Personal Finance

Credit Limit and Mortage

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  • Nov 19th, 2014 7:39 pm
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Newbie
Aug 26, 2014
9 posts
Port Coquitlam, BC

Credit Limit and Mortage

Hello everyone,

After reading online and meeting with a person at the bank, I have to reach out to this forum for some clarification.

I'm looking to pre-approved for a mortgage, however there's something I don't quite understand.

What I've been reading is that the lender will look (besides credit score) at your credit limit because it counts as potential debt.

I have 3 credit cards, adding up to a credit limit of 22900 so my debt breakdown according to TD Bank's mortgage calculator, comes down to $675/ monthly; so this is what they consider minimum payments for potential debt.

My current debt is $2900

When I talked to a person @ a bank (mortgage advisor), he suggested closing two credit cards and applying for a line of credit, saying is good to have credit cards and line of credit.

If I close two credit cards and apply for a line of credit, wouldn't that keep the same or close to my actual credit limit?

I know that before closing any credit cards, I have to make sure that when I do my debt to ratio does not go over 30%.

Can someone point me in the right direction? What would you do in my situation?

Please let me know if you need any further information.

Thanks in advance for your time and help.
15 replies
Newbie
May 19, 2013
92 posts
16 upvotes
Nova Scotia
I think it might depend on your income and how much your potential mortgage is as to whether a lender will request such things. When I did my mortgage I had a combined credit limit of about $70000 for CCs and they offered to increase my credit limits, not request I close any. I also had a car loan and a motorcycle loan. Banks like to know that you will be able to pay everything you're obligated to with the money you have. However my mortgage was $150000 (East coast prices) so i wouldn't have been overextended. If it had been $400000 they might have requested a credit reduction.
Deal Fanatic
Mar 24, 2008
6278 posts
2753 upvotes
Toronto
I don't think you need to close these credit cards just to get a mortgage *pre-approval*. They aren't even giving you money at this point and they will verify your debt service ratios and income closer to when they actually commit to providing you a mortgage (usually <90-120 days of closing). At that time they will let you know if they need you to close any of these cards, pay off loans etc.
Deal Addict
Feb 4, 2008
3137 posts
179 upvotes
Most lenders will look at the balance and not the limit. I am guessing the bank rep just wanted to sell you a line of credit.
Do your mortgage math correctly!
Newbie
Aug 26, 2014
9 posts
Port Coquitlam, BC
Thanks everyone for your prompt response.

The reason why I ask its because the numbers change according to the calculator on TD's page, gives me difference of around $86K!!! by just changing credit limit. That's huge!!!!!

https://tools.td.com/calculators/mortga ... rdability/

Here's how I got those numbers using their calculator.

Scenario 1
Income - $45,000
Down Payment - $40,000
Debt Breakdown - $150
Interest - 3 years @ 3.44%
Can purchase a home at a price up to $244,000

Scenario 2
Scenario 1
Income - $45,000
Down Payment - $40,000
Debt Breakdown - $687
Interest - 3 years @ 3.44%@
Can purchase a home at a price up to $158,000

They only thing that change is the debt breakdown and this is what they have on the website: "We calculate your debt breakdown based on credit available to you. It is assumed that you pay 3% of the credit limit monthly."

See the difference? that's just buy having a much lower credit limit. This is why I was thinking of lowering my credit limit.

What do you guys think?

Thanks in advance
Newbie
May 19, 2013
92 posts
16 upvotes
Nova Scotia
You could lower your limit for now, get mortgage in place, wait a year or two and then app for higher credit again. Credit cards seem to like a person with established assets.

If your goal is a house, and you have no need of the higher credit, lower your limits but don't cancel the accounts because you want longstanding accounts on your record. Then limit raise now and again while keeping your total percentage used low.

It is all about what you'd consider your personal priority. However, talk to the mortgage people first or try a broker. You might not need to lower your limits at all.
Deal Guru
User avatar
Feb 2, 2014
11231 posts
3350 upvotes
Toronto
The info you were given is very wrong. Some points:

-The rate and type of REVOLVING UNSECURED CREDIT (loc or credit card) does not effect the mortgage you qualify for. Lenders will take 3% of the current balance as monthly debt payments.
-By closing 2 established credit cards, you are actually hurting your credit. These 2 credit lines prove that you have good credit history (assuming you paid on-time of course).

Scenario 1 and 2 will equal the same borrowing amount for a mortgage. The only difference is that closing the credit cards will hurt your credit...keep them open. Now if the rate on the loc is lower than the credit cards, then certainly open one up and pay off the credit cards (but don't close them!).

I'm a mortgage broker and real estate agent with lots of experience.

Feel free to PM me btw.
cjpd84 wrote: Thanks everyone for your prompt response.

The reason why I ask its because the numbers change according to the calculator on TD's page, gives me difference of around $86K!!! by just changing credit limit. That's huge!!!!!

https://tools.td.com/calculators/mortga ... rdability/

Here's how I got those numbers using their calculator.

