If you’re looking to buy a home, you might be wondering if your credit card debt will cause problems when it comes to getting a mortgage. Most people in the UK own at least one credit card, but mortgage lenders still take missed payments very seriously.
The good news is, that while it’s difficult to get a mortgage with credit card debt, it’s not impossible. Lenders consider many different factors when assessing your mortgage application so having credit card debt won’t automatically mean your application is rejected.
How does credit card debt affect your credit score?
When you have missed, late, or defaulted payments on a credit card, lenders report it to credit reference agencies who then add it to your credit report for six years.
The three credit reference agencies in the UK are Experian, TransUnion, and Equifax.
This can have a direct impact on your ability to get a mortgage as lenders check your credit report when you apply for any type of credit. In fact, lenders perform a ‘hard inquiry’ when you apply for a mortgage, which means they carry out a thorough review of your credit history.
However, because different lenders report to different credit reference agencies, the impact of credit card debt on your credit score can vary slightly depending on which credit score you check.
Everyone goes through financial difficulty from time to time, but it’s important to note that even one missed payment on a credit card can harm your credit score. The extent of the impact depends on how overdue the payment is and your credit score before you missed the payment.
How much debt do you have?
Can you get a mortgage with credit card debt?
Having credit card debt will make the process of getting a mortgage more difficult than it would be than if you were debt-free. However, while it might take longer and potentially cost more, it’s certainly not impossible.
The key things to know before you apply for a mortgage with credit card debt are that the pool of lenders available to you will be smaller and you’ll likely pay much more in interest alongside the amount borrowed.
Remember, any form of debt will be scrutinised by a lender when you apply for a mortgage – especially if it’s recent. They do this by looking at your debt-to-income ratio, which is how much debt you have as a percentage of your gross monthly income.
For example, if you’re currently paying £700 a month towards your debt on a monthly income of £2,000, your debt-to-income ratio will be 35%.
Each mortgage lender has a different idea of what counts as a suitable debt-to-income ratio, but anything below 35% is generally considered acceptable.
What other factors affect are considered when you apply for a mortgage?
When you submit a mortgage application, every aspect of your financial situation will be examined to ensure you can afford your monthly repayments.
Aside from your debt-to-income ratio, here are some of the other things a lender will look at when you apply for a mortgage:
Your credit score
Your credit score is a measure of your creditworthiness, which is how likely you are to make monthly repayments on a credit agreement based on your financial history. It’s based on your credit report and can fluctuate from time to time.
Having a poor credit score due to debt can be a red flag for lenders as it means you might not be able to keep up with your monthly payments if you were to get a mortgage.
Each lender has their own benchmark for what counts as an acceptable credit score for a mortgage. The higher your credit score, the higher your chances of qualifying for a mortgage with favourable terms.
Your income and savings
The amount you earn and save will be considered when you apply for a mortgage as this indicates how much you’re in a position to pay towards your mortgage each month. Most mortgage lenders prefer a steady income income as this carries less risk.
When mortgage lenders review your income and savings, they’ll likely ask for several financial documents, such as recent bank statements, tax returns, and wage slips.
In most cases, having savings can also boost your chances of being approved for a mortgage as it indicates your ability to build an emergency fund and continue paying your mortgage in the event of an unexpected expense.
Your employment status
Your employment history also plays a pivotal role in your ability to get a mortgage as it has a direct impact on your income and savings. For example, if you’ve only had a full-time, permanent job for a few months, this is unlikely to be enough to convince lenders that you can maintain your monthly payments.
Similarly, if you’ve been unemployed for some time or you switch jobs on a regular basis, this might make lenders wary of lending to you.
Put simply, if you’re self-employed and have a fluctuating income, lenders might worry that you might not earn enough one month to pay your mortgage – even if you can prove you have enough savings to cover your mortgage in the event this happens.
How much is too much credit card debt for a mortgage?
There’s no maximum amount of credit debt that can prevent you from getting a mortgage. Instead, lenders are more likely to look at the amount of debt, when the debt occurred, and whether any attempt has been made to repay it.
For example, a lender might look at someone with £1,000 of credit card debt but a large enough income to cover monthly mortgage payments and approve their application while another lender might review the same application from the same person and automatically refuse them.
Each lender has their own lending criteria and some are more flexible than others. This can be frustrating if you’re shopping around for a mortgage with credit card debt, but it means that even if a high street lender rejects your application, a specialist lender might still be willing to lend to you.
There are various factors involved in the process of assessing someone for a mortgage. There’s no telling whether you’ll be approved for a mortgage before you apply, but a mortgage advisor should be able to help you understand your borrowing capabilities based on your current financial situation.
“No fuss, just simple, honest advice. Communication is good and they make the process as easy as they can.”
