How Credit Utilization Affects Your Mortgage Approval

Unless you can afford to buy a house with cash – and most people can’t – you will likely apply for a mortgage. Several factors determine whether a lender approves you for a mortgage – including your income, assets and debts – and one of those factors is your credit utilization.

Below, we’ll review what credit utilization is, why it matters when you apply for a mortgage and how to get yours into favorable territory.

What Is Credit Utilization?

Credit utilization is a measure of how much credit you’re using relative to your total credit limit. It doesn’t apply to all of your outstanding loans, however, such as auto or student loans. Rather, it applies only to revolving credit – specifically, credit card accounts.

The lower your credit utilization, the more inclined a lender may be to loan you money. There is no official “cutoff,”  but to improve your chances of qualifying for a loan, including a mortgage, you should keep your credit utilization ratio under 30%. The lower you can get that ratio, the better.

Let’s say you have three credit cards with a total credit limit of $15,000, and let’s also say you owe $5,000 across those three cards. That puts your credit utilization ratio at 33.33%. If you were to pay off $1,000, your credit utilization ratio would go down to 26.66%.

What Goes Into Your Mortgage Application

When you apply for a mortgage, a lender will review your finances to see if you’re eligible to borrow the amount you’re requesting. In order to understand why credit utilization is so essential to your mortgage application, let’s take a closer look at the criteria mortgage lenders use to approve candidates.

Credit Score

Your credit score is a measure of your reliability as a borrower and your ability to repay your debts. The higher your credit score, the more likely you are to make your mortgage payments on time every month.

Debt-to-Income Ratio

Your debt-to-income (DTI) ratio measures how much of your income is currently going toward your debts. The higher the ratio, the more difficulty you might have repaying your mortgage. A lower DTI ratio, on the other hand, indicates that you may have a manageable amount of debt, making you a less risky mortgage borrower. Many lenders prefer to see a DTI below 36%, though some loan programs allow higher ratios depending on other factors.

Income And Job Stability

Mortgage lenders will want reassurance that you can continue to make mortgage payments on an ongoing basis. So, they’ll assess your income to ensure it’s sufficient to cover your ongoing mortgage payments. Lenders typically want to see a two-year employment history, though it doesn’t have to be with the same employer.

Savings And Financial Resources

The more financial resources you have, the more likely a lender is to loan you money. For example, being able to make a large down payment or showing a substantial amount of savings reassures your lender. Plus, if you can put down a large down payment, you will need to borrow less money to finance your home.

A hefty savings balance also proves you have cash reserves that you could use to keep paying your mortgage if you lose your job.

What’s Your Goal?

Buy A Home

Discover mortgage options that fit your unique financial needs.

Refinance

Refinance your mortgage to have more money for what matters.

Tap Into Equity

Use your home’s equity and unlock cash to achieve your goals.

How Credit Utilization Affects Your Mortgage Application

Credit utilization impacts your mortgage application in a few ways. For starters, your credit utilization plays a significant role in determining your credit score – it actually represents 30% of your FICO score, which is the most commonly used credit scoring model.

If you have a higher credit utilization ratio, that could translate to a lower credit score, making it more difficult to qualify for a mortgage. Lowering your credit utilization ratio, meanwhile, can pave the way to a higher credit score and a greater likelihood of getting approved for that mortgage – and perhaps getting a more competitive interest rate too.

Another way your credit utilization impacts your mortgage application is through your DTI ratio. A higher credit utilization ratio may indicate that you have a substantial amount of credit card debt, resulting in higher minimum monthly payments. Those payments, combined with your other debts, are used to calculate your DTI ratio.

A higher DTI ratio may make it more difficult to qualify for a mortgage, while a lower DTI could make it easier to get approved.

Ways to Improve Your Credit Utilization

While a credit utilization ratio above 30% is not an automatic deal-breaker for a mortgage, you may face more challenges when applying for one – or for other types of loans too. If you’re hoping to borrow money, consider these strategies to a lower your credit utilization ratio:

Pay Off Some Of Your Credit Card Debt

One of the best ways to lower your credit utilization ratio is to pay off a chunk of your existing credit card debt. Let’s say you owe that same $5,000 against a $15,000 credit limit, leaving you with a 33.33% credit utilization ratio. If you paid off half of your balance, your credit utilization ratio would go down to 16.66%.

Ask For A Credit Limit Increase

Your credit utilization ratio measures your outstanding debt relative to your credit limit. If you can’t pay off some of your debt, your next best bet is to try to get your credit limit raised.

For example, in the scenario where you owe $5,000 against a $15,000 credit limit, you could ask to have that limit raised to $20,000. Even if you don’t make a dent in your $5,000 balance, that higher credit limit would now put your credit utilization ratio at 25%, which is more favorable than 33.33%.

All you need to do is call your credit card issuer and ask for an increase. If you’ve had your card for several months and your account is in good standing, they may say yes. Or, if your income has recently risen, you could call your credit card issuer to let them know. They may approve an increase on the basis of that alone, even if you haven’t had your card open for very long.

For this strategy to be effective, however, you need to ensure that you avoid racking up a larger balance once your credit limit increases. Otherwise, your credit utilization ratio may remain where it is or even increase. Worse yet, you could wind up with more debt on your hands.

Avoid Closing Old Credit Cards

You may have certain credit cards you no longer use. Closing those accounts might seem like a good idea but it can backfire, since those accounts factor into your total credit limit. Closing unused credit cards lowers your overall total, which could potentially increase your credit utilization ratio.

FAQ

Consider these questions and answers as you manage your credit utilization.

The Bottom Line: Credit Utilization Is Just One Important Factor in Qualifying For A Mortgage

In general, the lower your credit utilization ratio is, the easier it may be to get approved for a mortgage. Credit utilization isn’t the only factor that goes into your lender’s decision, however. Lenders also weigh income, DTI ratio and employment stability.

After all, it’s possible to have a low credit utilization ratio but still carry a lot of other debt (like student loans) that results in a high DTI ratio. Or, you may have an income that is too low to qualify for a mortgage.

The less you owe on your credit cards, the easier it is to keep up with your monthly payments and avoid paying a lot of credit card interest. So, keeping your credit utilization fairly low is always a good idea – not just for the sake of getting approved for a mortgage, but also for your overall financial health.

Maurie Backman

Maurie Backman has more than a decade of experience covering personal finance topics that include mortgages, loans, retirement, Social Security, and investing. Prior to becoming a full-time writer, she worked in the financial industry as well as in product design and marketing. Maurie holds a bachelor's degree from Binghamton University, where she studied creative writing and finance. She was happy to combine her two areas of study into a career that allows her to educate consumers on a host of financial topics.

View Profile