Here's Why (and How) I Kept My Credit Card Balance at $0 When Applying for a Mortgage

Recently, I applied for a mortgage. I wanted to qualify for the best possible rate while doing so, as getting a better rate can save you more than $100 per month for each $100,000 borrowed to buy a house.

To make sure I was able to get the most competitive loan offer available, I kept my credit card balance at $0 during the mortgage application process. Here's why I did that, and how I made it happen.

Here's why I wanted a $0 credit card balance during the mortgage application process

There were two big reasons why I wanted my credit card balance to be as low as possible as I sought out a home loan.

First, I didn't want a high credit card payment to affect my debt-to-income ratio. Mortgage lenders look at your debt relative to income in determining whether to approve you to borrow. Generally, they want your total debt costs (including the new mortgage) to be less than 36% of your income.

I regularly charge a lot on my credit cards and, although I pay it off in full when my statement comes, my card company frequently reports my balance before I've had a chance to pay the bill. When I obtained a mortgage a few years ago, this concerned my lender because my credit report showed I had a high monthly card payment due. By keeping my card balance at $0, though, the money I temporarily charge on the card wouldn't affect my DTI.

I also wanted my credit score to be as high as possible, since mortgage lenders take that into account. Credit utilization (credit used versus credit available) is the second most important factor in determining your credit score, accounting for about 30% of your score. By keeping my card balance at $0, I'll have the lowest utilization ratio possible.

The reality is, anyone applying for a mortgage needs to be aware of the effect high credit card bills have. You should try to avoid having your credit report show a big balance during the application process.

How I kept my credit card balance at $0

Although I wanted my credit card balance to be as low as possible so as not to hurt my mortgage prospects, I did not want to give up the chance to earn credit card rewards in the months leading up to applying for a home loan.

So here's what I did to keep my balance down. When I charged stuff on my card, I simply made a payment every few days to bring the balance back down to $0. There's no rule that says you can't pay off your card many times a month, and you still get rewards if you charge something and pay it off immediately. So that's exactly what I did.

Since my card balance was always at $0, or close to it, I knew no matter when it was reported to the credit bureaus, I'd have a low balance that would look good to my mortgage lender.

Remember, borrowing a lot of money means that even a small change in interest rates has a big impact. Let's say you're taking out a $400,000 loan. If you qualified for a 7.00% rate, you'd pay $2,129 per month in principal and interest and a total of $766,428 over the life of the loan. If your rate went up a tiny fraction to 7.125%, you'd instead be looking at a principal and interest payment of $2,156 per month and $776,124 over time.

So, it really does pay to do everything you can to get the lowest possible mortgage rate -- which means you may want to follow my lead and try to keep your credit card balance as low as you can during the mortgage application process.