The question I’d always hear, “Caleb, what is going to happen when you go to buy a home”? Fortunately for those who’ve asked, I have the answer. (my experience, yours may vary*)
You have how many credit cards?
For most, the thought of having 20 credits cards is a sure-fire way to get denied for a home purchase. I can assure you, however, that isn’t the case, at least not automatically.
Each bank/brokerage will have different levels of scrutiny, so I can’t speak for them all. That said, here is my experience and my two-cents.
There is no magic number of credit cards that will push you off the “approval” ledge. What really matters is how you manage your accounts.
Everyone knows that paying a credit card late is a no-no, but that’s not the full story. Your credit card balance is a huge factor when judging your overall credit-worthiness. Many banks don’t like seeing a single credit card with over 30% utilization That is your statement balance in relation to your credit limit.
This is easy on your part, you will just want to pay your credit card off IN FULL prior to your statement closing date. Your statement close date is NOT the same as your payment due date. By paying a credit card off in full before the statement closes, you ensure the highest credit score possible.
Pay Them Down
Your credit score weighs heavily on how well you manage your open cards. If your cards are maxed-out, the bureaus will lower your scores to reflect that you are over-leveraged on your accounts.
Before applying for a home, MAKE SURE your all your cards are paid down as low as possible and that it has reflected on your credit report. (it can take weeks)
When applying for a conventional loan, as in my case, each credit tier changes your interest rate. Simply put, the better your score, the better your rate. Most banks will combine all three of your bureaus and average them out (or take the highest and the lowest). It is important you wait to apply until all three bureaus display your latest – and greatest – statement balances.
A 740+ “average tri-score” is generally considered super prime, which is what I qualified for, as in the case of conventional loans. If you fall below that 740 tier by even a couple of points, that could increase your payment (due to a higher APR) by $20-$40 a month, on most homes.
90 Day Rule?
Each lender is different, but generally, most will want a written explanation of any new lines of credit opened in the last ~90 days. Some lenders, will even require explanations of credit inquiries in the last 60-120 days.
What they want to know is this: Did your credit inquiry result in new debt, if so, how much debt and what is your monthly obligation on that new debt.
Always be sure you are very thorough and 100% truthful when filling out your disclosures. Your Debt-to-Income ratio is calculated on your monthly obligations. If you have a minimum monthly payment on a credit card balance, that WILL count towards your monthly payment limits.
Why You Shouldn’t Have a Minimum Payment on a Credit Card
Depending on your loan type, FHA, VA, etc, the lender will limit your total monthly “debt” payments based on your income. If you are limited to 50% Debt-to-Income, having a few minimum credit card payments can make-or-break your deal.
If you have the ability, PAY OFF your credit cards in FULL prior to applying. Here is a scenario:
-You make $4,000 a month and are allowed to have a DTI ratio up to 50%. You have a minimum credit card payment of $35 on three credit cards.That means you have $105 in revolving “debt” payments each month, counted towards your DTI. (2.6% on $4,000 a month income, to be exact).
With a 50% DTI ratio, the bank will add up all your monthly obligations REPORTED to your credit bureaus, plus the new payment of your home. If your new home payment is $1,500, your car payment is $350, and your minimum credit card payments are $105, they will add that up and divide by $4,000 (your monthly income).
$1,500 (new house payment)
$350 (car payment)
$105 (monthly minimum credit card payments)
$1,955 divided by $4,000 = 48.8% DTI (Don’t cut it close!)
Remember, every situation is different, I just wanted to share general guidelines and set expectations for most buyers.
At the time of applying, I had 16 credit cards reflecting on my credit bureaus. The thing is, I actually have over 20 open credit cards in total. The reason only 16 display on my report is because 6 of my credit cards are small business credit cards.
Many business credit cards DO NOT report balances or even the account to the credit bureaus. If you are going to apply for a home in the future and you don’t want to worry about paying your credit card off in full before each statement closes, get yourself a small business card from; Chase, Citi, American Express, or Bank of America (these banks don’t report small business credit cards on your personal bureaus).
As always, consult your loan officer well in advance to get their advice.