Many potential homeowners wonder about the benefits of paying off a credit card before their new mortgage closing date. While paying off debt before applying for a loan is generally a good idea, there are other ways your credit can affect your mortgage approval and terms.
Here is some basic information to know about credit card debt and a mortgage:
Taking out new credit, whether it's opening a new card or retailer-specific line of credit, can negatively affect your credit score. While the damage might be temporary, timing is everything - increasing your credit limit and debt to income ratio before applying for a loan may show mortgage lenders you're too much of a risk.
Closing an existing credit card can also impact your credit score. Overall, most mortgage lenders prefer a stable, even credit history without any major, recent changes.
The minimum credit score requirement for a mortgage depends a bit on the type of loan you get. For example, conventional loans not backed by government programs require a score of at least 620. While it's possible to get approval with a lower credit score, you may end up with a much higher interest rate and monthly mortgage payments.
Both FHA and VA loans offer more flexibility when it comes to credit report requirements. A government loan may only require a score of 580. However, these can come with higher interest rates as a consequence.
If you want to open a new credit card, experts recommend waiting one full business day after closing at the very least. However, it's important to consider the lasting effect on your credit report. While your score can decrease quickly, it can take a long time to build back up again. Keep this in mind when making credit card account decisions after closing on a home purchase.
Daniel j Leeder is a REALTOR®. A Legislative Committee member of Citrus County Realtors Association. He has an extensive history of business experience. Has been a franchise owner of Tropical Touch Auto Restoration an independent contractor for Colors on Parade Inc. for 29 years. A business owner, homeowner as well has closed on properties 75 times in 3 states.
Strength of Character and a drive to please in all capacities of business and personal relationships helps him be the best choice for your Real Estate needs. Real Estate can be complicated, you need a professional in your corner to help you through the little details, and contracts, showings, and legal issues that arise with the buying or selling of one of your most expensive assets. You don't trust your Business or Home to just anybody. Consider Listing or Buying with the Captain. He will NOT steer you wrong.