A long time ago, my husband and I took out a mortgage for a property. As we were waiting for the loan to close, we decided to buy some new furniture for the home. Specifically, we opted to charge the purchase of several thousand dollars worth of furniture on a credit card in order to earn rewards points that we could redeem for merchandise or cash back.
This seemed like a good idea at the time, but it ended up causing us a host of problems and it almost made it impossible to close on my mortgage and get the loan we needed. Here’s why.
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How charging furniture could have cost me my mortgage
My mortgage lender reviewed all of my financial credentials before pre-approving me for my home loan. But this doesn’t necessarily mean I was guaranteed to be able to borrow the amount I needed at the promised rate. Before closing on my loan, after I had an accepted offer on a home, the lender once again went over all of my details.
When I charged my furniture purchase in anticipation of moving into my home, this obviously resulted in a large credit card balance. I had plans to pay it off right away when the statement came so I wasn’t going to be paying interest and I wasn’t going to be held responsible for monthly payments for the furniture. But, the large balance on the card still showed up on my credit report when my mortgage lender checked my credit again.
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Unfortunately, because I had charged so much on my card, my credit score was temporarily affected. My credit utilization ratio on my credit card was well above 30%. That ratio refers to the amount of credit used versus credit available, and it’s a key component in determining a credit score. A higher ratio is considered a red flag, so my lender saw my reduced credit score and it made them nervous.
The credit card company also reported my new minimum payment based on my high credit card balance and this adversely affected my debt-to-income ratio, which is the ratio of the amount you owe relative to what you earn. Mortgage lenders consider DTI a key criteria when determining whether to allow someone to borrow money.
With a lower credit score and more debt, I was no longer as attractive a customer to my mortgage lender and my loan was at risk. Fortunately, my lender was willing to work with me. I had to pay off the card in full and provide proof that this was done and that I still had plenty of assets in the bank before the lender was willing to close.
While we were able to get the loan in the end, it was a lot of added stress and hassle – and I might not have been able to borrow to buy the house if I couldn’t pay off the card in full.
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How you can avoid my mistake
If you are buying a home, you don’t want to make the error I did. While you are waiting for your mortgage to close, avoid charging any large purchases or applying for any new loans. Otherwise, your most important loan – your home loan – could be affected. Instead, wait until you close to move forward with any other borrowing you might need to do, so you can move into your home without any worries.
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