April 6, 2015 by Leave a comment

If you’ve worked consistently for the past two years, and you’ve been saving your pennies for a downpayment and closing costs, you may feel nothing can stand in your way of qualifying for a mortgage. And in all likelihood, you’re the ideal candidate.

However, what you may not realize is that certain credit card habits can stop a mortgage approval in its tracks. Not to say you can’t get a loan, but a bank may hold off approving your application until you get a handle on your credit cards. Here’s a look at five credit card mistakes that hurt your chances of buying a home.

1. Maxing out your credit cards

Unfortunately, making minimum credit card payments might not be enough to qualify for a mortgage loan. The lender looks at your entire credit history, and if you have maxed out credit cards, this raises your debt-to-income ratio and impacts whether you’re able to qualify for a mortgage, or how much you receive from a bank.

Basically, the bank calculates the percentage of your monthly debt payments and compares this figure with your gross income. If your credit card payments are higher due to maxed out accounts, your debt-to-income ratio may exceed what’s allowed by the lender, and the bank may not approve your application until you’ve paid off some of your accounts.

To avoid this problem, pay off credit cards every month, and make sure your balances do not exceed 30 percent of your credit line.

2. Past due accounts

You credit history might be stellar today, but if any credit card accounts have been 30 days or more late in the past 12 months, a mortgage lender may not approve your application at this time. It only takes one or two recent delinquent accounts to delay a home purchase.

Lenders are cracking down on late payments, and they typically allow no more than one or two 30-day late payments in a 12 to 24-month period (based on the type of mortgage).

3. Closing credit card accounts

If you’re weaning yourself off credit cards, you might close accounts to avoid additional debt. In hindsight, this is a good plan. But unfortunately, closing a credit card account can increase your credit utilization ratio, which can also drive down your credit score.

Credit utilization ratio is your total available credit in relation to your total credit lines. Let’s say you have two credit cards each with a $1,000 credit line (a total credit line of $2,000). One credit card has a $1,000 balance, and the other card has a zero balance. In this case, your credit utilization ratio is 50 percent, since you’re using half your total available credit.

In an effort to control spending, you might decide to close the account with a zero balance. Unfortunately, closing this credit card account increases your credit utilization from 50 percent to 100 percent — in other words, you’re now using 100 percent of your available credit, and your credit score will suffer as a result. The way credit scoring models work, the wider the gap between your balances and available credit, the better. Even if you decide not to use a credit card, it’s often better to keep accounts open.

4. Applying for too many accounts

Applying for too many credit cards doesn’t look good from a lender’s standpoint. When lenders check your credit history, the bank also looks at your number of recent credit inquiries. If you’ve applied for multiple credit cards in the span of just a couple of months, the bank may think you’re experiencing some type of financial hardship and in desperate need of credit.

Plus, each inquiry can reduce your credit score by approximately two to five points and they stay on your credit report for two years.

5. Being an authorized user

As an authorized user, you have permission to use another person’s credit card. The problem is that this credit account also appears on your credit report. Any action by the primary accountholder person—whether good or bad—affects your credit.

So, if the primary account holder pays the statement late or maxes out this credit card, this can hurt your credit score and make it harder to qualify for a mortgage. If you’re thinking about purchasing a house, request to have your name taken off any accounts where you’re an authorized user. Unfortunately, this doesn’t work if you’re a joint owner on the account.

The Bottom Line?

Buying a home is a big step. If you’ve spent years preparing for this move, don’t let bad credit card habits wreck your dream. If you use credit wisely and avoid maxing out your accounts, you’ll have a better chance of qualifying for a mortgage.

 

Eric Khan is a Senior Mortgage Banker licensed in 23 states. Eric has been in the mortgage industry for over 10 years, and can be contacted by phone at 203-783-4593 or by email at [email protected] NMLS# 184348.


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