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A big part of pursuing travel rewards is learning to take advantage of credit card welcome bonuses. Thanks to recent rate cuts by The Feds and more expected cuts, home ownership or refinancing is a trending topic these days. If you expect to apply for a home mortgage or refinance, you may be concerned about how using your credit card may affect the process.

In this post, we’ll examine how opening new credit card accounts can affect mortgage loan applications and what steps you should take to make sure your credit is in tip-top shape so you can get the best mortgage rate available.

How the mortgage process works

To plan your credit card strategy before you apply for a mortgage, it helps to understand exactly how the home loan application and approval process works.

Mortgage Loan Officer Scott Winn of Wynn & Egan Team at Citywide Home Loans spoke with TPG in Denver and shared his insights.

Winn explains that lenders will consider three factors about your personal finances when determining your eligibility: your down payment, your monthly income (minus any current debts) and your credit score. The second and third factors are factors that can be influenced by your credit card usage.

When you first talk to a mortgage broker, you’ll give them permission to pull your credit history and FICO credit scores from all three major consumer credit bureaus. An inquiry on your credit will be considered a “hard pull,” but the FICO scoring model will combine all home loan inquiries made within 14 days. So this is the time when you want to shop around for the best rate.

Brokers pull from all three bureaus because the industry standard is to judge applicants based on the middle of the three scores (or the lower of the two), to account for any differences in the collected data.

Next, your real estate agent may ask for a pre-qualification or pre-approval from your mortgage broker. Pre-qualification is a broker’s opinion of your ability to qualify based solely on the information you provide, while pre-approval usually requires collecting documents such as pay stubs, bank statements and tax returns.

When you’re ready to make an offer on a home, an extra level of verification from pre-approval can help convince a seller to choose your offer because they’ll feel more confident that your loan won’t be denied.

Your mortgage broker will then help you choose the best lender for your needs and you will be asked to submit a formal loan application. Finally, about a week before you close your loan, your credit will be checked one last time (which is a soft pull), and your employment will be verified again.

How your credit card accounts shape your credit score

When you pay your bills on time and have minimal debt, have a credit card Adding to your overall credit history can help your credit score. The two most important factors that contribute to your credit score are your payment history and the amount of your payments, which comprise 35% and 30% of your credit score, respectively.

Additionally, 15% of your score is centered on the length of your credit history, so keeping a few credit card accounts open over several years will help.

The remaining 20% ​​is divided equally between types of credit used and new credit lines opened. Opening and keeping credit card accounts in good standing will help, but applying for too many new credit cards in a short period of time will hurt.

Thankfully, the drop in your credit score will be small and temporary, as this factor is the least important. For more information, see our post on how card applications affect your credit score.

Related: Does Applying for a New Credit Card Hurt Your Credit?

Your credit score and your mortgage application

A common one The misconception is that you need the highest possible score for the lowest rate. To qualify for the best mortgage rates available, you need to have a credit score of 740 or higher, but in almost all cases, having a score of 760, 780, 800 or higher makes little difference. (Wynn pointed out that he has seen some rare exceptions in the past when a lender offered a specific program that required high scores, especially for very high value loans).

If you pay all your bills on time and have no significant debt other than a modest credit card statement balance that you pay in full each month, your credit score is likely to be in the high 700s. Applying for a new credit card may drop your score a few points, but as long as it stays comfortably above 740, you won’t hurt your chances of qualifying for the best mortgage rates.

Problems that credit cards can create with the mortgage application process

One of the problems mortgage applicants face comes from heavy credit card use (despite avoiding interest by paying off the full statement balance each month), which is common among many reward travel enthusiasts.

As cardholders see it, they have no debt Never carry a balance and never pay interest. However, from the perspective of card issuers and lenders, The balance that appears on each month’s statement is the amount owed that is reported to the credit bureaus.

As Winn explained, your credit report and credit score are only a snapshot in time, yet lenders will see the minimum payment listed as a more or less permanent debt obligation, even if you pay it in full.

That means the moment your statement closes is important to your credit score, although some card issuers may report balances more than once a month. So, if you’ve paid off your balance but it hasn’t been reported, your credit report will still show a high balance.

Unfortunately, then lenders will see a large amount of debt in your name, which affects how much they will let you borrow. Knowing this, you can choose Pay the balance in full before your statements close. That way, card issuers will report a $0 balance and your creditworthiness won’t be impaired by the appearance of debt.

Another problem credit card users may face is applying for a new credit card (or any other loan) after being pre-approved for a mortgage, especially after submitting a formal mortgage loan application. In fact, Wynn advises all of its clients to do the following after pre-qualifying:

• Don’t overuse credit cards.
• Don’t let the current account fall behind.
• Don’t co-sign anyone on a new account or loan.
• Do not allow anyone to run your credit (by applying for a new credit account).

Their reasoning is that lenders make new inquiries with new credit applications, which changes your eligibility for a loan. Additionally, the impact of these negative items can be much greater for non-homeowners and those with limited credit history.

My advice to travel rewards enthusiasts

Mortgage rates are starting to fall from record highs, so many people may consider buying or refinancing a home to lock in lower payments. you can Check current mortgage rates in your area here.

When you’re ready to move forward, you should talk to a mortgage broker who can quickly check your credit. Do this as soon as possible to see where you stand and give yourself a chance to correct any mistakes.

If your score is close to 740, you should consider every option to hit and stay above that mark, which means “fasting” from new credit card applications until the process is complete. Additionally, those looking to stretch their borrowing capacity to the limit should consistently pay off their credit card balances (even before the statement arrives) to minimize the debt’s impact on their credit reports.

If you already have a very high credit score (above 700 or higher), there is no need to change your behavior. As long as you follow Winn’s advice from pre-qualification to closing, which in most cases should only be a few weeks, you don’t need to use every trick possible to add a few points to an already great score.

The bottom line

Many travel rewards enthusiasts are very savvy credit card users, but applying for a home mortgage is a special circumstance that temporarily calls for a new set of rules. By understanding the process and taking the necessary precautions during this period, you can get the best possible mortgage rates and continue your pursuit of rewarding travel only after you close your loan and have the keys to your new home.

Related: How I went from no credit score to home financing in 2 years