Having somewhere to live is probably the most important thing in life. Shelter has always been at the forefront of human survival.
Over time, we adapt and change. We go from living with family or friends and maybe we rent a property for a while – but eventually, we want to buy our own place.
Maybe we want our freedom, or maybe we want to leave our family with something when we pass away. Whatever the case, unless you’re lucky enough to have a lot of money – the likelihood is you’ll need to apply for a mortgage.
Mortgages can be complicated and mortgage applications take your credit into consideration – probably the most crucial aspect of your mortgage application.
So when it comes time to apply, you might be concerned about your credit card limit and if that will positively or negatively affect your chances of mortgage approval.
Luckily, we’ve created a useful guide to mortgages and credit below, starting with some basic information but overall answering – does your credit card limit affect the chances of mortgage approval?
Let’s dive in.
What Exactly Is A Mortgage?
A mortgage is a special type of loan that allows you to purchase a property or even refinance a property (such as re-mortgage) and they’re often called mortgage loans.
You can think of a mortgage as a secured loan. If you fail to meet the repayments agreed in your mortgage agreement, the mortgage provider can cease your home as collateral. Typically, you can expect your mortgage to last 15-30 years – but this can differ depending on circumstances.
It isn’t a straightforward process when buying your own home. From mortgage application, mortgage approval, searching for your home, making the offer, getting accepted and final approval to closure.
Within these processes, there may be attorney costs and additional fees that might not have been apparent to you. It’s always worth getting mortgage advice before formally applying to check affordability and availability.
What Is Taken Into Account When Applying For A Mortgage?
The eligibility requirements may differ from lender to lender, but generally you can expect the following factors to be key:
- Personal circumstances: This refers to your age, martial and dependency status, your criminal background (if applicable) and possibly your health status. This allows lenders to assess if you will be able to meet the repayments in your lifetime and who might be held liable for your mortgage repayments in the event of your death or if you leave without notice.
- Employment information: Checking your work status is vital to lenders when considering lending for a mortgage. They will check the stability/reliability of your employment (how long have you been employed) along with any other persons listed on the application, and the salary earned per annum. They will also determine what your income/outgoing ratio is and whether they believe you can afford to buy. The income/outgoing ratio should be around 50% or less.
- Credit Score: This is crucial when applying for a mortgage. Again, this will differ depending on the lender, but you can expect to need the score to be around the 620 mark for a traditional mortgage loan, and around 580 for an FHA loan (although you can get an FHA loan with a lower score for a higher down payment).
Understanding The Credit Score Factor
Your credit score is an indicator to lenders of your reliability and financial stability. It provides lenders with an idea of how you can manage credit and avoid large debts.
Because of this, your credit score will play a massive role in what credit will be approved to you. This can be anything from a hire car to a mortgage – and the better your credit score, the better the chances of approval and the more competitive the interest rates will be (if any at all!).
There are many myths around what can seriously improve your credit or what can harm it and the question at the heart of this is – can credit card limits affect the chances of approval?
The answer is no. In fact, it’s quite the opposite. The higher your credit limits, the more likely you are to be approved for a mortgage.
In normal circumstances, lenders such as credit card companies will offer their customers who are reliable and stable, a higher credit limit because they have proven for a few months and years that they can manage their credit limit and repay it on time.
This provides a positive indicator on your credit report – and should improve your credit rating.
However, it is important to know that even with a high credit limit – poor management of your credit will negatively impact your score and therefore your chances of mortgage approval. So, what’s the solution?
- Pay Your Bills On Time: Your payment history actually makes up around 35% of your score. You do not want a black mark on your score with missed payments as this is a huge red flag to lenders – it suggests you cannot be trusted to make payments on time. The wise thing to do is to set any bills on autopay each month and be aware of your payment dates and budget.
- Credit Utilization: When we discussed overuse of your credit card – this is what we were referring to. Poor credit utilization indicates that you cannot be trusted with a loan and cannot manage credit correctly. Therefore, your mortgage approval chances significantly reduce. It’s recommended that you use around 20-30% or lower of your credit and repay any transactions on time each month in full.
- Don’t Apply For Credit Too Quickly: Over applications of credit are a worry for lenders and will harm your credit. You should wait at least 8 weeks before considering applying for new credit, but the longer you wait the better.
Your credit card limit will not necessarily affect your mortgage approval, but the higher it is, the better – assuming you’re managing your credit.