This BLOG On Credit Card Balances And Debt To Income Ratios And Credit Scores Was UPDATED And PUBLISHED On July 11th, 2020
Effects of credit card balances and debt to income ratios:
Homebuyers or homeowners trying to refinance their home loan, credit scores are not the only thing they need to worry about.
- Credit balances and Debt to income ratios are equally as important
- One of the quick fixes to high debt to income ratio solutions are paying down credit cards
- Minimum payment due on credit cards will be counted towards debt to income calculations
- Credit balances and debt to income ratios go hand in hand
- High debt to income ratio mortgage loan applicants may want to consider paying down credit cards prior to formally applying for a home loan
In this article, we will discuss and cover lowering Debt To Income Ratios by lowering credit card balances.
Why Are My Credit Scores So Low?
Many consumers cannot figure out why their credit scores are so low when they have no derogatory tradelines in the past several years.
- One of the biggest and main reasons why consumers have lower credit scores is due to not having any active revolving credit accounts
- Every consumer should have at least three credit cards with at least $500 credit balances
- Those with lower credit scores and prior bad credit should get three secured credit cards as soon as possible
- Each secured credit card can boost one’s credit scores by 30 or more points
As the secured credit card ages, consumer credit profiles will strengthen and their credit scores will go up further. Eventually, the secured credit card company will offer a higher credit limit increase without asking for an additional deposit.
Impact Of Credit Card Balances And Credit Scores
Part of the credit score is the number of available credit consumers has available. One of the quickest fixes any consumer can have to boost credit scores instantly is by paying down their credit cards. No more than 10% balance of the credit limit should be on every credit card to maximize credit scores.
- The more credit available on credit cards, the higher credit scores will be
- Consumers with credit balances that are close to the credit limit, then their credit scores will suffer
Just by paying down or paying off credit card balances, credit scores will greatly improve.
Guidelines On Paying Down Credit Cards During Mortgage Process
There are many cases borrowers barely meets the maximum debt to income ratio requirements.
- For conventional loans, the maximum debt to income ratio caps at 50% debt to income ratio
- For FHA loans, the maximum back end debt to income ratio caps at 56.9% to get an approve/eligible per automated underwriting system approval
Borrowers barely meeting the debt to income ratio caps due to higher credit card balances any unexpected increase in debt to income ratios will automatically disqualify them.
Credit Card Balances And Debt To Income Ratios: Case Scenario
For example, here is a case scenario:
- consumers with $100 in monthly homeowners insurance payments
- that goes up by $150
- that extra $50 in the increase of homeowners insurance can exceed the maximum debt to income ratios permitted
Need to reduce other monthly payments in order to meet the maximum debt to income ratios allowed.
Credit Card Balances And Debt To Income Ratios: Solution
The best solution to solve the debt to income ratios and reduce monthly debt payments is by getting rid of minimum credit card payments
- The benefit of paying off credit cards prior to the mortgage application and approval process is borrowers not have to close out credit cards
- However, if during the mortgage application and approval process borrowers pay off credit cards so they can meet the debt to income ratio requirements, both FHA and Fannie Mae will require borrowers to pay off credit cards and after paying off credit cards, will be required close out credit card accounts
Proof that the credit card accounts are paid off and that the credit cards are closed will be required. A new credit report showing that the credit card balance has a zero balance and that the credit card account is closed is required. Needs to be reflected on the credit report through a credit supplement.