Be Careful With Credit Cards When Buying A House

By Scott Sheldon (Open Post)

Your ability to purchase a home with financing is predicated on how much net income you have after all monthly debts. If you’re consumer liabilities absorb your income, particularly in credit card payments, you may have to put the brakes on the home search. Following is how even 0% interest credit cards may affect your home buying chances…

Most realize in order to purchase a home you need at least good credit and understand that the better the credit score the better the qualifying chances will be. One of the ways to build and maintain healthy credit score is the ability to use and manage credit over said period of time. Using 3 to 5 credit cards actively, paying them off in full each month is a fantastic way to support a good credit score, a benchmark factor in qualifying for the prize. However, credit cards are not something to be taken lightly. Do exercise caution especially if they are not paid off in full by month’s end.

How Credit Cards Can Limit Your Ability To Buy A Home

Carrying a balance-this, depending on the terms of your individual card services agreement may limit how much house you can buy. The key with carrying a balance on any one credit card is the payment. In most circumstances the larger the balance on any one credit card, the larger the monthly payment. The higher the monthly payment on any individual card, the higher the chances you will not be able to purchase as much house. For example let’s say you owe $10,000 on a credit card, the monthly payment associated with the obligation is $200 per month. $400 per month of your income is needed to offset that debt to not hurt your qualifying ability. If this balance could be spread out over say 2 to 3 credit cards each with a lower payment totaling less than $200 per month, you come out ahead as the lender is going to use the minimum monthly payment that’s due each month.

*Always remember it’s not what you owe that counts it’s what you pay…

O% credit cards- The question comes up regularly ” The card is 0% interest, it just makes sense to keep it right?” No, not if you’re trying to buy a home- paying off the higher rate credit cards first might be a good move if the monthly payment is higher than the cards you have that are 0%. In other words for buying a house, you’re going to want to focus on the cards that have the highest monthly payment despite the interest rate because those are the ones that will your qualifying ability the most. Lenders are required to use a debt to income ratio in determining how much of a house payment you can take on. Most lenders work with the debt to income ratio of approximately 45%. Meaning 45% of your monthly pretax income is allowed for a proposed new mortgage payment plus any consumer obligations. Consider the following approach: if you have a credit card that has a $2000 balance with 0% interest with the monthly payment at $150 per month compared against another credit card that has a $5000 balance with an interest rate that say 6% with payment $50 per month, you’ll have larger bang for your buck paying off the credit card that has a has the higher payment despite the fact that it 0%. The idea here is the you’ll want to cherry pick, the cards with the lowest balance with the higher payment in order of priority to maximize your buying potential. A good mortgager lender can assist you tremendously with this task.

*As a good rule of thumb for financial planning, it does make sense to tackle the higher interest rate credit cards first because of the additional interest expense you’ll pay over time, but that is not the case necessarily when it comes time to qualifying for a mortgage.

Consolidating Cards- Let’s face it, people carry credit card debt because they don’t have the cash to make the purchase outright. Consolidating any 0% interest credit cards or even other credit cards into one credit account containing a total new lower payment will help you qualify to buy a home. Why? It has to do specifically with the minimum monthly payment. Even if you choose to make a pre-payment each month in an effort to accelerate the debt payoff, it’s about the minimum obligation per credit card the lender will use in determining whether or not you’ll be able to buy that house- so consolidating may help.

If you have the cash are are undecided on using the cash for the down payment or paying off debt, talk to a lender. If you do plan to payoff the credit cards to qualify, this can be accomplished as a special lender exception (not all lenders allow paying off debt to qualify). For example if you’re contract to buy a home and your loan comes back from underwriting your debt to income ratio is too high, one way to reduce the debt to income ratio so your loan can be approved is to pay off the credit cards in full. This route also entails one additional step in order to remove the obligation, you would have to pay off the credit card in full and close the credit account. In most cases while this might adversely affect your credit score in the short term, a new mortgage loan in your name should far offset from a credit score perspective any adverse credit score drop as nothing has the ability to move your credit score up or down the way a favorable mortgage rating does.

Scott Sheldon is Senior Loan Officer and consumer advocate based in Sonoma County. Scott has been originating home loans for nearly a decade.

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