Applying for a Mortgage Soon? You Need to Be Extra Careful With Your Credit Cards Right Now

If you are in the process of applying for a mortgage loan, it's very important to be smart about how you use your credit cards. That's because your behavior with those credit cards could affect whether you get a loan -- as well as how much you have to pay for it.

In particular, there are a few key things you need to do to make sure your credit habits don't affect your efforts to buy a home with an affordable home loan.

Keep your credit utilization ratio down

Your credit utilization ratio is a key factor in your credit score. This ratio is calculated simply by dividing credit used versus credit available. So if you have $10,000 in outstanding credit across all your cards and have charged $2,000 on your cards, you would have a 20% utilization ratio.

Ideally, you will keep this ratio as low as possible, but definitely keep it below 30% when applying for a home loan to avoid hurting your credit score. Credit utilization ratio is the second most important factor that determines your credit score (after your payment history), so you cannot afford to run up a big balance.

Having too much credit card debt can also affect another important ratio -- your debt-to-income ratio. Mortgage lenders also consider this when deciding whether to give you a loan. Lenders will look at all of your debt payments, including your new housing costs, and compare that to your income. If the debt-to-income ratio is too high (36% is often the cutoff), you may not qualify for a home loan or may be limited to borrowing from lenders offering higher rates.

You don't want a big balance to hurt your chances at a home loan, so aim to use no more than 10% of your available credit in the months leading up to applying for a mortgage.

Pay your credit card on time

If you have a great credit score of 780 and no prior late payments, making just one payment 30 or more days late could result in your score dropping by as much as 110 points. Those with lower scores could still see a 60 to 80 point drop in their score after a late payment.

The impact of this score drop could be substantial. Say, for example, you're borrowing $450,000 on a 30-year fixed rate loan. If your credit score was in the 760 to 850 range, the average interest rate you'd pay as of mid-October would be about 7.209%, and your monthly payment would be around $2,038. But if your score dropped into the 660 to 679 range, the average interest rate goes up to 7.822% and the monthly payment increases to $2,164.

That one late payment could mean you'd end up paying $126 more per month and $45,360 more over time.

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You can't afford to reduce your chances of qualifying for a loan or to cost yourself thousands just because you make a simple mistake with your credit card in the time leading up to borrowing. So set up automatic payments, avoid using your cards too much, and keep tabs on your credit report to make sure you're as ready as you can be to apply for a loan and get an affordable rate.

When you're paying your mortgage off for the next three decades, you'll be very glad you took a little extra care during this crucial time.