3 credit card tricks to follow for qualifying a home loan

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By: tiarajoseph11
on 1st Apr,2015

It is true that building and maintaining a good credit score is not very tough job.
3 credit card tricks to follow for qualifying a home loan

Your net income (income after paying all monthly debts) has a tremendous effect on your ability to buy a home with mortgage. If you are paying a major part of your earnings towards debt payments, mainly credit card debts, then you will surely face difficulties while applying for mortgage.

How much credit card debts can affect your creditworthiness

Most of the homebuyers are well aware of the fact that for a better chance of qualifying mortgage, they will need a decent credit history. It is true that building and maintaining a good credit score is not very tough job. But you need to focus on your habits of using credit over a period of time. A great way of managing good credit score is possible if you will actively use 3 to 5 credit cards and paying them regularly. However, if you are not paying credit card payments within due date, the results may be horrible for your finances as well as it will have a deep impact on your credit history.

Your monthly payment towards mortgage is a big factor while deciding your mortgage affordability as well as eligibility. Most of the banks and lenders will allow up to 43% DTI ratio. You cannot exceed this limit or else your application will not be entertained.

Let's check some credit card scenarios and try to sort out possible ways that will increase the chances of mortgage approval.

1. Divide your debt

The relation between mortgage application and credit cards is very complicated. In most cases, if your credit card balance is huge, your monthly payment might also be bigger than you can imagine. The lender will verify your balances through credit history and determine a monthly income slab which will be able to cover up credit card payments as well as the new mortgage payment.

Suppose your balance on credit card is $20,000 and monthly you'll have to pay $400 towards it. To give you approval on the mortgage application, the lender will determine your income slab $600 more to offset that debt per month.

However, that scenario only described your debt on a single card. If you spread your debt balance in 3 or more different cards with low interest rate, then monthly payment you will owe towards credit card will be much lower. It total you will be paying less as the total interest rate will be getting lower than one single card.

2. Paying off credit debt

For qualifying a mortgage, you might be thinking of pay down some of your credit card debts. Before taking that decision you might want to use any credit card payoff calculator to calculate the duration. But you'll need to decide which credit card account must be dissolved first. It is wise to pay off the credit card debt first which has the highest monthly payments. In order to buy a house, you must remove your credit debts from the credit report. Whether the interest rate is high or low, you should always target the higher monthly amount. Practically, those mostly affect your ability to qualify for a mortgage.

For an example, suppose you have two different credit cards with balance $4000 and $6000 respectively. For the first card you have 2% interest with monthly payment of $250. The later one has 5% interest with $150 payment each month. So, as per the discussion above, you should choose to pay off the 1st card with higher payment ($250 per month).

3. Credit cards consolidation

The main purpose of credit card is nothing but using it instead of cash. So, it is good for your credit score if you can consolidate all of your credit cards into one single credit account. By this way you can save money from getting the low interest rate. If you want to make pre payments to pay off debts quickly, it will have less difficulties to handle a single card rather than many.

In most cases, if you close a credit card account, it will have a negative effect on your credit history. But if you are willing to take a new mortgage and you are totally able to pay it down, it can also be helpful to re-build a good credit score.

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