Don’t Let Your Credit Cards Drown You!

February 20th, 2011

This is going to come across as a lecture, and well, it is. I have had some loans come close to being denied, because people cannot control their credit card use. When you apply for a mortgage don’t use your credit cards! It is just that simple. Yes, you can buy some groceries, and go to the movies, and get gas. But problems can occur in many situations.

A problem may occur when you are in the process of getting a mortgage, and you decide to take the trip of a lifetime. Or, when you have planned the trip of a lifetime, and then planned to buy a house at the same time. The problem is that most lenders will pull their own credit report at underwriting, as well as at loan application, to see if any changes have happened in your credit in the interim. If the credit card balance spikes, and your minimum monthly payment spikes, that may throw off the debt ratio. I had clients who decided to take a $20,000 trip to Russia, it was a lifelong dream of theirs. They put it on their American Express and planned to pay it off later. Underwriter’s now use 5% of an American Express balance (even though Am/Ex usually has to be paid off monthly) and 5% of a $20,000 Am/Ex balance was $1,000 and that threw the buyer’s debt ratios over the limit, and we had a problem!

In another scenario, I had clients who were borderline as far as their debt-to-income ratio, and they decided to get some new credit cards during the loan processing for some reason. And they used them during the loan processing! And they bought new furniture! Lots of it! Fortunately for them, the lender we were using was not one of the lenders that pulled a new credit report during underwriting. This lender used the credit report we pulled when we started the loan application, so the client got lucky. Otherwise, the new debt on the new credit cards would have caused the debt ratio to be too high, and the loan would have been denied.

I had other clients who were renovating their home, and as the renovations were being finished we started a refinance to recoup some of the cash they had put into the renovations. They also started to massively run up their credit cards buying new furniture, a grill, pool toys, etc. They figured they’d pay off the credit cards with the “cash out” they were getting from the cash out refinance we were doing. But, you are not allowed to pay off or pay down credit debt to qualify for a mortgage. So we could not tell the underwriter we’d pay off the debt at settlement with the refinance proceeds. The loan was denied, and I had to find another lender that allowed for the higher debt ratio caused by their high credit card balances. Luckily I found such a lender, but the interest rate was not as attractive as the first lender.

I could go on with more stories, but you get the point. I am afraid to say, when you buy a new house or refinance, DO NOT get new credit, and DO NOT run up your credit cards for any reason, unless you are way overqualified, and the extra debt simply does not matter. But there are very few of us who are way overqualified. So please, do yourselves a favor, when you apply for a mortgage, take a credit card hiatus!

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.​

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