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Can You Get FHA Loan With a lot of Credit Card Debt?

I see this question come up quite often and since credit card debt is not a rare phenomenon, it’s understandable that people getting ready to submit their FHA loan application would ask this question in the first place.

If you’re asking yourself whether you can get an FHA loan with an outstanding credit card debt, you’re not alone.

Because the answer to this question is a bit more complicated than a simple yes or no, I decided to address this topic and cover what you need to know about getting an FHA loan with credit card debt.

I’ll start off by saying that concerns raised about applying for an FHA loan with credit card debt are founded since, indeed, having credit card debt at the time of submitting your application will impact on your eligibility for an FHA loan.

The issues I’ll cover in this article include:

  • Can a borrower with credit card debt get approved for an FHA-insured mortgage loan?
  • Is the large size of the credit card debt a disqualifying factor?
  • What is debt-to-income ratio and why is it important?
  • What’s the relation between payment history, credit score and getting approved for an FHA loan?
  • Are there credit card balance documentation requirements for FHA loans?

These are important aspects that you should know about when applying for an FHA loan or even for a conventional loan.

Understanding how these aspects influence your borrowing power will help you increase your chances of getting approved for an FHA loan.

Let’s talk about each point in more detail and see how you could qualify for an FHA loan even with an outstanding credit card debt.

fha-loan-credit-card-debt
Getting an FHA Loan with Credit Card Debt

Getting an FHA Loan with Credit Card Debt

Issued by a Federal Housing Authority-approved lender, an FHA loan is designed for low-to-moderate income borrowers with a bruised credit score and low savings set aside for a down payment.

The lower credit score requirement coupled with a lower down payment requirement makes this type of loan highly popular among first-time home buyers.

Since credit card debt is fairly ubiquitous, it’s fair to ask whether you can get approved for an FHA loan if you have credit card debt.

So, can you get an FHA loan with credit card debt? Yes, you can, but there are a few requirements you must meet related to the size of your credit, payment history, debt-to-income ratio and credit score.

Just because you have credit card debt it doesn’t mean you can’t get approved for an FHA-insured mortgage loan.

In fact, if you’re paying your bills on time, every time, having outstanding credit can actually work in your favor. How? By signaling to lenders that you’re a responsible borrower.

Making timely payments on your credit card debt can also improve your credit score and help you qualify for an FHA loan.

On the other hand, if you already have trouble paying off your credit card debt or you’re carrying too much debt, it could hurt your chances of qualifying for a loan since lenders will be reluctant to give a loan to a high-risk borrower.

Therefore, both the amount of your credit card debt and your payment history are important factors that are analyzed when you apply for a loan.

The takeaway here is that being responsible with your credit card payments can strengthen your borrowing power. But even so, there’s still the matter of debt-to-income ratio to consider.

Debt-to-Income Ratio (DTI) and Credit Score

Debt-to-Income Ratio (DTI) and Credit Score
Debt-to-Income Ratio (DTI) and Credit Score

Whether you’re applying for an FHA loan or a conventional mortgage, the mortgage lender will review your debt-to-income ratio to determine how much of your gross monthly income goes towards your monthly debt.

The amount of your credit card debt has a huge bearing on your approval for a FHA loan, because your credit card debt contributes to your DTI.

Determining your DTI is important for lenders because it tells them how much of your gross income goes towards paying your recurring monthly debt and how likely you are to default on payments.

If you were to spend one-third of your monthly gross income, your DTI would be around 33%, which would still qualify you for an FHA loan. A DTI over 50%, however, is likely to significantly impact your eligibility for this type of loan.

And it makes sense that borrowers with a higher debt load are more likely to default on mortgage payments. Therefore, it also makes sense for lenders to be more reluctant in approving them for a loan.

Applicants whose level of debt is manageable, and their debt doesn’t push the DTI over the acceptable limits of a lender will not have an issue qualifying for a loan.

On the other hand, if the amount of the existing credit card debt is already burdensome and contributes to a higher-than-average DTI, it’s very likely that approval for an FHA loan will not be granted.

So, while in itself credit card debt is not a disqualifying factor, the size of the credit card debt is something that will tip the scale one way or the other.

I mentioned that your credit score may be improved by an existing credit card debt if you’ve been making timely payments and since your FICO score will be looked at by mortgage lenders, you must be on top of your monthly payments if you’re looking to establish good credit and apply for a loan.

The higher your score, the better, therefore, your outstanding credit card debt and payment history can affect your credit score and your ability to obtain an FHA loan.

Avoiding making late payments on personal loans, auto loans, credit card debt, etc. is important to maintain a good credit score that will influence your future eligibility for conventional loans or FHA loans.

Currently, to qualify for an FHA loan, applicants must have a 580+ credit score, which will allow them to opt for a lower down payment option of only 3.5%.

Applicants with a lower credit score — but not lower than 500 — can also apply for an FHA-insured mortgage loan provided they have at least 10% down-payment saved up.

Therefore, to sum up, there are two main factors that will influence your eligibility for an FHA loan:

  • First, the size of your outstanding debt because it factors into your DTI; and
  • Your payment history because it reflects how you’ve been managing your debt so far and it has a direct influence on your credit score.

The mortgage lender will make an assessment of these aspects to determine if you’re eligible or not for an FHA loan.

While credit card debt isn’t an immediate impediment in applying for an FHA loan, it’s certainly something to analyze and think about from the perspective of the lender.

Namely, whether you are a low risk borrower from the lender’s standpoint, or on the contrary, your credit score and payment history reflect that you present a significant risk of default.

Credit Card Balance Documentation Requirements

Credit Card Balance Documentation Requirements
Credit Card Balance Documentation Requirements

The requirements for documenting credit card debt for an FHA loan application are established by the Department of Housing and Urban Development (HUD) and laid down in the HUD Handbook 4000.1 (Single-Family Housing Policy Handbook).

The amount of the credit card debt at the time of the application must be documented as per the requirements of the handbook, which states that the credit report “must include the monthly payment […] for the Revolving Charge Account”.

The term revolving charge refers to outstanding credit card debt or any debt, where the amount and length of the debt are variable.

Users can charge any amount up to the credit limit extended by the lender. Payment is not required immediately, and instead the unpaid balance rolls over at the end of the billing period.

In summary, you can qualify for an FHA loan even with an outstanding credit card debt provided that your debt-to-income ratio is within the limit determined by the lender.

A history of timely payments along with a good credit score signal that you’re a responsible borrower, making the loan less of a risk for the lender.

Too much debt coupled with a bad credit score and a history of payment defaults will make it more difficult or even impossible to get approved for an FHA loan.

Conclusion

An outstanding credit card debt can work for or against you when applying for an FHA-insured mortgage loan.

If the size of the loan is not large and you’ve been making your payments regularly and on time, it’s likely that it won’t bear negatively on your chances of getting your FHA application approved.

But a credit card debt is more likely to unfavorably influence your borrowing power if its size is large and makes your DTI higher than average, plus, if you’ve been defaulting on payments and your credit score is affected as a result.

I hope this article has helped clear up some of the concepts that lenders use to review a person’s borrowing power and helped you understand how an FHA loan approval is influenced by an outstanding credit card debt.

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