How is a mortgage application affected by a charge card, such as an American Express or Diners Club card? Quirkily.
A charge card requires you to pay the balance in full each month. Mortgage lenders view your charge card balances differently from how they used to, in part because of evolving guidelines established by mortgage investors and by Fannie Mae and Freddie Mac.
Years ago, charge card debt hardly counted toward a mortgage applicant’s debt.
“In the past few years, most investors required us to count 5 percent of the balance due as part of the borrower’s debt-to-income ratio,” says Deana Auman, vice president of operations for Fairway Independent Mortgage in Needham Heights, Mass. “Now, most investors require us to verify that the borrower has the funds to pay off the balance in full.”
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Auman says that issues with American Express cards are a frequent cause of delays in mortgage closings. Sometimes, problems with charge cards prevent applicants from qualifying for mortgages.
“It depends on the borrower’s situation whether it will impact the closing or not, but a lot of people use their American Express card to pay all their daily expenses in order to get rewards points,” Auman says. “The tricky part comes when we qualify someone on a day when their American Express card shows a zero balance — and then, when we do a credit-refresh check a few days before closing, it shows a balance of $5,000. At that point, we have to make sure we can document the assets to pay that bill, which can sometimes be difficult at the last minute.”
Barbara Roubo, a senior loan officer with Potomac Mortgage Group in Reston, Va., says that mortgage investors sometimes vary their guidelines based on the size of the charge card balance.
“If a borrower has a high American Express balance, the investors usually require us to document the income to pay it off,” Roubo says. “Some investors allow us to use 5 percent of the charge card balance as part of their debt-to-income ratio instead of verifying assets for the entire balance. As long as the borrower can still qualify for the loan with that extra debt, this method is easier because no additional documentation is necessary.”
If the cash to pay off the charge card balance in full must be verified, it can cause problems for the mortgage applicant.
“If someone has an American Express balance of $25,000 and needs $100,000 in cash to go to settlement, then they will need to show verifiable assets of $125,000, plus whatever cash reserves are required by the lender,” Roubo says. “If we don’t see enough in the documents we have, we’ll have to ask for a new bank statement and then source each deposit in the account.”
Charge card advice
If you have a high debt-to-income ratio when you apply for a mortgage, or if you don’t have a lot of extra assets, Auman recommends not using a charge card between the mortgage loan application date and the closing.
“If you’re a tight borrower, you shouldn’t use a charge card because it could delay your closing or even cause you to be disqualified,” says Auman. “Even if you use it for work travel and your employer will reimburse you, if a balance shows up on your credit report, you’ll have to show that you can repay it in full.”
Credit card rules
Rules about credit card balances are simpler than the rules about charge cards: The minimum payment due for a credit card must be included in your debt-to-income ratio when calculating your ability to pay the mortgage.
Carrying a credit card balance of more than 25 percent to 30 percent of the limit can negatively impact your credit score.
As long as you have the income and assets to cover your charge card and credit card bills, your mortgage application shouldn’t be adversely affected. But you should be prepared for the paperwork to document your ability to pay your charge card and your mortgage.