When you’re on the cusp of purchasing a new home, it’s natural for home buyers to want to buy furnishings and decor to make it as comfortable and functional as possible. While it’s tempting to apply for a new credit card to take advantage of financing options or rewards, opening a new line of credit can impact your mortgage experience.
As today's mortgage rates move higher after hitting historic lows in January, potential homebuyers are eager to lock in the best rate possible and secure affordable monthly payments. An excellent credit score and an impressive credit history can help consumers secure a lower mortgage rate. After all, credit problems and too much debt are among the top reasons lenders may not approve a mortgage loan.
Debt consolidation can also help you reach your financial goals by taking any loan balances, like a personal loan and car loan, and streamlining them into one. Debt consolidation loans are personal loans that can help you pay off existing balances over time. They usually have lower interest rates, and can ultimately play an important factor in the mortgage approval process.
If you’re ready to explore your mortgage options, visit an online mortgage broker like Credible to get personalized loan rates and preapproval letters without affecting your credit score.
Before a mortgage is approved, what are lenders looking for?
Toby Mathis, founding partner of Anderson Law Group and author of "Infinity Investing: How the Rich Get Richer And How You Can Do The Same," outlines what lenders review before approving a mortgage:
- Credit: Interest rates are based on a sliding scale based on a client’s FICO score, Mathis explains. A score in the 640 to 760 range is considered good, while 760 and above is deemed excellent for conventional financing.
- Income: A client must have at least two years of continued employment in the same industry or line of work to qualify for a conventional mortgage. "Income is based on your gross income on your W-2 income," Mathis says.
- Savings: Clients are required to have at least six months of reserves in checking, savings, retirement, or investment accounts to cover principal, interest, taxes and insurance based on their new loan.
Wondering about the interest rate you’d qualify for? Visit an online mortgage broker like Credible to get personalized rates within three minutes, again, with no impact to your credit score.
Will opening a new credit card hurt my mortgage application?
Applying for a new credit card during the mortgage application process could cost you the mortgage for several reasons. Mathis explains that your credit score may decrease as each application for a new line of credit shows up as a hard pull on your credit and can drop your score by as many as 10 points.
Additionally, if you open a new card, your score may decline as your amount of available credit increases.
Whether you're a first-time home buyer or have gone through the mortgage process before, it's crucial to understand how bad credit or even fair credit can affect your home buying experience and mortgage payment. Your credit score could also tumble if you’re extended a new line of credit, because the average account age of your credit will drop when a new card is factored.
"That said, there are several factors lenders use when deciding interest rates and credit worthiness," says Mathis. "Opening a card may not be enough to move the needle on any of them, especially if you have had credit cards for a long time and have very limited usage. But it would be sad if a new credit card cost you even .25 percent on a loan. That little difference can equal thousands of dollars over the life of your loan."
Before applying for a mortgage, do you need to pay off all credit card debt?
If your outstanding debt is so substantial that it prevents you from qualifying for a mortgage or borrowing as much as you’d like, you should try to pay off as much as possible and stabilize your bank account before applying.
Plus, paying down debt will boost your credit score, which can help you secure a low mortgage interest rate. Address any student loans, business loans or an auto loan, which will be helpful in improving your credit.
Loan calculators like Credible's online student loan calculator can be very useful in determining your remaining costs and help you get on your way to mortgage approval.
Overall, Mathis explains that the value of paying off all credit card debt depends on your debt-to-income (DTI) ratio. This calculation is made by dividing your monthly debt by your monthly gross income. Though the maximum DTI ratio varies by mortgage lender and program, generally, the number falls between 43 and 55 percent, Mathis explains.
Your DTI also factors in to how much you'll be eligible to borrow for a home loan. You may be exploring your options – like a jumbo loan, adjustable-rate, 30-year or 15-year fixed-rate loan – and you can visit Credible to compare lenders and mortgage rates.
How long after closing can I apply for a new credit card?
Once your file is officially closed—not just loan documents signed—you are able to apply for a credit card without any worry, Mathis notes.
"You do not want your DTI to change at all during the process, or it can muddy the waters and jeopardize your loan," he says.
If you're applying for a mortgage, a new credit card might be tempting. Mortgage rates are highly dependent on one's credit score and credit history, so holding off on a new card application until after closing can be a good strategy to ensure you save money and have a smooth mortgage experience.
Interested in exploring your credit card options? Visit Credible to compare companies.
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