Can a Charge Card Affect Your Mortgage?
Yes! When you apply for a home loan, the lender runs a credit check. If, at that time, your charge card shows a zero balance it does not affect your debt-to-income ratio or reserve requirements (metrics used by lenders to assess creditworthiness).
However, if the lender does a credit-refresh just days before closing and the card shows a balance of $5,000, that’s an issue they’ll need to address.
Charge cards such as American Express require payment in full each month. Lenders view that debt differently than revolving credit card debt, which allows smaller monthly payments. Therefore, the lender views the charge card’s pay-in-full requirement as a liability that may impact your ability to pay your mortgage.
So in this case, the lender may need to document that you’ve paid your $5,000 bill, or at least have the assets to do so, prior to closing your home loan.
Lenders use the debt-to-income ratios and reserves to decide whether homeowners will be able to afford their mortgage along with the rest of their existing debt. Fannie Mae, for example, requires lenders to verify the borrower has funds to cover the account balance. “The verified funds must be in addition to any funds required for closing costs and reserves,” clarifies Teresa Kay, a credit risk analyst in Fannie Mae’s Single Family business unit.
“We do this so people get loans they can afford,” notes Lisa Rogers, executive vice president of Originations at Nationstar in Lewisville, Texas. “We want to put homeowners into a good situation for the long-term,” she adds.
Consumers can continue to use their charge cards during a mortgage transaction, but they need to be aware of the timing and not make purchases during the time when it could completely derail closing your loan, advises Rogers.
If you have a high debt-to-income ratio when you apply for a mortgage, or if you don't have a lot of extra assets, Bob Smith, chief underwriter for Nationstar, recommends not using charge cards between the mortgage loan application date and the loan’s close.
Refinancing is sometimes a different story: “If you’re refinancing with your current mortgage company—for instance under the government’s Home Affordable Refinance Program or HARP—new charge card balances won’t come into play, notes Smith.
To find out how credit card debt could affect your home loan transaction, contact your mortgage company, a HUD-certified counseling agency, or the HOPE Hotline (888-995-4673) for free assistance.