Should I pay off credit cards before applying for a mortgage?

Posted by  on Apr 21, 2015

Q: Will it help me get approved for a mortgage loan if I pay off my credit card balances before applying?

A: It really depends on how big those credit card balances are. If you have multiple, large balances, it could help to pay them off or at least reduce them before applying for a loan. Mortgage lenders are going to be interested in both your total level of indebtedness and how heavy a burden your debt payments represent as a percentage of your income.

At the very least, you will want to make sure you are making all your required credit card payments on time as you prepare to apply for your mortgage.

Could there be a downside to paying off those credit card balances prior to applying for a mortgage loan? Only in a couple of scenarios:

  1. Don't pay off those credit cards if doing so is going to cut into your down payment. This may seem counter-intuitive because credit card rates are so much higher than mortgage rates. However, a larger down payment can help you get the best mortgage rate, and that is something that will affect you for many years to come. Assuming you can work to steadily pay down your credit card debt once you buy the house, securing a lower mortgage rate might have a greater impact in the long run.
  2. Even if you pay off some credit card balances, don't close those accounts. Your credit score can be affected by the percentage of available credit you are currently utilizing, and if you close a credit card account you reduce the amount of available credit.

Outside of the above two reasons, if you have the means to pay off your credit card balances, it probably makes sense to do so -- regardless of whether or not you are applying for a mortgage -- simply because credit card rates are so much higher than today's savings account rates.


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