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Consumer debt: Many of us have it. And most who do, have a love/hate relationship with it. If you can’t make the purchase with cash, do it with debt — right? We love to know we can still consume, but we hate the bill that comes 30 days later, along with the subsequent monthly payment. Ouch!
Like it or not, your relationship with money can be best expressed on paper by how much debt you carry or don’t carry, more specifically in the form of credit card debt. Credit card debt is a double-edged sword when it comes time to making high-ticket purchase like buying a home. On one end of the spectrum, having open trade lines with no debt increases a credit score, which can lower the cost of your mortgage. On the flipside, payment obligations reduce your ability to qualify, lowering how much house you’re eligible for. So here’s a quick guide to managing credit card debt when trying to get the holy grail (i.e. a mortgage).
Credit cards that are paid current with no derogatory items or delinquencies improve and support a good credit score, which reduces your borrowing costs.
Mortgage lenders typically want to see a borrower carry at least three open trade lines (and credit cards are a common form of a trade line). Examples of this would be a line limit with a department store for example or even basic Visa credit card.
Other ways credit cards help you in the mortgage process:
Credit cards, when not properly managed, have a greater effect on reducing your ability to land a mortgage than they do to improve it. Let’s look at how they can do this:
Because credit cards can either hinder or help your ability to get a mortgage, there is a fine line not to be crossed. The best scenario for your mortgage would be to have minimal or no credit card delinquencies of any kind in the past 12 months.
Are you paying off your credit card in full every month? Make sure you know when they report to the credit bureaus, so you can have the mortgage lender pull your credit report and credit score after that date so as to preserve high credit score. If there are multiple credit cards and you have the ability to consolidate the debt to reduce your minimum payment obligations, do it. Lenders are looking for cash flow after expenses. The more cash flow after expenses, the better your chances of a favorable credit decision with the lender.
Finally, if you know you want to buy a home in the near future, now is the time to get up to speed on your credit situation. Pull your credit reports and look for errors, signs of fraud, and areas that you need to work on (like payment history or debt usage, for example). You should also start monitoring your credit score so you can build your credit in order to get the best rates possible.
Consumers are allowed to get their credit reports for free once a year from each of the three credit reporting agencies through AnnualCreditReport.com. You can also obtain your score using free credit score tools and services (Credit.com offers a snapshot of your scores and a breakdown of your credit profile to help you determine what areas you need to work on). Whether you use a free score or you buy one from a credit scoring service, know that the number you see may differ somewhat from the score your mortgage lender will see, but it will nevertheless give you a helpful range to work within.
Image: Hemera
December 13, 2023
Mortgages