Will a New Credit Card Hurt My Mortgage Application?
It’s worth shopping around for a credit card just as much as it’s worth shopping around for a mortgage. But should you do both at the same time?
Applying for a credit card right before applying for a mortgage or during loan underwriting could present challenges to getting those coveted house keys. You could end up either paying more for your mortgage in the long run or — in a worst-case scenario — losing your chance to become a homeowner altogether.
Below, we walk you through how a new credit card can affect your ability to get a mortgage.
How credit cards affect mortgage eligibility
One of the main factors that mortgage lenders consider when reviewing loan applicants is their credit usage, which includes the outstanding balances they have on credit cards. If you’ve spent close to your credit limit on your existing credit card accounts, that’s a red flag.
Your credit score
The total amount you owe on all your debt makes up a whopping 30% of your credit score. Lenders care about the overall debt you owe because they’re concerned with how much of your available credit is in use. This is referred to as your credit utilization ratio, or the percentage of amounts you owe compared with your credit limits.
It’s good practice to keep your credit utilization ratio below 30%, especially on credit cards. For example, if you have a card with a $2,000 credit limit, you should aim to carry a balance of no more than $600 or, ideally, pay off the balance in full every month. High revolving balances will likely affect your ability to get a mortgage.
Lenders also consider the length of your credit history, which accounts for 15% of your credit score, and new credit, which is worth 10% of your score. The longer your credit history, the better your credit score. Opening a new credit card account lowers your average age of accounts and impacts your score. Plus, when you apply for a card, you trigger a credit inquiry, which also affects your credit score.
Your debt-to-income ratio
The account information found on your credit reports and your pay stubs is what lenders use to calculate your debt-to-income (DTI) ratio. Your DTI is the percentage of your gross monthly income that is used to cover your debt payments. If a large percentage of your income is dedicated to making credit card payments and tackling other debt, that can also negatively affect your chances at getting approved for a mortgage.
Will a new credit card hurt your mortgage application?
The answer: It depends.
Before applying for a mortgage
Let’s say you apply for a credit card during one week and then apply for a mortgage the following week. The inquiry from the credit card application can drop your score by a few points. A lower score means a higher mortgage interest rate.
During the mortgage application process
When a lender pulls your credit reports and scores, that information is usually good for 120 days, explained John Stearns, a senior mortgage banker at American Fidelity Mortgage Services in Milwaukee.
“If they’ve already pulled it, getting a new credit card is not going to change your credit score,” Stearns said. Let’s pause here for a couple of caveats:
- The credit score your lender pulled won’t change, provided you close on your home within those 120 days. Otherwise, they will need to pull new reports and scores.
- The score won’t change on the lender’s side for those 120 days, but your actual score is affected by the new credit.
Stearns said when a client is further along in the mortgage underwriting process and about a month away from closing, he’s automatically notified whenever they apply for new credit. He then confirms with the client whether they opened and have been using a new credit account. If they have, he needs to know both the balance and monthly payment details, as this can affect their DTI ratio and, ultimately, their approval.
3 tips to help you maintain your mortgage approval
Consider the following three credit tips to avoid losing your mortgage approval status.
Don’t apply for any new credit until the mortgage closes
Although it’s possible that you’ll close on your home within the 120-day window of your lender’s credit pull, it’s best to wait a while before you apply for a new credit card, auto loan, line of credit, etc. New accounts can derail the underwriting process and push your DTI ratio outside of the range of mortgage eligibility.
Don’t swipe with reckless abandon
As previously mentioned, your credit utilization matters to the mortgage lending process. If you want to make it to the closing table, don’t increase the outstanding balances on your credit cards by making large purchases like appliances and furniture. If anything, pay down the balances you owe so in the event your credit report and scores are pulled again, there are some improvements present that could lead to a better mortgage rate.
Don’t close unused credit card accounts
If you have some paid-off credit cards collecting dust, you may think closing them will help your credit profile, but think again. Closing credit cards means you lose available credit. Losing available credit means a higher credit utilization ratio. A higher credit utilization ratio leads to a lower credit score. Just say no.
The bottom line
It’s probably best to refrain from opening a credit card before buying a house or taking any other actions that result in a hard inquiry on your credit report. This could prevent some headaches and contribute to a smoother homebuying process overall.
You might be anxious to get going on your home’s design and decor, but there will be plenty of time for that in the months and years to come.
“My overall advice is: Sit tight,” Stearns said. “Keep the credit good, keep the income as it is, don’t go crazy on debt.”