Applying for a Home Loan and think all you need to do is pay off your credit card?
…there’s more to it than that
When most people are thinking of getting a home loan one of the first things they try to do is reduce their current debt, and this is a good thing. However, most people believe that simply paying off their credit cards is enough, and that you can leave the credit cards open to purchase furniture for your new home.
Unfortunately, even though they have the right idea in mind by wanting to reduce their debt, sometimes just paying off the credit card is not enough.
Whilst it is obvious that a lender will consider your credit card debts and the monthly repayments on those credit cards when you apply for a home loan. But what most people don’t realise is that the lenders do not look at what you owe on the credit card, they look at the limit of the credit card. What this means is that if you have a $10,000 credit card but owe nothing at the moment, the lender will still assess your home loan application as though you owe $10,000 on your credit card.
But why do they do this?
Lenders do this because even though at the moment you owe nothing, there is nothing stopping you from going and spending that $10,000 as soon as your home loan is approved (on furniture for example).
Having the credit card can impact how much you are able to borrow. On a $10,000 credit card the banks will look at your minimum monthly repayment being $300, that’s $300 less that you can pay towards your home loan each month.
$300 per month is enough to be able to afford an additional $50,000 on your home loan.
Now of course sometimes the credit card may not affect your home loan application if you are not needing that extra amount for the loan. The best way to see whether your credit card may affect your application is to speak to Vikki today and see where your finances stand.