Scenario 1
Income - $45,000
Down Payment - $40,000
Debt Breakdown - $150
Interest - 3 years @ 3.44%
Can purchase a home at a price up to $244,000

Scenario 2
Scenario 1
Income - $45,000
Down Payment - $40,000
Debt Breakdown - $687
Interest - 3 years @ 3.44%@
Can purchase a home at a price up to $158,000

They only thing that change is the debt breakdown and this is what they have on the website: "We calculate your debt breakdown based on credit available to you. It is assumed that you pay 3% of the credit limit monthly."

See the difference? that's just buy having a much lower credit limit. This is why I was thinking of lowering my credit limit.

What do you guys think?

Thanks in advance
Kevin Somnauth, CFA
Principal Broker/Owner - First Toronto Mortgage - MA (Ontario #13176, BC #X301007)
Real Estate Salesperson - Century 21 Innovative
Newbie
Aug 26, 2014
9 posts
Port Coquitlam, BC
Thank you Scrounger888 and CdnRealEstateGuy, your info is helpful.

I will be meeting with a Mortage Broker next friday and will share my notes on this thread.

Thanks to everyone.
Deal Addict
User avatar
Jan 2, 2012
4596 posts
3099 upvotes
Toronto
cjpd84 wrote: When I talked to a person @ a bank (mortgage advisor), he suggested closing two credit cards and applying for a line of credit, saying is good to have credit cards and line of credit.

If I close two credit cards and apply for a line of credit, wouldn't that keep the same or close to my actual credit limit?
I wouldn't be surprised if a big bank's mortgage advisor encouraged you to close some of your credit cards not with their bank... and open a LOC or other cards with that bank.
Gotta be careful about bank "advisors" upselling you on products that you don't really need at the same time you apply for your mortgage.
Sr. Member
Sep 9, 2012
623 posts
156 upvotes
Edmonton
CdnRealEstateGuy wrote: The info you were given is very wrong. Some points:

-The rate and type of REVOLVING UNSECURED CREDIT (loc or credit card) does not effect the mortgage you qualify for. Lenders will take 3% of the current balance as monthly debt payments.
-By closing 2 established credit cards, you are actually hurting your credit. These 2 credit lines prove that you have good credit history (assuming you paid on-time of course).

Scenario 1 and 2 will equal the same borrowing amount for a mortgage. The only difference is that closing the credit cards will hurt your credit...keep them open. Now if the rate on the loc is lower than the credit cards, then certainly open one up and pay off the credit cards (but don't close them!).

I'm a mortgage broker and real estate agent with lots of experience.

Feel free to PM me btw.
Good advice.
Deal Addict
User avatar
Jul 3, 2007
1787 posts
179 upvotes
This is crazy! There was another thread about someone being asked to open or "increase" the person's credit limit to help with the credit score!
Banned
Nov 27, 2006
2200 posts
445 upvotes
Toronto
Most of the time if you have a good credit score and minimal balance those limits will not be used to ward's your tdsr.

So for example if you have a 10 000 limit on a line of credit with zero balance then it's not included.

If you have a 10000 balance on the same line tjen 2 to 3~% will be used for monthly payment and wil increase your tdsr
Banned
User avatar
Jul 16, 2003
10397 posts
1468 upvotes
Toronto
sslinn wrote: Most lenders will look at the balance and not the limit. I am guessing the bank rep just wanted to sell you a line of credit.
This!
Andre Oliveira - Mortgage Agent
Mortgage Intelligence - FSCO# 10428
Newbie
Aug 26, 2014
9 posts
Port Coquitlam, BC
It's been a while but I will still share what the broker told me.
For some of you this info will be obvious so I'm sharing for someone who is in a similar situation.

Mortgage broker said:
DO NOT apply for a line of credit right before applying for a mortgage
DO NOT apply for any new credit cards right before applying for a mortgage
DO NOT add any credit debt @ a store
DO NOT close any credit cards
Pay my debt off before I apply for a mortgage if possible; if I can't its ok, lenders might not consider it because of the "low" debt amount.
Penalty Box
Apr 16, 2012
3565 posts
688 upvotes
Greely
Scrounger888 wrote: I think it might depend on your income and how much your potential mortgage is as to whether a lender will request such things. When I did my mortgage I had a combined credit limit of about $70000 for CCs and they offered to increase my credit limits, not request I close any. I also had a car loan and a motorcycle loan. Banks like to know that you will be able to pay everything you're obligated to with the money you have. However my mortgage was $150000 (East coast prices) so i wouldn't have been overextended. If it had been $400000 they might have requested a credit reduction.
What is your income and age that they granted u a mortgage even though u had a massive 70k limit?
Deal Addict
Apr 4, 2013
1274 posts
410 upvotes
cjpd84 wrote: It's been a while but I will still share what the broker told me.
For some of you this info will be obvious so I'm sharing for someone who is in a similar situation.

Mortgage broker said:
DO NOT apply for a line of credit right before applying for a mortgage
DO NOT apply for any new credit cards right before applying for a mortgage
DO NOT add any credit debt @ a store
DO NOT close any credit cards
Pay my debt off before I apply for a mortgage if possible; if I can't its ok, lenders might not consider it because of the "low" debt amount.
This is very good advice. Do not rely on on-line calculators as they are usually woefully inaccurate. Based on the numbers that you have provided, and assuming that you have excellent credit, you should be able to get a pre-approval for about $270,000.

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