Will Applying For A New Credit Card Hurt My Chances Of Getting A Home Loan?

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Buying a home and applying for a home loan is both an exciting yet tense event.  Any sudden financial change can potentially put your mortgage application in jeopardy.  There are several factors the loan underwriters will use to determine your creditworthiness for a home loan, and one of those is applying for new credit cards.

Will applying for a new credit card during the mortgage application prevent you from buying a dream home?  There is no definitive answer although most financial experts, including the Consumer Financial Protection Bureau, do not recommend applying for a new credit card or any other type of loan until your mortgage has closed.  To help prevent a future mortgage crisis, mortgage lenders will almost certainly review your credit report immediately before closing to ensure there have been no “changes in borrower circumstances” since the initial mortgage application to ensure a potential borrower has not misleadingly overextended themselves financially.

Avoid Store Charge Cards

An overlooked variety of credit cards is store charge cards.  Oftentimes people only think of a new credit card only as traditional credit cards.  A Visa or MasterCard that are obtained from their local bank, or preferred airline that can be used anywhere credit cards are accepted.

Store charge cards are treated the same way as full-service credit cards.  Whether it’s signing up to get 10% of your initial purchase at a clothing store or 0% financing for 3 years at La-Z-Boy, a store charge card is a new line of revolving credit that will show up on your credit report.

As much as you may want to purchase that new leather sectional and have it delivered on moving day, you will probably want to wait to sign the closing papers on the home loan first.

Not to be confused, store charge cards are different than rewards cards.  Both can only be used at specific stores, but rewards cards cannot pay for purchases.

Why a New Credit Card Can Mean Rejection

The best advice is to wait to apply for any new credit or loans until after your home loan has closed.

Mortgage lenders will only approve applicants if they are very certain the monthly payment can be made for the duration of the loan.  Applying for new credit, even if you do not carry a balance, increases the potential risk of missing a payment.  It also means that the underwriters have to recalculate your credit worthiness, at a minimum, a new card or loan application can delay a final decision on your mortgage application.  Lenders do not like surprises, particularly after the initial application.

If you have a perfect credit score of 850 and apply for a new credit card, will your mortgage application get rejected?  There are several variables to the scenario, but probably not.  For those with credit scores around 700, it very well could jeopardize your chances of approval.  Regardless of your credit score, any new type of credit could trigger higher interest rates on your home loan.  Why?  Because new credit will temporarily lower your credit score for several months or up to two years.

New credit history is factored at 10% of your overall credit score.  “Hard” inquiries, ones initiated by an applicant, will typically stay on your report for two years.  Most lenders and agencies only consider inquiries made within the last year.  Applying for a credit card, store charge card, or any other loan will be counted as a hard inquiry and also part of your new credit history.  Even if you do not apply for new credit while waiting for your home loan to be approved, any new credit you received 6 months or a year beforehand can impact your application.

If you are unsure about your creditworthiness because you recently applied for a new card, you might want to wait several months before pursuing a home loan.  This should allow sufficient time to demonstrate to the lenders and underwriters that you can make timely payments and do not carry a high balance.

Other Factors Mortgage Underwriters Consider

New credit cards are not the only factor mortgage underwriters look at to determine your credit worthiness.  Here is a quick synopsis of what else is important to obtaining a mortgage:

  • Credit Report & Credit Score
    • Shows credit & payment history for previous loans & credit cards. Some lenders use trended credit reports that look at payment history for the previous 30 months.
      • All credit disputes need to be settled before applying for a home loan.
    • A history of previous loans, active credit cards, and on-time payments will create a higher credit score.
  • Debt-to-Income Ratio
    • A high credit score isn’t always enough. Lenders want to make sure you can actually afford the monthly payment for your new house.  A ratio higher than 43% could spell trouble for getting final approval.
  • Total Assets
    • This is your net worth. The figure is calculated by how much money is in savings, investments, and the value of assets you own like an automobile or your current house.
  • Current Income & Employment History
    • Lenders want to know you have a steady income and constant employment. Changing employers shortly before or during the application process will raise some red flags.  Self-employed applicants will need to be prepared to provide more paperwork that shows proof of income from previous years (possibly the last five years of tax returns).
  • Down Payment
    • Applicants with lower credit scores might be required to pay a higher down payment to secure financing or receive a lower interest rate. This can mean a smaller loan, but requires more cash upfront at closing.  So you might have to buy a cheaper house in order to make the monthly mortgage payment and keep money in your savings account.

What You Should Do Instead

So new credit cards are not the only way to hurt your chances of getting a home loan.  In fact, they are a small piece of the puzzle.  If you will be applying for a mortgage soon or already in the process, do not apply for a new credit card until the final decision is made.  It’s like intentionally driving above the speed limit when you see a cop ahead.  He may write you a ticket or he may wait for somebody going even faster.  You cannot predict what he will do, so it’s best to obey the speed limit.

Instead, be proactive.  If you think you will want to apply for a home loan in the near future, apply for a credit card at least one year before.  This allow time for your credit score to improve because of the account will be a little older (higher average age of accounts) and certain lenders do not count hard inquiries more than one year old.  People with scores in the 800’s or upper 700’s can apply after 6 months with little worry.

Sometimes obtaining a new credit card before closing on a home loan is unavoidable.  If this is the case, it probably won’t be the end of the world.  It can potentially delay the application process or cause the lender to charge a higher interest rate than originally quoted, but it shouldn’t disqualify responsible applicants in most instances.  Lenders are more concerned about an applicant’s employment history, the total amount of assets, and their debt-to-income ratio.

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