How Revolving Credit Balances Affect Your Mortgage Application

Many Americans deal with revolving credit accounts on a daily basis.If this is the case for you, here are a few things to consider about how revolving credit balances could affect your mortgage application.

Debt to Income Ratio

One of the biggest ways that revolving credit balances can affect your mortgage application is in the debt to income ratio. Lenders use a lot of financial ratios in order to determine whether or not you are a good fit for a mortgage. One of those ratios is called the debt to income ratio. This ratio is affected by the amount of debt that you have and the amount of income that you bring in on a monthly basis. They are essentially comparing your monthly debt payments against the money coming in each month. If you do not have enough income to sufficiently cover the debt comfortably, your debt to income ratio will be a concern. If you do not meet their guidelines for debt to income ratio, you will not be approved for a loan. Therefore, simply having too many revolving credit accounts with balances could potentially cost you getting the house of your dreams.

Credit Score

Another way that your revolving accounts could affect your mortgage application is by lowering your credit score. One of the big criterion that credit bureaus look at when they evaluate a file is revolving accounts. If there is too much money on the accounts, they will not look favorably on your credit file. 

As a rule, you should try to keep your balances at 30% or less of your maximum credit limit. Keeping your balances at this level tells the credit bureaus that they can trust you with more credit. If you have high credit card balances at the end of the month, lenders will believe that you do not know how to handle credit. As a result, they will be hesitant to give you credit when you apply for it.

Credit Mix

When you apply for a mortgage, lenders like to see that you have a good mix of credit. They want you to have different types of accounts so that you can prove to them that you can handle it. If you only have four or five revolving accounts and nothing else, it will not reflect positively on you. Therefore, you should try to limit the number of revolving accounts that you keep open.

Having a good credit mix entails possessing several different types of credit accounts. For example, when you finance a car, this represents an installment loan. You could have an account with a department store, student loans, and even a personal loan at a bank.