New Rules Will Make It Harder to Get a Mortgage If You Have a Credit Card Balance
After the housing crisis, the rules for approving mortgages have become stricter. Fannie Mae is developing a new set of rules that will take into account how you will pay for your credit cards. If you have a balance sheet, it will affect your ability to get a loan.
On June 25, Fannie Mae will be unveiling a new set of guidelines for its mortgage underwriting policy. One of the key updates is “trending credit data,” which mostly works against you if you don’t pay your credit card balance in full each month. While they have always viewed high credit utilization as a risk, here’s what will change with the new guidelines:
Trending credit data will be used to assess the borrower’s ability to manage revolving credit card accounts. A borrower who uses revolving accounts conservatively (low utilization of revolving credit and / or regular repayment of the revolving balance) will be considered more at risk. A borrower who has a high level of revolving loan utilization and / or who only makes a minimum monthly payment each month will be considered more risky as this indicates that the borrower may have trouble making payments in the future.
In other words, if you pay your balance in full monthly, you are probably fine. If you have a revolving balance sheet, you see yourself as a risk, and depending on how much debt you renew, it could prevent you from getting a loan.
The reason for the change, Forbes explains, is a “blind spot” that exists in how credit use affects ratings .
Imagine two hypothetical people:
- Mary has a $ 5,000 credit card. She only has one credit card and has been using it for over 20 years. Since this was her first card, the cap is still very small compared to her income. She makes $ 300,000 a year and spends about $ 4,500 a month on her card. But she pays the balance of the statement in full and on time every month.
- Joe has five credit cards with a total available credit of $ 25,000. He makes only $ 24,000 a year and has $ 5,000 in credit card debt. He only pays the minimum due for this debt, but he was never late.
Mary has a 90% utilization rate because she uses $ 4,500 of her $ 5,000 loan. Joe has a 20% utilization rate. Mary pays no interest and her monthly credit card balance is less than 2% of her income. Joe has 21% of his gross income in debt and pays high interest.
In short, even though Mary is a more favorable borrower, her credit score is probably lower because the estimates do not take into account income, but they do not count how much available credit you have. Fannie Mae’s new rules hope to take this into account by looking at how much of your balance you actually pay each month.
We should also point out that buying a home is a serious financial decision, and if you have consumer debt in the first place, you really need to consider many factors that influence your decision .
Check out Fannie Mae’s full press release below. They detail each change that will be associated with the new guidelines. If you are thinking about buying a home, it can help you understand exactly how your credit history will affect the mortgage process.