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A mortgage is likely to be the largest amount of money you’ll ever borrow. Keep reading to learn how existing credit card accounts can impact it. [[{“value”:”
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If you’re hoping to take out a mortgage and buy a home, it’s important to consider your entire financial profile beforehand. Knowing how your credit stands and what kinds of red flags you might be waving at a mortgage lender can inform you what type of home loan you should apply for, as well as how much you could be approved for.
According to credit card research from The Motley Fool Ascent, the majority (74%) of Americans have two credit cards or fewer. But what if you have more — say, a double-digit number of active credit card accounts? Let’s take a closer look at how this can help — and hurt — your ability to secure a home loan.
A lot of credit cards: Not a deal breaker
Two credit cards or fewer might be the norm for Americans, but if you’re part of the 13% who have four or more, it doesn’t mean your quest to buy a home is doomed. I’m part of that 13%, and I know some of my colleagues here at The Ascent are too, and some of them own homes.
I’m currently house hunting myself, and I applied for mortgage pre-approvals with several lenders. No mention was made of my credit card roster, and since mortgage lenders access your credit report in the process of deciding whether you’re a safe bet to lend to, they saw them.
But they also noticed that I’m not carrying revolving credit card debt, and my balances are either $0 (in the case of cards I don’t use often) or very low. I have a small handful of core credit cards that I use for most of my monthly expenses, and I pay them off every month. I do this to benefit from purchase protections, cash back, and other rewards. Plus, using credit cards and paying them off on time is a great way to keep my credit score in good shape, meaning I’ll pay less to borrow money (say, in the form of a mortgage).
If this describes your relationship with credit cards, having more of them than the average shouldn’t hurt your ability to get a mortgage.
A lot of credit cards: Potentially a problem
But if you’ve got multiple credit cards and are struggling to manage the accounts, you could run into difficulty qualifying for a mortgage. If you’re carrying a lot of debt on multiple credit cards, and not paying off your balances every month, it could be a red flag for a mortgage lender. Are you relying on credit to get by? It might be indicative of an income problem more so than a spending problem. If you’re unable to cover your regular bills without the help of credit, can you afford mortgage payments?
Carrying credit card balances can directly hurt your credit score as well. A higher credit utilization ratio (say, above 30%) can have a negative effect — credit utilization is responsible for 30% of your FICO® Score. Your credit score impacts the interest rate you’ll be charged for a mortgage, and if your score is below 620, you may not get approved for a mortgage at all.
FHA loans are available to people with lower credit scores, but they tend to come with stricter requirements on the home the loan is being used to purchase. In some cases, home sellers may be reluctant to accept FHA offers due to the more stringent requirements for these loans. In short, having a lower credit score can make buying a home more expensive and more difficult.
Ultimately, the way you manage existing credit is a more crucial factor in buying a home than the nitty-gritty of how many credit cards you have. If you’ve got a lot of cards but don’t lose any sleep over paying them off every month, or you carry low balances, you’ve got a better chance than someone with maxed-out credit cards.
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