How can I improve my chances of getting a mortgage?
There are certain things you can do to boost your chances of getting a mortgage while you have credit card debt or are actively making debt repayments.
Here are some of the steps you should take if you want to improve your credit score and therefore your likelihood to get approved for a mortgage:
Be realistic
Going into the mortgage process expecting every lender to accept your application will only lead to disappointment – especially if you have credit card debt.
It’s also important to note that lenders can change their lending criteria over time, meaning that getting a mortgage can be unpredictable depending on when you apply.
Even if you’ve been accepted for a mortgage with a similar financial situation in the past, it doesn’t automatically mean you’ll be accepted by the same lender again.
Check your credit report first
Before applying for a mortgage, you can get a better idea of what the outcome will be by checking your credit report first.
It’s impossible to know for certain whether your application will be accepted without knowing the lender’s criteria first, but it can help you identify certain financial markers that might be flagged.
Remember, you have three separate credit reports from each of the main credit reference agencies and you don’t know which one the lender will use. Checking all of your credit reports can help you see what lenders will find out when they carry out a credit check on you.
Fix any errors on your credit file
Though rare, credit errors can occur fairly easily. It might not seem like it would make a huge difference but something as simple as an old address or a misspelt surname can lead to a discrepancy between your reports and cause your mortgage application to be rejected.
If you spot anything that doesn’t look right, contact the relevant credit reference agency with proof of the mistake and ask them to update their record accordingly.
The Financial Ombudsman Service should be your next step if the credit reference agency refuses to fix the error.
Register to vote at your current address
Most people don’t realise how important it is to register to vote at your current address but it can potentially make or break your mortgage application.
When you register to vote, your details are added to the electoral roll, which is used by mortgage lenders to confirm your identity (e.g. who you are and where you live).
Therefore, if your details match up, lenders will be able to rule out identity fraud and may be more willing to offer you a mortgage with favourable terms.
Manage your other monthly repayments
Payment history is one of the biggest factors lenders look at when assessing someone for a mortgage or any type of credit.
This essentially means your ability to stick to your other monthly payments, such as your rent and bills.
If you can prove that you can stick to multiple credit agreements, lenders will view you as a responsible borrower and might accept your mortgage application based on this information.
Use a specialist mortgage broker
Trying to get a mortgage with a standard lender can be difficult.
However, a specialist mortgage broker might be able to help match you with a lender who offers bad credit mortgages for people with poor credit histories due to debt.
Some lenders have more flexible lending criteria and will be happy to offer you a mortgage despite your current financial situation.
Can I remortgage with credit card debt?
Mortgage lenders look at remortgaging in a similar way to offering a new mortgage. In other words, it can be difficult, but not impossible.
Generally, as long as you meet all the other eligibility criteria and can prove that you can afford the monthly payments, you should be able to remortgage with no problems.
It might also be an option to remortgage as a way of consolidating your debts from multiple monthly payments to one or to release equity to pay off your credit card debt.
Depending on the extent of your credit card debt, you might still need to use a specialist lender to remortgage. In any case, it’s always recommended to seek free financial advice before trying to remortgage with debt.
Debt help tailored to you
From writing off a large portion of your debt, to readjusting your budget, we’ll find a solution that suits you.
Will promising to repay my credit card debt after getting a mortgage improve my chances of being approved?
Even if you’re not currently in a position to pay off your credit card debt, proving that you have a plan to deal with it can potentially boost your chances of getting approved for a mortgage.
For example, if you’re able to prove that your financial situation will improve after you get a mortgage but before you buy a home, lenders might factor this into their decision and you might be able to borrow more or qualify for better terms because of it.
However, if you’re confident your financial situation will improve after you get a mortgage, it might be a better idea to wait until this happens before applying. This will also reduce the likelihood of your application getting rejected, which can cause further harm to your credit score.
It can be difficult to find a lender willing to give you a mortgage based on words alone as promising something doesn’t necessarily mean that it will happen. To counter this risk, they might agree to subtract the amount you plan to repay from your total debt before giving you the mortgage.
Conclusion
If you’re looking to get a mortgage in the near future, it’s important to know if any existing credit card debt you have might potentially stop you from getting approved. Credit card debt is one of the most common types of debt in the UK, but this doesn’t mean mortgage lenders will overlook it.
Because any type of debt (e.g. payday loan) implies that you’ve struggled with your finances in the past and needed help to pay for day-to-day expenses, mortgage providers might worry that you won’t be able to afford your monthly mortgage repayments.
To improve your chances of getting a mortgage with credit card debt, use a specialist mortgage broker. They will know which mortgage lenders are more likely to accept applications for people with poor credit, reducing the likelihood of your application being rejected.
