Rules for credit card debt
It’s getting easier to get approved for a mortgage.
According to the Federal Reserve, banks are loosening mortgage standards nationwide; and, lenders are now approving more applications than during any period this decade.
The banks aren’t getting reckless, though — they’re just coming to realize that standards may have toughened too much after last decade’s losses.
“The Pendulum”, as some in the business say, is swinging back to common sense. As a result, lenders now treat credit card debt completely differently then they have in the past, which is helping first-time home buyers and refinancing households.
If you’ve been turned down for a mortgage in the recent past, it’s a good idea to re-apply. You may get approved today.
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Lenders are now treating credit card debt completely differently than they have in the past. Notably, a paid-in-full credit card will no longer count against an applicant’s debt-to-income calculation. This change will benefit:
- Credit card holders who pay off their balance each month
- Debt-consolidating homeowners
- Applicants who are close to qualifying, and who have cash in the bank that can be used to pay down cards at closing
You can pay off credit cards to qualify
Nearly two-thirds of loan applications are approved by today’s mortgage lenders. Going forward, though, that number is expected to increase. This is because lenders are changing the way they calculate an applicant’s debt.
The change will benefit applicants who use credit cards monthly, and both home buyers and homeowners looking to will benefit.
Under the new rules, which apply to conforming mortgages, credit card debt is treated differently.
For credit cards which are paid in full at closing, lenders are no longer required to “close” the credit card in order to exclude it from the applicant’s calculation.
A paid-in-full credit card no longer counts against an applicant’s DTI.
There are three groups of consumers this change will benefit.
Group 1: Credit card holders who pay off their balance each month
Previously, lenders used whatever mid-statement balance a credit card reported to the credit bureaus — even if that balance would be paid off at closing.
The lender would “hit” the borrower with the payment showing on the credit report.
If no minimum payment was given, the lender would multiply the reported balance by 0.05 to determine the card’s “monthly obligation.”
A $10,000 American Express balance would add $500 to a consumer’s obligations, for example.
But what if the loan applicant pays off that balance prior to or at closing?
Under former rules, the lender would still apply $500 toward the borrower’s monthly debts.
Now, under current rules, the applicant is hit with a $0 monthly payment when that American Express card’s balance is taken to zero.
Group 2: Debt-consolidating homeowners
The second consumer group which benefits from the DTI rule change is existing homeowners doing a debt consolidation: refinancing and using home equity to pay down credit cards.
Under current mortgage rules, credit cards paid off at closing via a debt consolidation no longer count against a person’s DTI. Previously, cards were required to be paid and closed. Closing cards is no longer required.
Group 3: Applicants who are “very close” to qualifying
The third group is comprised of home buyers and refinance applicants who find themselves close to qualifying, but whose debt-to-income levels fall just outside today’s requirements.
For applicants on the brink of qualifying, cash in the bank can be used to pay down cards at closing, in order to lower DTI and get approved.
Even for cards with a balance of $250 or less, this can mean the difference between getting approved and getting turned down. Your lender can help you determine which cards should be paid down to help you get approved.
Check your mortgage eligibility
Mortgage approval rates are at their highest levels in years and, with changes meant to help today’s borrowers, approval rates are expected to climb.
Check your eligibility for a home purchase or refinance, even if you’ve been turned down due to high credit card debt in the past.