What to Know About Applying for a Credit Card After Mortgage Approval
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If you’re buying or refinancing a home but haven’t closed on your home loan yet, avoid applying for a credit card after a mortgage approval or running up charges on your existing accounts. Doing so may put you at risk of a mortgage denial or having to pay a higher interest rate.
After you’ve been approved for your mortgage and closing day has passed, you’re in the clear to apply for a new credit card.
How credit cards affect your mortgage approval
During the mortgage loan process, underwriters want to ensure you use credit responsibly and you can manage new debt. Here are factors they consider:
Your credit scores
Your credit score is a rating that helps lenders judge how well you manage credit. While there are a few different scoring models, the one most commonly referred to is your FICO Score. Here’s how it’s calculated:
- Credit utilization ratio: By comparing your credit balances to your credit limits, the credit utilization ratio shows how much of your available credit you’re using. This accounts for 30% of your credit score. In other words, the lower your utilization ratio, the better your chances are of getting a mortgage.
- Credit history length: How long you’ve had open lines of credit comprises 15% of your credit score, so the more extensive your credit history, the better.
- Payment history: Lenders want to make sure you can pay your debts, which is why your payment history is the biggest factor in your score. It accounts for 35%.
- Credit mix: Not all credit is created equal. Lenders look for a mix of credit types, including installment loans (e.g. student or auto loans) and revolving credit lines (e.g. credit cards). It makes up 10% of your credit score.
- New credit: This also contributes 10% to your score. You’ll be considered a higher risk if you open too many new lines of credit in a short time frame.
Here’s how your credit score is judged, according to MyFICO.com.
|FICO Score ranges||Rating||What it means|
|Below 580||Poor||Well below the national average, and lenders consider you risky|
|580-669||Fair||Below national average, but some lenders may approve your loan|
|670-739||Good||At the national average or a little above, and lenders like a “good” score|
|740-799||Very Good||Above national average and says you’re a reliable borrower|
|800 and above||Exceptional||Way above the national average; 850 is a perfect FICO Score|
Your debt-to-income ratio
Your debt-to-income (DTI) ratio compares your monthly debts against your monthly gross income. There are two calculations for DTI: front- and back-end DTI ratios. The front-end DTI ratio includes your monthly housing expenses only, which is then divided by your monthly income; the back-end DTI ratio includes all of your monthly debts (including the new mortgage payment).
Your DTI ratio is one of several factors that help lenders judge whether or not you can handle an additional debt obligation. The calculation includes account balances that show up on your credit report; it doesn’t include monthly bills like groceries, child care, health care and other recurring bills.
Do’s and don’ts of using and applying for a credit card after mortgage approval
Make your credit card payments on time. If you tend to forget, either set up automatic payments or use electronic reminders.
Keep the balances on your credit cards low. Better yet, try to pay them in full each month.
Scan your credit reports for errors. If you find something you think is wrong, dispute the error ASAP. It’s good practice to review your credit reports each year to look for inconsistencies or identity theft.
Lower your DTI ratio. Pay down your credit balances in order to reduce your overall debt load, which will help boost your credit score.
Apply for new credit. Any new credit accounts may jeopardize your chances of getting a mortgage approval.
Make large purchases. Although it may be tempting to buy new furniture or electronics for your new home, hold off until after you’ve closed, otherwise, your DTI ratio may increase.
Close credit card accounts. If you have cards you haven’t used for some time, keep them open. Closing them shortens your credit history, which may impact your credit score.
Assume your credit will be pulled only once. Lenders can pull your credit up until the day of closing. That’s why you shouldn’t apply for credit cards or other loans before you’ve closed on your mortgage.
FAQs about applying for a credit card after mortgage approval
Can I be denied a mortgage after the closing disclosure is issued?
Yes, you can. The closing disclosure is a multi-page document that spells out your loan terms, estimated payments and your obligations at closing. By law, lenders must issue it, at least three business days before your closing date. And they can pull your credit up until the closing is completed.
How soon can you apply for credit after closing?
It’s a good idea to have a couple of mortgage payments under your belt before you add more debt to the mix.
How many days before closing is my credit pulled?
Although it varies by lender, your credit can be pulled up until and on the day of closing. The last time it’s pulled, the underwriter decides if you’ve met all the criteria for the loan.
Will closing a credit card hurt my mortgage approval?
It’s best not to close a credit card before closing on a mortgage because it could affect your credit history and lower your credit score. If you’re planning to apply for a mortgage in the next few months, don’t close any of your credit cards.
Is paying off a credit card before the mortgage closing date a good idea?
Yes, it is. Paying off an account balance before your closing date won’t hurt your credit score and it can lower credit utilization. Remember to pay it before the credit account’s due date.
Can I use my credit card before the closing date?
It depends. If you have a high back-end DTI ratio, avoid using your credit cards until well after closing. But if your credit is in good shape, then making a few small credit purchases that you pay off in full shouldn’t hurt your chances of getting a mortgage loan.