Revolving v Installment Credit. How they Affect Qualifying for a Mortgage

Written by Posted On Thursday, 29 February 2024 00:00

We all  know about credit. Pretty much everyone has had some sort of credit account over the years. Some use credit quite extensively while others use it sparingly, if at all. Yet it’s there and people use it. But how does credit affect qualifying for a mortgage? Mortgage loan approvals take  into consideration credit accounts and take the monthly payments assigned to those accounts and add them into the total debt when looking at debt to income ratios, or simply ‘debt ratios.’ 

Most mortgage loans do look at debt ratios and while it might not be obvious to the borrower, ratios are used. Automated underwriting systems will typically calculate debt ratios on their own when evaluating a loan application. Those with higher credit scores will be allowed to stretch these debt ratios and a higher down payment will also help. Lower down payments and lower scores will be more restrictive. 

But not all credit accounts are the same. Essentially they’re broken down into two categories: revolving and installment and both are reviewed when applying for a mortgage. So what are the differences and what should you know about both before applying for a home loan?

The first one to review is revolving credit. Revolving credit is typically something like a credit card account. There is usually a limit on how  much someone can borrow. It’s called a revolving credit account because the monthly balance and payment will typically be different each month. The credit limit will stay the same but the balances and payment amounts can vary. So, if payments can vary, what does the lender use when calculating debt to income ratios? 

Credit reports will show the credit limit for a revolving account and can also show the current balance and current payment. The lender can use the current payment but can also look at recent monthly reports. Again, automated underwriting systems will use their own calculations but some mortgage programs require a maximum ratio number. If a mortgage program requires the total debt ratio be  no greater than 43, then there’s not  much a borrower or lender can do about that except pay down some debt or make more money.

Installment debt is pretty straightforward. The monthly  payments stay the same and with each payment the balance is slowly diminished until it is paid off entirely. A car payment is typically an installment debt. Buying something on credit from a department store is also installment debt. Once the balance has fallen to zero, the monthly payment is removed. Some loan programs also allow for balances with less than 10 months remaining and also ignore the monthly payment.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

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