Credit Card Churning & Getting a Mortgage: What to Expect Top to Bottom

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mortgage credit card churner
Courtesy of GotCredit

Miles to Memories, ESR Media, LLC & the author are not credit providers and do not provide personal financial or professional advice or credit assistance. The information published in this article is of a general nature only and does not consider your personal objectives, financial situation or particular needs. Consult a professional.

Mortgage Primer for Credit Card Churners

Getting a mortgage is truly one of the most stressful things one can do. I know that is sort of a cliché, but in most cases it is absolutely true. Mortgages, especially when you are purchasing a home, involve so many moving pieces. Those pieces combined with a ton of regulation, mean that mortgage loans are anything but simple.

I worked for a mortgage company for a few years and mortgage is sort of the family business as well. Even though I no longer work in that industry (and haven’t for awhile), I am always caught up to date with the latest happenings at birthday parties, holidays and just about any other time the family gets together. It is an interesting world to me, especially given the credit aspect of what I cover on Miles to Memories.

Different FICOs for Different Purposes

Yesterday I covered how to check your free FICO score at each of the major banks. I think knowing your score is important, since credit is truly one of the most powerful and important things in modern American life. Unfortunately, your score can change and differ depending on which bureau’s data is used and which scoring model is used.

Then, there is another factor as well. Depending on what type of credit you are applying for, a different version of the same scoring model might be used. For example, credit card issuers use the Bankcard Score 8 model while auto lenders will use the Auto Score 8 model. Then there are mortgage lenders who use a completely different model altogether. You can find an interesting chart with all of the different models at myFICO.

mortgage credit card churner
Courtesy of GotCredit

The Tri-Merge Mortgage Report

While there will be some differences between banks, generally most banks use a “tri-merge” credit report for mortgages. This report takes data from all three of the credit bureaus (Experian, Equifax, Transunion) and merges it together. What it doesn’t do is merge your scores. A tri-merge credit report will include three scores, one from each of the bureaus.

If you have ever obtained a mortgage then you know that they use a singular “credit score” when qualifying you. So how do they get this? You might think it is some sort of average of the three scores or a formula, but it is generally much simpler than that. What they do is drop the lowest and highest scores and simply take the middle one. This is really good if you have a ton of inquiries on one bureau which are dropping your score.

Inquiries

Speaking of inquiries, I know many of you worry about them a lot. I have written before how you can check which bureau each credit card bank pulls from and I suggest using that information to “load balance” your inquiries. Of course this article is about mortgages and I think it is important to note that there is a big difference between inquiries on a credit card report and a mortgage report.

Again, this could vary by bank, but in most cases mortgage lenders only request inquiries for the past 120 days. This is good for people who may have a lot of inquiries, but remember they see inquiries across all three bureaus. If you have a lot of inquires showing on your report, be prepared to explain to the underwriter why you applied for so much credit. Generally they will ask for a letter.

mortgage credit card churner
Courtesy of Ken Teegardin.

Funds & Bank Accounts

When applying for a mortgage, a bank will ask you to list your assets. They use this information to determine the source of a down payment (if applicable) and closing costs. They also take into account the amount of reserves you have in determining your strength as a borrower. When looking at reserves, a bank will generally go through your statements in order to look for irregularities. They must be able to determine the source of the funds and if they see anything abnormal they may disqualify the money or ask for a letter of explanation.

If you are an MSer, then no doubt you have bank accounts that look strange. The good news is that you can separate your MS activities from your personal activities and be alright. That is because generally you don’t have to include all of your assets on a mortgage application. Of course if you need all of your assets to qualify then you may have a problem, but if you have enough money in your normal accounts, then you may be able to avoid problems by leaving your complicated accounts off of the application.

Letters of Explanations

One of the tools the underwriter uses to cover themselves is a letter of explanation. Of course this is up to their discretion, but any irregularity will generally be met with a condition for the borrower to write a “letter of explanation”. This is a very common thing and generally doesn’t mean anything. They just want to show the investor (yes mortgages are investments) that they thoroughly went over everything.

Letters of explanation can be required for all sorts of things. For example, I have seen letters for everything from gaps in employment to large deposits. If you have opened and closed a lot of credit accounts, then you may be asked to write a letter explaining why. Usually a simple explanation such as, “I travel a lot and open rewards cards to maximize my value” will work.

Conclusion

Getting a mortgage is stressful under normal conditions, but if you have a lot of accounts like many of us, it can cause a few hiccups. With that said, if you have steady income, assets and a good credit score, then you generally won’t have anything to worry about. If you are planning to get a mortgage, it can be a good idea to plan ahead, avoid unneeded inquiries and make sure you document all deposits to make sure everything goes as smoothly as possible.


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31 COMMENTS

  1. My husband and I are regular churners and have a lot of cards with a pretty large combined credit line. We decided just 60 days ago to buy a new house. This didn’t give us any time to hold off on credit inquiries. Our mortgage process was really easy, I was pleasantly surprised. We are self employed but with a good steady income. We didn’t owe anyone and we have money in savings and retirement accounts. Our old home was already paid off and we didn’t sell it until after we purchased the new house. We also put a large down payment on the new house which probably helped.

