How your interest free consumer debt may be keeping you from buying a home

If you’re thinking about purchasing a home and you’re carrying any consumer debt, such as installment loans, personal loans, or even low-rate credit cards. These things could adversely affect your ability to purchase a home. If you carry any of these obligations and you are desiring to buy a home the following information is for you…

Mortgage lenders use a special formula called a payment-to-income ratio sometimes also called a debt-to-income ratio. It’s a calculation of your total monthly consumer payments plus a proposed mortgage payment divided into your gross monthly income. Generally, mortgage lenders will use a maximum debt-to-income ratio of 43% which represents a qualified mortgage. Fannie Mae and Freddie Mac on conventional loans will generally allow up to 50% as long as it passes automated underwriting. VA actually will go to a 63% debt ratio and FHA can go as high as 56.99. The debt-to-income ratio represents how much debt you have in relation to your monthly income. The higher the number, the greater the risk for the bank, and the more risk factors come into play. So the lender takes into consideration the mortgage payment plus your other consumer debt, and this is including all student loans, personal loans, car, loans, and monthly credit card debt.

Here’s where the rubber meets the road, let’s say in order to qualify for a $700,000 home you need to free up $300 a month of payment. You can either spend more money down or you can do a little know lending strategy called paying off debt to qualify. This means by closing the debt you presently carry will be paid off in full subsequently, lowering your debt-to-income ratio and improving your purchasing power freeing up to $300 a month in this example. Let’s say the $300 a month could be accomplished by paying off 0% interest credit card debt. Let’s say it costs $10,000 of cash for $300 a month of payment relief, allowing you to qualify for the home you want. You give pushback to the mortgage company because you’re not paying the interest on that credit card debt. Well, that might be true. Here is the reality, free money or not it’s still adversely affecting your debt-to-income ratio so you have to ask yourself if being able to get the higher-priced home is worth it for your family in the long term than the value of the temporary relief of free money as a relates to keeping a credit card? If the answer is, it’s more important to have the free money on a temporary basis then it might mean having to reevaluate a different price point or possibly look into a different neighborhood. Paying off debt to qualify is a fantastic strategy that is prudent and makes sense and only helps your ability to support a mortgage payment and drive affordability.

The bigger picture here is buying a house, right? So the notion of saying I don’t want to pay off credit card debt even though it’s the best possible obligation to improve my parent power because the 0% interest doesn’t really hold a whole lot of water because, at the end of the day, you still owe the money on the credit card anyway. More than likely at some point, the interest rate is going to radically increase. It would be a better use of your money to pay off the debt to qualify driving affordability while maintaining a monthly budget while at the same time being able to purchase the home that you can want comfortably and safely support versus keeping in credit card debt. Consumer debt only works against you when buying a home.

The only way that credit card debt ever benefits you as relates to buying a home is by keeping a healthy credit score and you can accomplish this by paying off the credit card in full each month as you go.

Don’t carry credit card debt if you can otherwise avoid it, for a few reasons

  • interest is extremely expensive in most cases, particularly now the Federal Reserve is increasing interest rates
  • adversely affects your debt-to-income ratio limiting your purchasing power

Trying to get buy a home and getting frustrated with your lender? Get a 2nd opinion rate quote online today!

RELATED MORTGAGE ADVICE FROM SCOTT SHELDON

When buying a home, it’s natural to want the lowest mortgage rate possible. But sometimes, chasing a slightly better rate from another lender—especially after your offer has already been accepted—can backfire in a big way. Let’s walk through a real-world scenario. You’ve got an offer accepted on a house. You’re working with a lender who has you approved, documents in underwriting, and a 21-day close of escrow in place. Everything is moving forward. Then you hear from another lender offering a rate that’s 0.25% lower, with slightly better closing costs. It’s tempting. But before you make a jump, here’s what you need to consider. Switching Lenders Comes with Time Costs When you pivot to a new lender mid-contract, they’ll need to: Re-underwrite your entire loan, Order a new appraisal, Disclose and sign new loan documents, Submit the file for final loan approval, Schedule and fund closing—all over again. This doesn’t happen overnight. Even in ideal circumstances, the new lender is likely going to need at least 25–30 days to close. If you’re in a fast-moving or competitive market, this is a real problem. Most sellers won’t grant a contract extension just because you’re switching lenders. So, what happens next? A Contract Extension Can Jeopardize Your Deal Asking for a contract extension means the seller must agree to delay closing. But that delay introduces risk—especially if the seller has backup offers or simply wants certainty. They may not grant the extension. Or worse, they could cancel the deal outright and take another buyer’s offer. Even if the seller agrees to extend, your earnest money and negotiation power could take a hit. And for what? A slightly lower rate that might save you $50 to $75 a month? Mortgage Rates Aren’t as Far Apart as You Think Here’s the truth: all mortgage lenders get their money from the same place—the bond market. The pricing differences between lenders usually range from 0.125% to 0.25% in rate on any given day. If one lender seems to be offering dramatically better pricing, the first thing you should ask is: How? Head over to FreddieMac.com and check the average 30-year fixed rate posted weekly. This is one of the most reliable benchmarks for where rates truly stand in the market. If a lender is quoting you a rate that’s well below that average, ask for the details: Are they charging extra points? Is this a teaser rate with a prepayment penalty? Is it based on a different loan product or risky structure? Often, what sounds “too good to be true”… is. Consider the Bigger Picture Think long-term. If you’re financing $600,000, a 0.25% lower rate may reduce your payment by roughly $75/month. But what if you lose the house and have to start over? That monthly savings doesn’t mean much if you’re outbid on your dream home or lose your deposit. Also, remember: you’re not going to keep this rate forever. Today’s homebuyers typically refinance when rates drop by about 0.75% or more. So if rates fall within the next year or two, you’ll likely be refinancing anyway. Instead of paying extra points now or risking the entire deal for a minor monthly savings, it may be better to accept a slightly higher rate—knowing you’ll refinance when the time is right. The Real Risk Isn’t the Rate—It’s the Delay When shopping for a home loan, don’t just ask, “What’s your rate?” Ask: Can you close on time? Is this rate sustainable or based on hidden costs? Will switching lenders delay or jeopardize my contract? A home purchase contract is a binding agreement between you and the seller to perform within a set timeframe. If you can’t meet those dates because you're chasing a slightly better rate elsewhere, you may want to reconsider if now is the right time to buy. Final Thoughts Yes, interest rates matter. But execution matters more. Before making a switch mid-transaction, talk to your lender. Have an honest conversation about pricing, timelines, and strategy. You might find that staying the course, securing the house, and planning to refinance later offers a better path to financial security. Want to Know Your Options? Let’s compare rates and strategies the smart way—without risking your dream home. 👉 Click here to get a custom rate quote today.

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