Rising Credit Card Payments May Impact Loan Qualification
Regulators have mandated that credit card issuers increase their minimum payments to ensure individuals are paying toward their principal balance each month. This means minimum payments could more than double for some individuals.
When reviewing the debt-to-income ratios (see earlier post on Qualifying Ratios), mortgage lenders calculate debt ratios based on the minimum payment required on any credit cards. If those minimums suddenly increase, many potential homebuyers may find they no longer qualify for the mortgage they want.
Right now, most companies set minimum payments at about 2%. Unfortunately, if you carry a high balance and have a rate over 20%, that probably doesn’t even cover the interest owed for the month. Your balance then increases each month by the amount of interest your payment didn’t cover, making it impossible to ever pay the debt off making minimum payments.
Regulators want to change that. The new guidelines are designed to force lenders and their cardholders to reduce individual credit card debt each month by having minimum payments that cover not only the interest for the month but part of the principal balance too.
I recommend anyone with credit card debt look carefully at their current payment, figure any payment increase will be to at least 4% of the principal balance owed, and begin adjusting their monthly budget to accommodate the higher payment now. Then watch your monthly statement and/or mailings from the card issuer. They have to notify you 15 days in advance of any payment changes.
Then, if you are in the market for a new home, talk to your loan officer or mortgage broker. Find out if these increases will impact your ratios enough affect your qualification for the house you want. Talk to to them about loan options, expanded underwriting programs or those with higher allowable debt-to-income ratios. But also keep in mind, expanded loans programs may cost more in both lender fees and interest rate.