio
Before approving a home loan, the lenders check the credit score. The credit score largely depends on the credit utilization ratio. The credit utilization ratio means you have utilized upto what percent of your credit limit.
Your credit score will be low if you borrow closer to your credit limit. Thus the chances of your getting approval for a home loan with a favorable interest rate will be less.
The strategy you have to adopt is to pay off at least a portion of your credit card debt. It will help you to make your credit utilization ratio low and you can get approval for a mortgage with a favorable interest rate.
Thirdly, paying off credit card debt will make the burden less on your monthly income
You have to remember one thing that your income is limited. You are managing your spending, your credit card debt payment within this income.
With the monthly mortgage loan payment, a new debt burden will be included in your income. Thus if you pay off the credit card debts, you will have less debt payment on your shoulder.
You can pay off the monthly home loan payment in a tension-free manner.
Why it is important to pay off your credit card debts before applying for a mortgage
When you are going to apply for a home loan, the lender will, first of all, check your credit score and the DTI ratio.
The interest rate of your home loan will depend on your credit score and the DTI ratio. Be it a secured loan or an unsecured loan, the most important factor is the interest rate.
The lower, the lender, will offer you an interest rate the quicker you can pay off the principal balance.
That is why it is important to pay off your credit card debt quickly when you are thinking about taking out a home loan. It will help you to improve your credit score and subsequently, you will get approval for the home loan with a favorable interest rate.
Not only your credit card debt, if you have any other loan burden you should try to pay it off also. You can search the internet regarding the right way to pay off debt. Thus you will be free from any unsecured debt burden.
You may have already understood that the lenders will check your affordability first before approving a home loan to you. Whether or not you can afford a home loan payment, your lender will come to know about it when they will check your credit score and DTI ratio.
So, when you can show an impressive credit score and DTI ratio to your lender, chances are you can get the home loan with a favorable interest rate. Thus it is important to pay off your credit card debt before applying for the mortgage.
Author Bio: Phil Bradford is a financial content writer and an enthusiast. He has expert knowledge about personal finance issues and he is a regular contributor of IAPDA. His passion for helping people who are stuck in financial problems has earned him recognition and honor in the industry. Besides writing, he loves to travel and read books.