Credit card strategies for mortgage and home loan applicants

An important part of pursuing travel rewards is learning how Take advantage of credit card welcome bonuses. Thanks to the Fed’s recent interest rate cut and more cuts predicted to come, home ownership or refinancing is a hot topic right now. If you’re planning on applying for a home mortgage or refinancing, you may be worried about how your credit card usage could affect the process.

In this post, we’ll look at how opening a new credit card account can affect your mortgage loan application and the steps you should take to make sure your credit is in top shape so you can get the best mortgage rates available.

How does the mortgage process work?

To plan your credit card strategy before applying for a mortgage, this will help you understand exactly how the home loan application and approval process works.

Scott Wynn’s mortgage loan officer The Wynn & Eagan team at Citywide Home Loans in Denver spoke with TPG and shared his insights.

Wynn explains that there are three factors lenders will consider about your personal finances when determining your qualifications: down payment, your monthly income (minus existing debts) and your credit score. The second and third factors are factors that can be influenced by your credit card usage.

When you first talk to a mortgage broker, you’re giving them permission to take your credit history and FICO credit score from all three major consumer credit bureaus. An inquiry into your credit will counted as “hard pull”, but the FICO scoring model aggregates all home loan requests made within 14 days. So this is the time you want to shop for the best price.

Brokers choose from all three bureaus because the industry standard is to evaluate applicants based on the midpoint of three scores (or the lower of two scores), to account for any differences in the data presented. collect.

Next, your real estate agent may request a preliminary appraisal or pre-approval from your mortgage broker. Pre-qualification is simply the broker’s opinion of your eligibility based on the information you have provided, while pre-approval typically requires the collection of documents such as Pay stubs, bank statements and tax returns.

When you’re ready to make an offer on a home, the extra level of verification from a pre-approval can help convince the seller to choose your offer because they will feel more confident that your loan will not rejected.

Your mortgage broker will then help choose the best lender for your needs and you will be asked to submit a formal loan application. Finally, about a week before you close your loan, your credit will be given a final check (this is a soft pull) and your employment will be re-verified.

How your credit card accounts shape your credit score

When you pay your bills on time and keep your debt to a minimum, your credit card will can help your credit score by adding to your overall credit history. The two most important factors that contribute to your credit score are your payment history and the amount you owe, which account for 35% and 30% of your credit score, respectively.

Additionally, 15% of your score focuses on the length of your credit history, so keep a few credit card accounts open over the years will help.

The remaining 20% ​​is divided equally between used credit types and newly opened credit lines. It helps to have a credit card account open and in good standing, although applying for multiple new credit cards in a short period of time is harmful.

Thankfully The decrease in your credit score will be small and temporarybecause this factor is the least important. For more information, see our article above How card applications affect your credit score.

Related: Does applying for a new credit card affect your credit?

Your credit score and your mortgage application

One thing in common misconception is you need highest score possible at the lowest price. To qualify for the best mortgage rates available, you need a credit score of 740 or higher, but in most cases, having a credit score of 760, 780, 800 or higher will not make a difference. smallest difference. (Wynn points out that in the past he has seen rare exceptions where a lender offers a particular program that requires a higher score, typically for very high-value loans.) .

If you pay all your bills on time and have no significant debt other than a modest credit card statement balance that you pay in full each month, you’ll likely have a high credit score. 700. Apply for a new credit card It’s possible to drop your score a few points, but as long as it stays comfortably above 740, you won’t hurt your chances of qualifying for the best mortgage rates.

Problems that credit cards can create during the mortgage application process

One of the problems mortgage applicants face comes from using their credit cards too much (even when avoiding interest by paying their statement balance in full each month), which is what many people do. Travel enthusiasts often behave.

From the cardholder’s perspective, they have no debt because of them never carry a scale and never pay interest. However, from the perspective of card issuers and lenders, The balance that appears on your monthly statement is the amount owed as reported to the credit bureaus.

As Wynn explains, your credit report and credit score are just a snapshot in time, however lenders will see the minimum payment listed as a more or less permanent debt obligation, regardless of whether you pay in full or not.

That means when your statement closes is important to your credit score, although some card issuers may report balances more frequently than once per month. So if you’ve paid your balance but it hasn’t been reported yet credit report will still show a higher balance.

Unfortunately, the lender will then see a larger amount of debt in your name, which affects the amount they will lend you. Knowing this, you can choose Pay the balance in full before your statement closes. That way, card issuers will report a $0 balance and your borrowing capacity won’t be impaired by debt.

Another problem credit card users may encounter is applying for a new credit card (or any other loan) after being pre-approved for a mortgage, especially after having already applied for a mortgage. Apply for an official mortgage loan. In fact, Wynn advises all of its clients to do the following once they have received pre-qualification:

• Don’t overuse your credit cards.
• Don’t let existing accounts fall behind.
• Do not co-sign for anyone on a new account or loan.
• Do not allow anyone to run your credit (by applying for a new credit account).

His rationale is that lenders combine new inquiries with new credit applications, which changes your loan qualifications. Furthermore, the impact of these negatives can be much greater for non-homeowners and those from disadvantaged backgrounds. Limited credit history.

My advice for travel enthusiasts

Mortgage rates are starting to fall from record highs, so many people may be considering buying a home or refinancing to get a lower payment. you can Check current mortgage rates in your area here.

When you’re ready to move forward, you should talk to a mortgage broker who can quickly check your credit. Do this as soon as possible to see where you stand and give yourself a chance to correct any mistakes.

If your score is close to 740, you should consider every option to get that score and stay above it, which might mean “fasting” from applying for a new credit card until the process is over. Additionally, those looking to push their borrowing power to the limit should continually pay down their credit card balances (even before statements come in) to minimize the impact of debt on their debt. with their credit report.

If you already have a very high credit score (over 700 or higher), you don’t need to change your behavior. As long as you follow Wynn’s advice from pre-qualification to closing, which in most cases takes just a few weeks, you don’t need to pull every possible trick to add a few points to your numbers. Already excellent score.

Bottom line

Many travel rewards enthusiasts are savvy credit card users, but applying for a home mortgage is a special case that temporarily requires a new set of rules. By understanding the process and taking the necessary precautions during this stage, you can get the best mortgage rate possible and continue pursuing award-winning travel right after you close. loan and have the keys to your new home.

Related: How I went from no credit score to having money to buy a house in 2 years