Buying a home with credit card debt is difficult, but not impossible. Here are some methods that will help you understand how you can own a home despite your debts.
The gross depreciation ratio or ABD
Before you make a mortgage loan, professionals calculate what is called the maximum mortgage amount. Estimates are made based on invoices such as your income, down payment, and debts.
One of the important conditions that must be met in order for you to get a mortgage is the gross debt amortization ratio. It must be less than 32%. The ABD allows you to know the percentage that your various expenses or occupancy costs represent, compared to your annual income. The occupancy costs are:
- property tax;
- school taxes;
- your monthly mortgage payments;
- annual heating costs;
- 50% of annual condo fees.
According to the financial instructions, the ADB ratio must not exceed the ceiling of between 32 and 39%. To calculate it, all you need to do is add up all of your occupancy costs, the total divided by your gross annual income.
If you pay $7,000 in property tax, $2,000 for school taxes, $12,000 for annual mortgage payments and $2,000 for annual heating costs, your annual income is $70,000 and condo fees are zero. Your ADB will therefore be 0.32, or 7,000 + 2,000 + 12,000 + 2,000, all divided by 70,000. You are eligible for a mortgage loan.
The total debt amortization ratio or ATD
The second condition for getting a mortgage is the total debt amortization ratio. ATD takes into account all your debts. Therefore, the decision to grant you a loan will also depend on him. It lets you know if you are able to cover your expenses, and even unforeseen expenses. The standard ATD rate is 44% for an insured loan. It can be reduced from one financial institution to another. To calculate it, apply the following formula:
(Housing costs + Payments to be made on the credit card + Payments to be made on the car + Costs related to your loan) ÷ Annual income.
Let’s keep the example of ADB expenses. Now consider that your debt is $4,300 with $1,300 for the credit card, $2,000 for your car loan, and $1,000 for the cost of the loan. Your ATD will then be 7,000 + 2,000 + 12,000 + 2,000 + 4,300, all divided by 70,000. The percentage will be 0.39. You are therefore eligible for a mortgage loan despite your debt.
Have the highest credit score
You must have a high credit rating to qualify for a loan. In other words, your credit card must be used at the limit of 35% for your rating to be high. High credit gives you access to the best mortgage rate.
In summary, even with credit card debt, you can buy a house. The only condition to be met is to be within the standards for the ratios.