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I was under the impression that having little to no credit card debt makes it easier to get a mortgage since it translates to low debt-to-income ratio.
But recently I came across some internet articles/posts which imply that even if all the credit cards are paid off (i.e. zero credit card debt), your credit limits impact the ratio!
Here is just one of them: How Much Home Can You Afford?
So, if my credit card debt is ZERO, but my total credit card limit is, say, $50k, the mortgage lender figures out the minimum monthly payment on a potential $50k cc debt, which will of course dramatically increase my debt-to-income ratio???
Interesting article. Still, one's income and their lack of debt, will have significantly more impact on one's ability to secure a mortgage, than the amount of one's 'credit limit' (which doesn't really mean much in the context of one's ability to repay a mortgage).
For example, would a college student who acquires a dozen credit cards, each with a $5K limit, be considered a better risk than an employed person who has one card with a $50K limit?
First off... I wish people would come up with more creative names for their articles. I'm pretty sure I've seen that same title over 50 times already.
I don't trust that article though. They use a lot of "here's a 'fact' so you should fear this unrelated 'fact'" type logic.
I can't say with certainty that lenders don't factor in the potential minimum payment. I can say that if the lender I used did that, it would have dramatically hurt my ratios to the point where I don't think I could have gotten my mortgage.
Beyond that, I can say say that this guy in particular seems to be making stuff up and I wouldn't trust him at all.
His article reeks of "I know some way to calculate ratios that you didn't think of so be afraid and make sure you listen to me."
I wouldn't worry about having credit cards with no balance on them. If those were really a risk, no one would be able to get a mortgage since those are actually typically the people with the highest rates available.
Thank you very much thelopez (as always ) Jeo and jghorton.
I am hoping that the article is incorrect.
I will, of course, check with my lender when the time comes, and if it turns out to be true, I guess I will call up the credit companies and lower my limit!
Thanks everyone
DrD
It doesn't really make sense for mortgage lenders to deny someone simply due to their limit being high.
To do so amounts to saying "We won't give you the loan, because you could spend too much money on the cards and consequently not be able to pay us back".
But that's true whether you have credit limits or not. Even if you have ZERO credit lines, you could overspend to the point that you can't pay the mortgage. For instance, you just got paid and have $3000 in the bank, mortgage payment of $1200 is due in one week. You withdraw $2500 and spend it on drugs and hookers. Then you can't pay your mortgage!
Is this really different from being unable to pay the mortgage because you overspent on credit cards?
The real question is, under what conditions is the risk of being unable to make a mortgage payment due to out-of-control impulsive behavior a bigger or a smaller risk?
It doesn't really make sense for mortgage lenders to deny someone simply due to their limit being high.
To do so amounts to saying "We won't give you the loan, because you could spend too much money on the cards and consequently not be able to pay us back".
But that's true whether you have credit limits or not. Even if you have ZERO credit lines, you could overspend to the point that you can't pay the mortgage. For instance, you just got paid and have $3000 in the bank, mortgage payment of $1200 is due in one week. You withdraw $2500 and spend it on drugs and hookers. Then you can't pay your mortgage!
The real question is, under what conditions is the risk of being unable to make a mortgage payment due to out-of-control impulsive behavior a bigger or a smaller risk?
Thank you very much thelopez (as always ) Jeo and jghorton.
I am hoping that the article is incorrect.
I will, of course, check with my lender when the time comes, and if it turns out to be true, I guess I will call up the credit companies and lower my limit!
Thanks everyone
DrD
I wouldn't lower my credit limit. I'd check with various lenders.
It is about "available" credit that can be slightly damaging to some people. I think it really depends on the persons income, credit history, etc. If you have a flawless credit history of making payments, having $50k in "available" credit on, say, credit cards, shouldn't be too much of an issue if your debt to income ratio is low.
However, if your debt to income ratio is "close" to being acceptable, and then they see you have FAR more "available credit" than you could possibly manage, it could raise some red flags.
That is why they say not to keep too many credit card accounts open. I have 3 cards with zero debt, and a total limit on them that is less than 5% of my yearly income.
Seeing this article does make me realize I should probably close my two I don't use, with high interest rates and crappy rewards program, and get one better card to go with my current "good" card (mostly just as a backup type card)
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) Jeo and jghorton.
