Author Topic: Question regarding qualifying for a mortgage, with credit card debt  (Read 553 times)

Lmoot

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I currently have around $40k in credit card debt due to 0% APR promotions. I prefer to keep some of the debt, but also am looking to buy a condo within the next 6 months. I will likely pay off about half of it before applying for mortgages (leaving a 15-20k balance). Even with the minimum payments and a small mortgage on my first house (which I am not selling and is currently being rented out), I'd be within a reasonable DTI ratio for the price range I am looking in.

I am concerned about there being a lender bias against credit card debt vs other types of debt, but don't know if they take into account that I am not currently paying interest on it, since 0% APRs are not a new thing and are everywhere these days. I was wondering if anyone applying for a mortgage has had additional pushback or questions about credit card debt, or if it in anyway hindered the application process even if everything else checked out? Also, the only other debt I have is a $38,000 mortgage on the rental.

For anyone curious, much of the debt came from large expenses related to repairs on the rental property. But I also have wrapped many of my monthly expenses into it in the form of balance transfers, as an attempt to keep as much cash as possible on hand, and earning interest in savings/ CDs. Ideally when the big one ($10,000) comes due Nov 2020, I want to get a no fee balance transfer card (Chase Slate), and put it off for another year, essentially turning it into a 2+ year free loan. That's why at the very least, I don't want to pay that balance off early. I don't want to lose 2 years of 2.5% plus interest payments. Plus the security of having cash on hand, especially with 2 mortgages. Also, using funds to pay off debt before its due, would mean having to put of buying another property for even longer than I have.
« Last Edit: August 28, 2019, 03:57:35 AM by Lmoot »

Sibley

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Re: Question regarding qualifying for a mortgage, with credit card debt
« Reply #1 on: August 27, 2019, 08:16:50 AM »
I understand your math. However, it's based on an assumption: that the current economic conditions will continue essentially as they are. If that assumption remains true, then you'll be fine. But if it doesn't, the whole house of cards could fall down on top of you.

So, looking at current conditions, current political climate, etc - what do you think the economy is going to do? Personally, you're taking on a LOT of risk, much more than I'd be comfortable with. But you are not me.

As for the lenders, they're going to worry about your leverage, income, and if the rental(s) is profitable.

Lmoot

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Re: Question regarding qualifying for a mortgage, with credit card debt
« Reply #2 on: August 27, 2019, 09:51:11 AM »
^ Agreed. It is more than I typically carry and am all that comfortable with. But I would comfortably carry at least $20k in debt, which is why I want to get it down to or below that. I have most of the cash to cover that, and if needed can access other ways to pay it off were it to come down to it when it's due. That $40k will also naturally be reduced by the due dates because 100% of the minimums will go towards the principal.

I figure as long as I get it to the point where I could pay it all off if and when I choose, it wouldn't be any more riskier than a loan (especially since the risk is for a shorter term than most loans). I did consider risk though, as I have been using 0% credit card promotions as a budgeting method and free loan, for the better part of the last 10 years. It began as a coping strategy while I renovated my house using Home Depot 18mo - 24 mo 0% financing specials. Then I saw the benefit in saving up cash while continuing to spend on credit, package it, balance transfer it...save cash, package credit card debt, balance transfer...etc etc.

I have an emergency fund and multiple streams of income (which in of themselves are a form of an efund), so that also was factored into this strategy. I got wacked with a $12,000 plumbing bill/sewer line repair earlier this year, and had to spend several thousand last month for last minute international travel for my grandmother's funeral...and that all went on the card. Even though I had the cash to cover it...barely but I had it. I chose to let the cash earn me interest, and give myself some time to collect myself financially, and save. Fortunately other than the $38k mortgage and the credit card debt, I don't have any other debt, so am able to save close to 50% of my income.

But paying off the final $10k in credit card debt, would mean holding off on buying a property for at least year...which would mean paying rent for another year, which ideally I'd like to avoid.

I admit I tend to make the best decision I can for the present circumstances, then worry about preventing future fallout, well, in the future. I've been lucky so far and have various safety nets, so I'm less worried about how I will fare with a second mortgage and the debt, and more on how it will interfere with my plans to buy a property. I also don't plan on claiming rental income for the rental property, not for this next purchase. But I will for real estate purchases thereafter.

UnleashHell

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Re: Question regarding qualifying for a mortgage, with credit card debt
« Reply #3 on: August 27, 2019, 12:03:53 PM »
I just got a mortgage with 15k of 0% credit card debt. your credit usage ratio on a per card basis may be questioned. I only had one card that was over 50%(just) so no issue here. with rental income and plenty of other credit limits I think your FICO score would be way more important.

