A big part of pursuing travel rewards is learning to take advantage of credit card acceptance bonuses. Due to the recent rate cut by The Feds and the expected reductions to come, home ownership or refinancing is a trending topic these days. If you’re waiting to apply for a home loan or refinance, you may be concerned about how your credit card usage may affect the process.
In this post, we’ll explore how opening new credit card accounts can affect your home loan application and the steps you should take to make sure your credit is in top shape to get the best loan rate available.
How the mortgage process works
To plan your credit card strategy before applying for a loan, it helps to understand how the home loan application and approval process works.
Home loan officer Scott Wynn of the Wynn & Eagan Group at Citywide Home Loans in Denver spoke with TPG and shared his insights.
Wynn explained that there are three factors lenders will consider about your personal finances when determining your qualifications: your down payment, your monthly income (minus any existing debts) and your credit score. The second and third factors are the ones that can affect your credit card usage.
When you first talk to a real estate agent, you’ll give them permission to pull your credit history and FICO credit scores from all three major credit bureaus. Your credit inquiry will be considered “hard pull,” but the FICO scoring model will include all home loan inquiries made within 14 days. So this is the time when you will want to shop for the best price.
Marketers draw from all three bureaus because the industry standard is to judge applicants based on the average of three scores (or less than two), to account for any differences in the data collected.
Next, your real estate agent may request a pre-qualification or pre-approval from your real estate agent. A pre-qualification is simply the seller’s opinion of your ability to qualify based on the information you have provided, while a pre-approval usually requires the collection of documents such as payslips, bank statements and tax returns.
When you’re ready to make an offer on a home, the extra level of assurance that comes from a pre-approval can help persuade a seller to choose your offer as they’ll feel more confident that your loan won’t be turned down.
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Your mortgage broker will then help you 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 reviewed for the final time (minimum deduction), and your work will be reverified.
How your credit card accounts change your score
If you pay your bills on time and have little credit, credit cards can help your credit score by adding to your credit history. The two most important factors that affect your credit score are your payment history and the amount you owe, which account for 35% and 30% of your credit score, respectively.
In addition, 15% of your score is based on the length of your credit history, so keeping a few credit card accounts open for many years will help.
The remaining 20% is divided equally between the types of credit used and the opening of new lines of credit. Having credit card accounts open and in good standing will help, although applying for several new credit cards in a short period of time will hurt.
Thankfully the drop in your credit score will be small and temporary, as this factor is very important. For more information, see our post on how card applications affect your credit score.
Related: Does applying for a new credit card hurt your credit?
Your credit score and your mortgage application
A common misconception is that you need the highest possible score for the lowest price. To qualify for the best loan rates available, you need to have a credit score of 740 or higher, but in almost all cases, having a score of 760, 780, 800 or higher will make little difference. (Wynn indicated that he has seen rare exceptions in the past when a lender offers a specific program that requires a high score, usually for a very high-value loan).
If you pay all your bills on time and have no major debts other than a modest credit card statement balance, which you pay off in full each month, you will likely get a credit score in the high 700s. Applying for a new credit card may 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 loan rates.
Problems that credit cards can cause in the mortgage application process
One of the problems mortgage applicants face comes from overusing credit cards (even when they avoid interest by paying off statement balances in full each month), which is a common rate among reward travelers.
As cardholders see, they have no debt, as they never carry a balance and never pay interest. From the perspective of card issuers and lenders, however, The balance from the monthly statement is the amount of credit that is reported to the credit bureaus.
As Wynn explained, your credit report and credit score are just a snapshot of time, but lenders will see the minimum payment amount listed as a higher or lower debt obligation, regardless of whether you pay it in full.
That means the time when your statement closes matters to your credit score, although some card issuers may report balances more often than once a month. So, if you’ve paid off your balance but it hasn’t been reported, your credit report will still show a high balance.
Unfortunately, lenders will see a large amount of credit in your name, which affects how much they will allow you to borrow. Knowing this, you can choose pay the balance in full before your statements close. That way, card issuers will report $0 balances and your ability to borrow won’t be hampered by credit visibility.
Another problem credit card users may face is applying for a new credit card (or other loan) after being pre-approved for a loan, especially after submitting a formal home loan application. In fact, Wynn advises all of his clients to do the following after they’ve gotten their pre-qualifications:
- Don’t overuse credit cards.
- Do not allow current accounts to fall behind.
- Do not co-sign anyone on a new account or loan.
- Do not give permission to anyone to use your credit (by applying for new credit accounts).
His reason is that lenders include new questions and new loan applications, which changes your loan qualifications. In addition, the impact of these negative factors can be greater for non-homeowners and people with limited credit history.
My travel advice rewards enthusiasts
Mortgage rates are starting to drop from record lows, so many people may consider buying a home or refinancing to lock in a lower payment. You can check current house prices in your area here.
When you’re ready to move forward, you should talk to a real estate agent who can quickly check your credit. Do this ahead of time to see where you stand and give yourself a chance to correct any mistakes.
If your score is close to 740, you should consider all means to hit that mark and stay above it, which means “fasting” from applying for a new credit card until the process is over. In addition, those who want to stretch their borrowing capacity to the limit should always pay off their credit card balance (even before the statements arrive) to minimize the impact the debt has on their credit reports.
If you already have a very high credit score (over 700s or higher), there is no need to change your behavior. As long as you follow Wynn’s advice from graduation to closing, which should only be a few weeks in most cases, you don’t need to use all the tricks to add a few points to an already excellent score.
Bottom line
Many travel rewards enthusiasts are very savvy credit card users, but applying for a home loan is a special situation that requires a set of rules for a while. By understanding the process and taking the necessary precautions during this time, you can get the best mortgage rates and continue to pursue your rewarding journey right after you close your loan and have the keys to your new home.
Related: How I went from having no credit to financing a house in 2 years
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