    • The truth is that people with good credit and decent income tend to be fine. It is when you have a few blemishes, are looking for a low down payment or something else looks off that the inquiries and new accounts may start to cause problems. Thanks for sharing Kathy and congratulations on your new house!

  2. We refinanced a few years ago, and the lender asked lots of questions about why I had so many credit cards. I was honest with him, but it made him uncomfortable, so he approved a loan in my husband’s name only (he has not churned quite as aggressively as I have).

  3. I have found mortgage lenders to be pretty much indifferent to credit inquiries.

    On the other hand, the big issue with CCs and mortgages is that, in my experience, the lender counts every account that has a balance reported to a credit bureau as creating a monthly expense equal to the monthly minimum payment. This whether or not you pay off the balance each month.

    The effect is to reduce the income the lender uses to qualify you for the loan.

    This is also true for authorized users: if you are the authorized user on someone’s cc account, your monthly income for the lender’s purposes gets reduced by the monthly minimum payments on their balance.

    This can make it impossible to qualify for the loan you want.

    Remedies: in the period before the lender makes credit inquiries, pay all credit card charges, including those not yet on the statement, to zero, and keep them at zero until after the inquiries.

    Do the same for any accounts where you are the AU, or remove yourself as an AU.

    Allow enough time for these to be reflected on your credit report before the lender inquires.

    • You are right regarding the income. They will calculate the minimum payment reported on your credit report even if you don’t carry a balance month to month. If you are really close to qualifying, they can do a credit supplement right before closing to update the balances, but that generally costs more money.

      I agree a good strategy to have if your income is tight is to make sure all/most cards are paid off before the statement prints so no balances are sent to the credit bureaus.

      • A small but crucial correction: it is actually bad for your FICO scores to have ALL of your credit cards reporting at $0. This will cause you to take a substantial score hit.

        The best strategy as you approach pre-approval and also closing is to have all your cards reporting at $0 except one, which should report a small positive balance ($10, $40, whatever.) This will give you a FICO boost and will also minimize the DTI issue rightly raised by the other commenter.

        • Great point Shawn. If the current balance is tiny enough (e.g. $4) do underwriters classify that $4 as your minimum monthly payment (rather than say the typical $25)?

          I suppose that this would be a way to tweak your DTI even further, while still having a positive balance for FICO purposes. It’s worth observing, however, that when the balance gets really REALLY tiny (e.g. $1.50) some people have experienced a card issuer zeroing it out, so I personally wouldn’t feel comfortable gambling with anything less than $5.01 when approaching a mortgage approval.

  4. I had 7 or 8 inquiries within the last two years when I bought my house, but it never came up as a problem. One thing that did come up was the $5,000 in deposits to my checking account in the last month from my Amex Serve account. That required a letter from me, but I just kept it vague and said it was a prepaid account I seldom use for purchases and so I was putting the money back in my checking account. I imagine this won’t be much of an issue for most now that serve is dead.

  5. When we applied for our most recent mortgage, the broker said he had never seen so many “Chase” pages on anyone’s history. He is a points and miles guy and thought he played the game well until he saw our credit histories. 😉

  6. I was looking into getting PMI removed on my mortgage in February. It turned out that since I was getting an appraisal for that, I might as well refinance. Wasn’t prepared at all – 4 new CC and 5 inquires in previous 3 months…oops. It ended up not mattering in the end, although I may have paid an extra 1/8% due to ~20 points drop from inquiries. Not too big a deal. I didnt have to wrote a letter, but had to explain every inquiry on a form. “Opened new CC account for bonus”. Then had to attach the CC statement for each new account.

    I went from being incredibly bummed to miss CC funding of Citigold account by 2 days, to so relieved that I didnt have to explain that $22k charge on my brand new Arrival+! My previous CC funding were on my wife’s Arrival+, so they didn’t show up.

    Personally I thought it was worth paying $30 for one month of FICO Ultimate 3B scores. It includes the scores that are used for mortgages, so I knew exactly what my middle score was before actually completing applications/getting hard pulls. This helped me decide whther I should float the current rates or apply and lock-in now. I locked in and am very happy with my new rate and no PMI! Still paying it off in the same time frame, but paying $350 less a month

  7. Why not just be honest ?
    If I were looking at whether or not someone was a good credit risk, an experienced churner is as high a recommendation as one can hope for. Once I explain what is involved in managing 29 active cc accounts, they are stunned by the organization, discipline and consciencousness involved.
    I am an awesome credit risk and they should be fighting to lend me money (which is how I ended up with my 2.75 mortgage rate).

