Yes, under the new Fannie Mae guidelines effective September 1, you can. In fact, you can go into credit card debt for up to 2% of the value of your new mortgage loan.
Borrowers are still not allowed to use credit card proceeds for the down payment, but may use them for certain costs paid outside of closing and early in the application process. This would include lock-in fees, origination fees, commitment fees, credit report fees, and appraisal fees.
This may sound good on the surface, but is it? It may not be smart, and in today’s climate of shrinking credit card limits, it might not even be possible for most people.
Charging an amount of this size requires two things: A very high FICO score going in, and very high credit limits on your credit cards.
We’ve been told for years that in order to keep credit scores high, we should not use more than 30% of the available balance on any one credit card. If you plan to charge 2% of the value of a $200,000 home loan, you’d be adding $4,000 to your credit card balance. That means your limit has to be more than $13,334.00 – with no other charges on the card, of course.
If you begin the loan process with a FICO score that’s “on the edge” of score limits to obtain the best rates, using your credit card for these purchases could lower it that one or two points to drop you into a higher interest rate bracket.
And if you use the card early in the process it could get worse…
We’ve been seeing consumers across the country suddenly hit with credit card limits below their outstanding balance – especially if they have just made a large purchase or gotten a cash advance. This practice will be outlawed in February, but right now you might charge that $4,000 in costs against a $14,000 credit limit – then find that your credit limit has been reduced to $3,000. That will really hurt your FICO scores.
Consider carefully before using a credit card for loan costs.
This change also means more work for your mortgage broker. In order to use a credit card for these fees, the lender must verify that the borrower has sufficient liquid funds to cover the charges, in addition to other funds needed for closing. Or, the lender can re-calculate the credit card payment to account for the new charges, then use the updated payment to re-calculate the qualify loan ratio.
Author:Marte Cliff
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