Lmoot

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Re: Question regarding qualifying for a mortgage, with credit card debt
« Reply #4 on: August 27, 2019, 01:58:30 PM »
^ thank you for sharing. When I got my first mortgage I didnít have any debt, not even a car loan in my history. So it was pretty smooth sailing. Glad to hear you were able to secure financing with that amount of cc debt. I hear you about keeping on top of the utilization ratio. I think I am at around 40%, and that will go down as I pay the minimums and pay a few balances that will come due in a few months.

I guess I want to know how much cc debt I can get away with. $10k is the minimum, but I would like to be able to keep $15-19k rolling forward, so I can keep more cash/efund on hand especially with a second mortgage on the horizon. I can worry about how and when to pay it off later, as I will have 1-2 years to work that out. I only have a few months to secure financing. I am waiting several months to give myself a chance to earn extra, and get that total debt balance down.


Sibley

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Re: Question regarding qualifying for a mortgage, with credit card debt
« Reply #5 on: August 29, 2019, 07:33:10 AM »
In the case of economic downturns, you're potentially setting yourself up for a situation where the mortgages are called and you can't refi or pay cash. I believe something like that happened to Dave Ramsey 10+ years ago and he had to declare bankruptcy.

Re how much debt you can carry now, go talk to a mortgage broker. They should be able to dump all your info in and give you an estimate.

Lmoot

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Re: Question regarding qualifying for a mortgage, with credit card debt
« Reply #6 on: August 29, 2019, 09:06:43 AM »
^ wow, well I would be screwed either way as my cc debt is a drop in the bucket compared to what I'd need to put up to pay off a mortgage. Fortunately I don't have that clause in my mortgage agreement. I have a very straight and narrow, boring, conventional loan agreement with a FDIC insured and well-known lender (and will ensure any future agreements I have will be similar).

I have a feeling Mr. Ramsay was wheelin' and dealin', working with all sort of scrupulous private lenders/ sharks bc he was in it so badly no one else would lend to him.

I'm less worried about how much I can qualify for, with the number of debt I'm carrying, as that is something I could fairly easily figure out on my own, and was just curious about if banks treat different kinds of debt differently, based on others' experiences. But I might take that advice and as long as it doesn't require a pull on my credit, I suppose it couldn't hurt to go straight to the horses' mouth.

Aegishjalmur

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Re: Question regarding qualifying for a mortgage, with credit card debt
« Reply #7 on: August 29, 2019, 01:03:51 PM »
For the credit cards, the lender will use the figure that shows on the credit report as the minimum payment(even if you pay in full monthly). For the mortgage on the rental, they will likely want to get 2 years tax returns and then may be able to offset all or part of the payments.

Fannie Mae/Freddie Mac give the lender the ability(whether the lender will or not is determined by the lender/uw and their risk tolerances) to exclude installment loans(cars/student loans) if have under 6 months payments remaining, so if you have a large loan,may be worth making a larger than normal payment on them(probably aim for 2 months before you apply as many cc companies are slow to report data).   

The other issue with cc's is the impact on your credit, even if you can afford the payments. For every 25% a card is utilized, it dings your score. so at 25% you get a small ding, 50% a bigger one, 75% a larger one, and at 100% another one.

If with the minimum payments on the CC, any loans(cars, student), Full Principal, interest, taxes and insurance payments on the rental, and the proposed payments on the new property(include HOA dues in this), you are at under 45% DTI(debt to income), I wouldn't worry about it, most lenders will approve, especially if putting a decent down payment(20%) down and have reserves.

I would say that if you take the highest figures for everything and you still are under 45%, you are likely going to be good.

Aegishjalmur

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Re: Question regarding qualifying for a mortgage, with credit card debt
« Reply #8 on: August 29, 2019, 01:20:20 PM »
Here are a couple links for you, this way you can review the guidelines yourself and it might help reassure you.

Desktop Underwriter is Fannie Mae's underwriting system. You can actually access these online yourself, but as a link, here is some info on credit:
https://www.fanniemae.com/content/job_aid/desktop-underwriter-dti-ratio-job-aid.pdf

Freddie Mac uses Loan Prospector
http://www.loanprospector.com/about/docs.html

it didn't want to let me copy the fulllink to their credit guidelines, but if you follow the link above and then click on 'Loan Prospector Documentation Matrix' on the right side under 'resources', on page 2 it will have a link labelled 'Credit and Liabilities' that explains their requirements.

frugaliknowit

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Re: Question regarding qualifying for a mortgage, with credit card debt
« Reply #9 on: August 29, 2019, 01:33:51 PM »
What's your debt to income ratio with and without the new mortgage?  That and your credit score is what they look at.  Not much else.  No, they don't care whether is 0% or 20% interest rate.