|Credit cards can impact fate of home mortgage
Will credit cards help me land a mortgage? Well…yes and no.
Like it or not, your relationship with money can be best summed up on paper by how much consumer debt you carry, more specifically in the form of credit cards. Credit card debt is a double-edged sword, especially on high-ticket items such as a house purchase.
On one end, having open credit lines with no debt increases a credit score reducing your cost of borrowing money, making you eligible for more loan programs. On the flip side, payment obligations reduce ability to qualify, lowering how much house you can buy.
Here’s the lowdown on how credit cards help your ability to land a mortgage:
• Credit cards paid current with no late payments or delinquencies improve a credit score, opening up more low cost loan programs. Lenders typically want at least three open credit accounts, and credit cards are a common form of a trade line such as a line with a department store, for example, or even basic Discover card.
• Credit cards are reported to the credit bureaus, sometimes just one or two bureaus, and are very beneficial to a credit score assuming perfect payment history.
• Assuming no derogatory or late payments, credit card obligations show a pattern of consistent payment history, which is a plus in the eyes of the scrupulous lender.
• With no balances, credit cards show lenders the consumer has “good character,” an important aspect of lending.
Here’s how credit cards hurt your ability to land a mortgage:
• Credit card companies are required by law to report the minimum monthly payment due associated with any balances carried. If the minimum payment is $150 per month, that is what will show up on your credit report and that’s the amount the lender will use on a dollar in dollar out basis. Because the debt is there, how much you can borrow in terms of total house payment will be limited by $150 per month. Granted, $150 per month is small in the grand scheme of things, but the payment will produce a dollar-for-dollar reduction in your eligible mortgage payment.
• Have a credit card late payment? This will tank your credit score, increasing the costs to borrow mortgage money, making your loan more costly. Also not that a credit card late payment every now and then happens. It’s the consistent pattern of lack of repayment over time that really drops the credit score, greatly increasing loan costs and jeopardizing your chances of an approval.
• Credit card charge-offs still reporting a balance on your credit report will need to be zeroed out in order for you to successfully fund your new home loan. Talk to your mortgage lender first.
• Mortgage tip: Credit cards when not properly used have a stronger propensity to reduce your ability to land a mortgage than they do to improve it.
Best credit card managing practices
Credit cards both hinder and help your ability to get a mortgage, bottom line. The ideal consumer mortgage scenario would have no credit card late payments of any kind in the last 12 months and no balances/payments due. Paying off your credit card in full every month? Make sure you know when they report to the mortgage lender, so you can have the mortgage lender pull your credit report for the mortgage after that date. This will preserve your high credit score while still showing no debt.
Also, if there are multiple credit cards and you have the ability to consolidate the credit cards that would reduce your minimum payment obligations, take action.
Lenders are looking for how much of your income goes to debt.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.