    • I’m a conventional mortgage underwriter at one of the largest banks. I agree with above, the act of credit card churning itself is not viewed as the same risk as a credit card analyst would. Low credit utilization and strong credit history are good things. The main reason a explanation is needed on inquiries is just simply to make sure no missed balance/payments are outstanding but not reported yet. if we see a matching account that aligns with the inquiry month, we don’t need to ask. if we don’t address the ones that don’t match,, it’s likely an investor could question it and be deficient.

      If you actually do carry balances and using credit cards to support a lifestyle or living off them, then yes, there would be bigger concerns about recent new accounts. But for the most part it’s a non issue. Best to pay off amex charge cards in full before statement date. They report the balance as payment so you’d have to show assets to cover.

      And please do not tangle MS with assets used on the app. Don’t even move money between accounts as large deposits typically require a paper trail to show the investors we sourced all funds used to close and no money laundering. If you deposit $5k serve funds into an account and you make less than $10k a month for example, you just opened a can of worms the underwriter didn’t want to have to do and certainly you don’t either. That’s when it gets messy.

      But prudent, organized churners should have no worries.

  8. I have mixed feelings about what I’m reading here. I financed a home in 2014, shortly after the Citi AA Exec 100k offer. While others were getting card after card and up to 500k AA miles, I exercised restraint and had no inquiries for about 2 years. Now it seems like I could’ve snuck in a card or 3 and probably would’ve been all right. My scores are great and I have very good income.

    • Well to be fair, the further away 2009 becomes, the easier mortgages are becoming. Also, there is a difference between original purchase and a refinance. My 20+ inquiries in 2 years and 6 in 4 months prior may have affected my ability to get a new purchase mortgage, but definitely didn’t affect my refinance.

      • I agree, the further we get from the housing bust, the easier it’ll be. It’s a slippery slope though because we don’t want them to completely forget what happened before as it would increase the chances of history repeating itself. Then again with the all-cash offers from foreign investors and tighter requirements we’ll most likely not see a rerun of a very dark time for real estate.

        • Well remember the “investment side” of mortgages is still going very strong which means there is still inventive to generate more products to sell. Of course there are more eyes on what is going on and credit default swaps aren’t the secret they once were, but the system is largely unchanged from before downturn. Certainly more unchanged than most people think.

      • You are right about purchase vs. refinance, especially for new homebuyers. If you have a previous mortgage with a strong payment history that helps a lot. Also, most refinances tend to have stronger equity whereas on purchases often times people want to put down the least amount of money possible. The higher the equity or down payment, the lower the risk to the bank.

  9. In 2012 we got a mortgage on our current home. It was like pulling nails. From people that we’ve talked to it appears we had poor timing as far as getting approved after the housing bust. They wanted explanations for a lot of various things. We were even told that they have to verify everything and reassured us it was more so to cover their bases than it was an issue of us qualifying. At the same time though it was worthwhile seeing as our home has appreciated in value since the summer of 2012. So yes, it’s definitely YMMV and market timing I’m sure has a lot to do with your experiences.

    We’ll be moving later this year or early next about an hour away. We’ll rent our current home and rent in the new location as well (for a year). When it comes time to apply for another mortgage (probably not until at least late next year) I’ll definitely wind down all activity at least 6 months prior. This includes bank account transfers for fee waivers on bank accounts and large credit card payments from high MS. In short, I’ll be looking to firewall all MS related activity into a secondary account which hopefully we won’t need to provide as proof of assets during the process.

    Risking a higher interest rate because of a few credit cards and banking activity just isn’t worth it over the course of the loan term. If rates stay as low as they are you’re even more inclined to never refinance. In this type of situation a fraction of a percent higher rate will cause you to pay thousands over the loan term that you may otherwise have avoided if your score is higher and your accounts are risk-free. I think Noah with Money Meta Game eluded to this as well.

  10. All of this is great to hear, but I am still confused about the credit scores banks use when you apply for loans. I recently refinanced my mortgage with Citi, and while I didn’t technically have any problems (most likely because I have been a CitiGold customer for over 10 years), they sent me a standard letter saying my credit score was 737. At the time, all three of my major scores were over 800, so your explanation of “they drop the highest and lowest and take the middle score of the three” doesn’t seem to have applied in my case. I was thoroughly confused.

    • The link I provided in the article talks about the different scoring models used. The credit card companies largely provide you with the Bankcard model which is what they use. Mortgage companies use a completely different model which scores your credit differently. Yours seems to be a larger difference than I have seen, but 737 was most likely your middle score, but your middle score out of the 3 scored with the different model.

      • That was the descrepancy I found, too. The rest of my FICO and FAKO scores were at least 760, with most around 800. Mortgage scores were 698, 721, and 740.

  11. Nice article…
    I got my mortgage in Feb 2015 when we had the Amex Redbird going on and I thought that with credit card loads to RedBird I will pay off mortgage every month and earn miles too… But my dreams were dashed when in few months the cc loads to RedBird were stopped.
    Now I have my BlueBird also closed and still hanging on to some other bluebird cards belonging to family
    Does anyone else have some novel way of doing some similar process (as above) and get miles by paying mortgage and without paying fees or minimal fees ?

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