Paying Off Credit Cards Monthly

There is a new underwriting rule change that is going to be very painful for mortgage borrowers. It has to do with open 30 day charge accounts. This relates to paying off credit cards monthly. The rule says for open 30 day charge accounts that do not reflect a monthly payment on the credit report, or 30-day accounts that reflect a monthly payment that is identical to the account balance, lenders must verify borrower funds to pay off the account balance. The documented funds must be in addition to any funds required for closing costs and cash reserves. This is very important. It used to be that the underwriter was only required to count 5% of the outstanding balance against the borrower’s debt ratios. Now we have to show sufficient cash to prove they can pay the balance off. Below is an example:

Really Old Rules (pre 2008 financial crisis):

American Express account
$9,852.000 balance
*The underwriter did not have to count any of this debt against the borrower, because it is required to pay off your American Express account monthly, so they figured there was no monthly payment to count against the debt ratio, since the account is required to be paid off monthly.

Old Rules (post 2008 financial crisis up until the most recent guideline change):

American Express account
$9,852.000 balance
*Underwriter must count 5% of the balance, or a payment of $492.60, against the borrower’s debt ratios. Borrower’s would complain and say that nothing should be counted against their debt ratios, because it is a requirement to pay the account off monthly. I had client who was taking the vacation of a lifetime right as they decided to buy a house, and had a $20,000 American Express balance, and the $1,000 a month I had to count against their debt ratios was problematic.

New Rules (as of this month):

American Express account
$9,852.000 balance
*Underwriter must show that the borrower has the funds necessary to payoff the balance of this account, as well as sufficient funds to close their loan. So the good news is that no monthly payment will be charged against the client’s debt ratios, the bad news is that we have to dig further to document this extra cash to show they can pay off this monthly open charge account.

To me, it just gets harder and harder.