Does Credit Card Debt Affect Mortgage Approval?

Your credit score can mean the difference between qualifying for a mortgage loan or not. When you apply for a loan, expect the lender to order your credit report and credit score. Because a lender will be interested in how much of a credit risk you are, the amount of credit card debt you carry can lead to denial for a home loan. A lender might still approve you for a mortgage loan even if your credit score is low but will charge a higher interest rate.

FICO Score

The information in your credit report -- particularly your credit score -- helps a mortgage lender decide whether to give you a loan. While there are different credit scoring models mortgage lenders can use, most will pull the FICO score from each of the nation’s three major credit reporting bureaus. Along with your payment history, lenders consider the amount of debt you owe, the length of your credit history and how many of your credit accounts are new accounts. If you’re close to maxing out the credit available to you on your credit card accounts, a lender might worry that you’ve overextended yourself and will be late with your mortgage payments.

Debt-to-Income Ratio

Even if you really need those new appliances to go with your new house, wait until after closing to charge the purchases on your credit card. Adding any new charges to a credit card account while your mortgage loan is being processed increases your debt-to-income ratio, and that can spell trouble. Before making a mortgage loan, lenders generally look for a total debt-to-income ratio that doesn’t exceed 36 percent of your gross monthly income, points out personal finance expert Liz Weston. Your mortgage payment can account for up to 28 percent of that amount, which means that your car loan, credit card payments and any other debts must be paid out of the remaining 8 percent. It’s a good bet that your lender will take another look at your debt-to-income ratio right before you close and can still turn you down for a loan if you owe too much debt.

Credit Recheck

If you think you're over the hurdle after that initial credit check, think again. Applying for a new credit card before you close on your house could louse up your mortgage approval. Most lenders will check your credit again right before the closing date. Opening a new line of credit -- even if you don’t use it -- while your loan is still in the underwriting process can be enough to make a lender worry. It doesn’t matter how attractive a credit card deal may seem. If you’re thinking about getting a new credit card between the time you apply for a home mortgage and the time closing is scheduled, don’t. You risk the lender delaying closing or even canceling the loan.

Consequences

Opening a new line of credit can cost you points on your ever-critical credit score. Besides taking on more debt, you have no payment history with that card company. Getting approved for a new credit account affects the length of your credit history, which can put a ding in even a high credit score. In fact, it’s easier to inflict damage on a high credit score. Accepting just one new credit card offer lowers the average age of all your credit accounts and that can lower your credit score. Closing credit card accounts can negatively affect your score, too, by giving you less of a credit history and reducing the total amount of credit you have available.

About the Author

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