How to Manage Credit Cards While Buying a House

I’m pretty knowledgeable when it comes to the universe of credit cards, because part of my business is to stay on top of information related to plastic. But I’m the first to admit that dealing with mortgage lenders is a whole different ballgame. Remember those old vintage baseball parks around the USA that had great history plus outfield fences that were a lot closer, making it easier to hit a homerun? Well they are a thing of the past, and today’s ball players will confirm that it takes a lot more punch to knock one out of the much bigger and more expansive parks of the 21^st century. Well the same can be said for the mortgage business.

Less than six years ago you had to basically shoot yourself in the foot to manage to get turned down for a mortgage. Even if you had lousy credit, paltry income, and no job you could walk into most any bank or mortgage company and just sign your name, make up some imaginary numbers to fill in the application, and they’d lend you hundreds of thousands of dollars, no problem.

These days, though, your credit score means a whole lot less. A score of 650, for instance, is worth only about as much as a score of 600 was before the credit crisis of 2008. That’s because mortgage companies and credit rating agencies have tightened their criteria. What used to be “great” is now only “good.” What used to be “good” is now “subpar.”

Your tax returns for this year may also be just the tip of the iceberg in terms of what they require for income verification. Your job, if you are lucky enough to have one, may not impress them enough to trust you to repay your obligations.

It’s a mean old world if you want a mortgage, and one of the weakest links in the application process is your credit card history. So don’t make the mistake of applying for a mortgage without first taking deliberate steps to rein in your credit card use.

You need to pay off those balances you carry month to month, to improve your chances of loan approval. If you cannot do that, then you need to rethink your ability to shoulder additional debt. Maybe you’re not ready to buy a house and take on a big fat mortgage and monthly house payment. Trying to service more debt than you can handle is why millions of Americans recently lost homes to foreclosure. So be honest with yourself. Pay off your plastic before you go house shopping.

It is okay to keep one card with a relatively small balance on it, but keep that balance under 25 percent of your total credit line. So if you have a card with a $2,000 limit, for example, do not carry a balance higher than 25 percent of $2,000 – or around $500. Leave that extra $1,500 open, because that unused credit improves your credit score.

But don’t do the knee-jerk reaction of just cutting up all your plastic and canceling your cards, either. That sounds like a smart idea, but it is better to have cards – and lines of credit – that you do not use. That shows discipline and restraint on your part, and that looks good to lenders. Canceling a card, on the other hand, shrinks your available credit – and that can effectively diminish or shrink your overall credit profile.

For most people that means you need to start planning about six months ahead of time, because it can take a few weeks or even months for the data stored on your credit record to get fully updated. Order copies of your credit report from all three of the major reporting agencies. Study the report and if you find any errors, notify the agency. Meanwhile work on paying off debts to raise your credit score. Then wait a few months for those new, improved changes to show up in your credit files. You want the credit agencies to have plenty of time to refresh your file – reflecting the steps you take to improve your credit card profile – before your application goes through and the mortgage company reads your credit reports.

Don’t apply for any new loans. That means auto loans, department store credit cards, regular credit cards, student loans, and all the rest. Hold off on those until after you have closed on your house purchase so that your debt load remains as light as possible. Also shop around before you apply for a mortgage, so that you only apply through one bank or mortgage company. Applying multiple times makes you look desperate, and that will hurt your credit.

Do all of that and you’ll look great when you apply, dramatically enhancing your chances of getting mortgage approval so you can buy a home.