Watch out: carrying a credit card balance can hurt your mortgage chances - Ingrid Bjel McGaughey - Mortgage Broker

Managing your credit card makes your mortgage application stronger

The opposite of this statement is also true: carrying a credit card balance can hurt your mortgage chances. So, being mindful while managing your credit cards isn’t just about maintaining a good credit score. It can also play a big role in getting approved for a mortgage in Canada. Here’s how handling your credit cards wisely can boost – or injure – your mortgage prospects.

1. Your credit card balance affects your credit score

Lenders weigh your credit score heavily when considering your mortgage application. By using your credit cards responsibly – like paying bills on time and keeping your balances at less than 30% – you can keep your credit score healthy. This makes you more appealing to lenders.

2. The 3% rule impacts your purchasing power

Lenders look at the “total debt service ratio” to see how much of your monthly income goes towards debt payments, over and above your potential mortgage payment. The debt payments include how much you owe toward your credit card payments monthly. The catch? They don’t just use your minimum payment. They look at your credit card balance. Then they set your monthly payment at 3% of that. So, if you owe $5,000 on your credit card, we have to use 3% of that, or $150, as your monthly payment. These payments can really add up, and cut into your purchasing power. In other words, you might qualify for a significantly smaller mortgage.

3. The self-employed mortgage can be jeopardized

Self-employed individuals often face unique challenges when it comes to managing their credit, especially when applying for loans or mortgages. Since their income may fluctuate and financial documentation can be more complex, demonstrating smart credit management becomes even more crucial. When we’re trying to use “stated income”, or income verified by non-traditional means, it hurts our case if you have a lot of credit card debt built up. It simply doesn’t make sense to suggest that you have a great income if you don’t seem to be able to get your credit cards paid down. If the story doesn’t make sense, it can make lenders nervous.

4. If we need an exception, we might not be able to get one

Lenders sometimes have wiggle room for their approvals. For example, if you have a nice sized down payment and the mortgage qualification ratios are above the normal guidelines, we can try to make a case for getting an exception. Similar to the situation with self-employed borrowers, it is much harder to get an exception approved if you are showing large balances on your credit cards. Lenders love to see responsible credit card management. It shows them you can handle debt responsibly, which boosts your chances of getting approved for an exception. And, it can mean the difference between getting the mortgage amount you want.

In summary?

How you handle your credit cards can make a big difference when it comes to getting approved for a mortgage in Canada. A large balance on your credit cards can actually hurt your mortgage chances. So, keep those balances low, pay on time, and show lenders you’re financially responsible, and you’ll be in a better position to secure the mortgage you want.

Get in touch if you’d like to discuss your own financial situation. I’d be happy to give you my feedback and suggestions on a game plan for getting the mortgage you want.

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