That pesky Credit card. It can be your best friend in times of need but become your foe when it comes to applying for a home loan. It's great having the convenience of a little extra cash when things get tight - or when you need to buy a big-ticket item and pay it off over manageable payments. But can your Credit card get in your way when it comes to trying to get a mortgage?
Articles on Credit cards limiting first-time buyers getting home loans have been circling in the news for a while now. But how much is your Credit card debt really hindering you from getting into your first home?
It's true that the less you owe, the better your chances are of attaining a home loan.
HOW CAN PERSONAL DEBT AFFECT MY MORTGAGE APPLICATION?
Any debt, whether it be from student loans, credit cards, auto loans, cellphone bills or utility bills can all influence the amount lenders are willing to offer you for your first home. But it's not just the debt itself that factors into a potential lender's consideration of your application.
It goes without saying that you should start paying off any outstanding debts on your credit card as soon as you begin thinking about buying a home. But having debt won't necessarily exclude you from getting a good mortgage. Try to pay off your car and personal loans as much as possible before applying for a home loan as this will certainly factor into your application.
The reason for this is that the banks will look more favourably on a home loan application if you consistently pay the full balance of the Credit card debt each month, as outlined by the first home buyers club:
“If you only pay the minimum or less than the full amount owing, the banks will typically allocate 2-3% per month of your credit card LIMIT (not the balance) to service the debt.”
This can be a big deal. If you have a $10,000 limit then the bank could assume that you need $200 to $300 a month to service the card. And when they look at how affordable the mortgage loan repayments will be for you they will have to factor in that you have debts that will also require servicing.
Your Credit card limit may also work against you. Even if you don't owe a cent on your $10,000 limit Credit card facility, the bank must factor this in as a 'potential' debt that could be raised at any time in the future. A smaller limit on a Credit card can hugely impact the amount a bank is willing to lend on your first home. If you are not using your Credit cards it's best to close them entirely or consider lowering the maximum limit.
Hot Tip: As you pay off your credit card, reduce your limit.
All lenders must comply with the Responsible Lending Code. In short, this law expresses that if you can't comfortably afford to pay the loan back then they are not allowed to lend to you. While the law is intended to help protect you and lenders from the perils of unaffordable debt, it means that potentially some customers can't gain a home loan due to their past credit history and/or their current spending patterns.
Your credit history can be made worse by having debts that you're late in paying, but it can also look amazing if you can prove you're on top of your debts.
HOW CAN I FIND MY CREDIT SCORE?
You can find out your credit history before you even apply for a home loan. This will show your history concerning your credit, debt and repayments over a period of time; any unpaid debts you have had in last five years; if you have been bankrupt; repayment information from the previous two years (even if you haven't missed any) and any court rulings against you will all be shown in your credit history. Overdrafts, store credit cards and personal loans all have an impact on your Credit rating.
In New Zealand, three different credit agencies will prove a credit history report for you.
Everyone is entitled to a free copy of their credit history report. However you can speed up the process by paying a fee ( $10 is the maximum charge for any fast-tracking service). From your credit history, an overall credit rating can be outlined and this reveals your reliability to lenders when it comes to paying off debts.
Hot Tip: Get a credit report to see how much work you need to put into your financial health
Banks look at past credit behaviour as a predictor of future loan behaviour, therefore they will typically decline loans based on poor past credit history. It is also presumed that if you are ever behind in credit card payments, you might be more inclined to pay your credit card debt before your home loan repayments (as the interest rates on credit cards are higher).
Knowing your credit history can provide you with the opportunity to improve your credit rating before you apply for home loans, and a stronger credit rating will likely enable you to negotiate a better contract on your mortgage.
WHAT IF I HAVE LOTS OF DEBTS OR A POOR CREDIT HISTORY?
It's not all bad news. If your loan application or credit background is questionable, mortgage brokers such as those at Stephanie Murray Mortgages, can assist by finding you the best loan tailored to your personal circumstances. A mortgage broker cannot change the facts of your financial situation, but they do know what is most important to banks and can advise you on the places you need to work on as a priority. A mortgage broker can work with you on:
- Before you apply - sorting your finance and advising on improving your financial profile
- During application - getting the necessary information together and submitting to lenders on your behalf
- After application - explaining your possible options (free of jargon) including non-bank lenders
- Approval - achieve a pre-approval, finalising the amount and settling the offer on the house
- After approval - finalising paperwork and settlement
- Check up - once a fixed term period comes to an end reviewing your circumstances and options
The Stephanie Murray Mortgages team can help to present your home finance application in a way that is attractive to lenders, while not misleading them. Mortgage brokers know how to represent you in the best light to banks and can accentuate the positives of your home loan application. We also scan a range of home loan lenders and know which lenders are more likely to accept borrowers in your unique situation. Each lender (including banks) has their own policies and rules - it's possible that you could be approved by one, but not others.
If you are unsure of whether your Credit card debt could be adversely affecting your mortgage application chances then don't worry. At Stephanie Murray Mortgages we can provide personalised advice and show you how to improve your credit history and scores, making you look even better to potential lenders. The earlier in the process you speak to us the more time you have to focus on your financial health before applying for a mortgage. It's never too early to have a chat with us !
Lastly, when you do get your first home loan, be absolutely sure you never miss a payment. Paying every month (or fortnight) on time will quickly strengthen your credit rating for future home loans.
Our services are completely FREE to you, so don't hesitate and book a 'no obligation' free chat.