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When youre on the cusp of purchasing a new home, its natural for home buyers to want to buy furnishings and decor to make it as comfortable and functional as possible. While its tempting to apply for a new credit card to take advantage of financing options or rewards, opening a new line of credit can impact your mortgage experience.

 

As today's mortgage rates move higher after hitting historic lows in January, potential homebuyers are eager to lock in the best rate possible and secure affordable monthly payments. An excellent credit score and an impressive credit history can help consumers secure a lower mortgage rate. After all, credit problems and too much debt are among the top reasons lenders may not approve a mortgage loan.

 

Debt consolidation can also help you reach your financial goals by taking any loan balances, like a personal loan and car loan, and streamlining them into one. Debt consolidation loans are personal loans that can help you pay off existing balances over time. They usually have lower interest rates, and can ultimately play an important factor in the mortgage approval process.

 

Before a mortgage is approved, what are lenders looking for?

 

Credit: Interest rates are based on a sliding scale based on a clients FICO score, Mathis explains. A score in the 640 to 760 range is considered good, while 760 and above is deemed excellent for conventional financing.

 

Income: A client must have at least two years of continued employment in the same industry or line of work to qualify for a conventional mortgage. "Income is based on your gross income on your W-2 income," Mathis says.

 

Savings: Clients are required to have at least six months of reserves in checking, savings, retirement, or investment accounts to cover principal, interest, taxes and insurance based on their new loan.

 

Will opening a new credit card hurt my mortgage application?

 

Applying for a new credit card during the mortgage application process could cost you the mortgage for several reasons. Your credit score may decrease as each application for a new line of credit shows up as a hard pull on your credit and can drop your score by as many as 10 points.

 

Additionally, if you open a new card, your score may decline as your amount of available credit increases.

 

Whether you're a first-time home buyer or have gone through the mortgage process before, it's crucial to understand how bad credit or even fair credit can affect your home buying experience and mortgage payment. Your credit score could also tumble if youre extended a new line of credit, because the average account age of your credit will drop when a new card is factored.

 

"That said, there are several factors lenders use when deciding interest rates and credit worthiness," "Opening a card may not be enough to move the needle on any of them, especially if you have had credit cards for a long time and have very limited usage. But it would be sad if a new credit card cost you even .25 percent on a loan. That little difference can equal thousands of dollars over the life of your loan."

 

Before applying for a mortgage, do you need to pay off all credit card debt?

 

If your outstanding debt is so substantial that it prevents you from qualifying for a mortgage or borrowing as much as youd like, you should try to pay off as much as possible and stabilize your bank account before applying.

 

Plus, paying down debt will boost your credit score, which can help you secure a low mortgage interest rate. Address any student loans, business loans or an auto loan, which will be helpful in improving your credit.

 

Overall, the value of paying off all credit card debt depends on your debt-to-income (DTI) ratio. This calculation is made by dividing your monthly debt by your monthly gross income. Though the maximum DTI ratio varies by mortgage lender and program, generally, the number falls between 43 and 55 percent.

 

How long after closing can I apply for a new credit card?

 

Once your file is officially closednot just loan documents signedyou are able to apply for a credit card without any worry.You do not want your DTI to change at all during the process, or it can muddy the waters and jeopardize your loan .

 

If you're applying for a mortgage, a new credit card might be tempting. Mortgage rates are highly dependent on one's credit score and credit history, so holding off on a new card application until after closing can be a good strategy to ensure you save money and have a smooth mortgage experience.


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