Quick answer: High credit card debt does not automatically disqualify you from a home equity loan or HELOC. Lenders look at your credit, your home equity and your debt-to-income ratio, which compares your monthly debt payments with your income. If the new loan pays off the cards at closing, those card payments may drop out of your ratio, though approval is never guaranteed.
If your credit cards are maxed out, you may assume a home equity loan is off the table. That is not necessarily true, and in some cases the debt is the reason a borrower looks at home equity in the first place. Here is how lenders actually view it.
Does Credit Card Debt Disqualify You From a HELOC?
No, not by itself. Lenders weigh several things together: your credit history, how much equity you have, your income and your monthly debt payments. Card debt matters mainly through two of them, your credit score and your debt-to-income ratio. A high balance can hurt both, but neither is the only test.
What Is Debt-to-Income, and Why Does It Matter?
Debt-to-income ratio, or DTI, is your total monthly debt payments divided by your gross monthly income. It shows lenders how much of your income is already committed. Credit card minimum payments, car loans, student loans and your mortgage all count.
Lenders set their own limits, and the limit can vary by loan program and by borrower. For reference, Fannie Mae’s guidelines for conventional mortgages allow a maximum DTI of 50% for loans underwritten with its automated system, and lower for manually underwritten loans. Home equity programs are set by each lender, so ask Tithe Lending about the maximum DTI for its HELOC.
Can Paying Off the Cards Improve Your Ratio?
Often, yes. If the new loan pays off your credit cards at closing, those monthly card payments are no longer counted as your debts, and the new loan payment is counted in their place.
| What lenders count | Before the payoff | After the payoff |
| Mortgage payment | Counted | Counted |
| Credit card minimum payments | Counted | No longer counted |
| New home equity payment | Not applicable | Counted |
If the new payment is smaller than the card minimums it replaces, your debt-to-income ratio goes down. If it is larger, the ratio goes up. The result depends on the size of the new loan, its rate and your actual debts, so a loan officer needs your real numbers to tell you.
Next step: Wondering where your own debt-to-income ratio stands? A loan officer can review it with you before you apply.
No obligation. A review does not guarantee approval. It only takes a few minutes.
Does High Credit Card Debt Hurt Your Credit Score?
It can. Credit utilization, the share of your available card limits that you are using, is one of the factors in your score, and balances near the limit generally push scores down. Late payments hurt more. See Which Credit Score Does Tithe Lending Use? for how scoring models differ.
There is a possible upside: paying the cards down can lower your utilization and may help your score over time. A new loan and credit inquiry can also cause a short-term dip, so the net effect varies.
How Much Equity Do You Need?
Equity matters as much as credit. Lenders generally limit your mortgage and the new loan combined to a percentage of your home’s value, often in the range of 80% to 90%, depending on the program and your profile. Ask Tithe Lending about its maximum combined loan-to-value ratio. The right number for you depends on your home value and mortgage balance, and a loan officer can work it out with you.
What Could Make Approval Harder?
Card debt is manageable. These are the harder cases:
- Recent late payments on your mortgage or cards.
- Very high total debt relative to your income, even after the payoff.
- Limited equity, such as a recent purchase with a small down payment.
- Unstable or hard-to-document income.
If one of these applies, it does not mean you are out of options, but talk to a loan officer before you apply so you know where you stand.
What Is the Risk of Using a HELOC to Pay Off Cards?
The risk is that you turn unsecured debt into debt secured by your home. If you cannot make the payments, you could lose the home, which is not true of credit cards. Most HELOCs also have variable rates, so payments can rise when the Fed raises rates. See How the Federal Reserve Affects Mortgage Rates.
The second risk is behavioral. If the cards are paid off and then run back up, you end up with the home equity debt and new card debt. Many borrowers close or stop using the paid-off cards for that reason.
What Should You Do Next?
Before applying, gather your recent card statements, your mortgage statement and proof of income. Then talk to a loan officer about your own numbers. The full picture of the trade-offs is in Using Home Equity to Pay Off Credit Card Debt.
Frequently Asked Questions
Can I get a HELOC if my credit cards are maxed out?
Possibly. High card balances can lower your credit score and raise your debt-to-income ratio, but lenders also look at your equity, income and payment history. If the HELOC pays off the cards at closing, those payments may drop out of your ratio.
What debt-to-income ratio do I need for a HELOC?
It varies by lender and program. Conventional mortgage guidelines allow up to 50% with automated underwriting, and home equity lenders set their own limits. Ask Tithe Lending about the maximum DTI for its HELOC.
Will a HELOC hurt my credit score?
There may be a short-term dip from the application and new account. Paying down card balances can lower your utilization, which may help your score over time.
Can I use a HELOC to pay off credit cards if I am behind on payments?
It can be harder to qualify, depending on how recent and how serious the late payments are. Talk to a loan officer about your situation before you apply.
Next step: Card balances do not have to rule out a home equity loan. Tell us what you owe and we will show you where you stand and what your options are.
No obligation. Approval depends on your credit, income, equity and property. It only takes a few minutes.
Sources
- Fannie Mae Selling Guide, B3-6-02 Debt-to-Income Ratios
- CFPB, Home equity loans and HELOCs: what is the difference?
Tithe Lending LLC | NMLS #2439006 | Equal Housing Lender. General information only; not a loan offer or financial, tax or legal advice.