Home > Mortgages > How Your Credit Card Can Keep You From Buying a Home

Comments 0 Comments

New changes coming to Fannie Mae’s automated underwriting system next month could have prospective homebuyers rethinking how they pay their credit card bills. Here’s why.

Lenders generally use Fannie Mae’s automated underwriting system for every single mortgage loan sold in the secondary mortgage market. This system has always reviewed the mortgage applicant’s credit history, credit score, debt-to-income ratio, reserves (a fancy term for savings) and occupancy in order to determine whether they should be approved for the loan.

But, starting June 25, Fannie Mae will use trended credit data to evaluate how applicants paid off their loans over the past two years. And the new data will show not just the loan balance and whether you’ve made all your payments on time (as traditionally is the case on credit reports), but also the actual payment amount that you made on the account.

This change is designed to reward “transactors,” borrowers who pays off their credit card balances in full each month. “Revolvers,” conversely, carry a balance, pay the minimum each month or regularly do balance transfers in an effort pay less interest on their debt. They’re generally considered riskier applicants as the more revolving, unpaid monthly obligations you carry, the greater the odds you’ll have trouble paying your bills down the line.

For instance, let’s say your credit card bill generally ends up around $300 each month. For the transactor, this bill would not be considered a problem as the new data demonstrate they paid their credit card off each month. The revolver, however, would be unable to show the obligation is paid and, therefore, it would be seen by the lender as a strain on borrowing power to income.

What Does This Mean for Me?

If you are transactor, you’re in good shape for buying or refinancing a home so long as you continue to pay off your credit card while supporting a high credit score as a result. (You can see where your credit currently stands by viewing your two free scores, updated every 14 days, on Credit.com.)

If you are a revolver, you’re going to have some choices to make. These choices may include the following.

  • Can you buy less house?
  • Can you cash-out refinance and pay off the obligations through closing?
  • Can you write a check to pay off the consumer obligations, even if the interest rate on them is 0%? (Revolving 0% credit obligations could still limit your ability to qualify for a mortgage.)
  • Can you consolidate your credit card debt so you can save on the mortgage and take the monthly savings and prepay the consumer obligations? (Note: You would have to do the math ahead of time to determine if swapping your revolving credit card payments for an installment loan payment would help your debt-to-income ratio and your wallet.)

If you have monthly ongoing credit accounts, you could still be able to get a mortgage, but it’s going to add another layer of credit scrutiny that will play a role in your ability to buy a home or refinance one you already own. Simply put, more emphasis will be placed on the full credit, debt, income and assets. These changes are designed to promote fairness in the area of credit while helping to promote Grade A securities being delivered to Fannie Mae.

If you need guidance as to which debts would have the most impact on your ability to qualify, talk to an experienced mortgage lender who can clearly articulate how your liabilities may affect your ability to borrow.

More on Mortgages & Homebuying:

Image: Highwaystarz-Photography

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team