Revolving debt is credit with a limit you can draw on, pay back and draw on again: credit cards, store cards and personal lines of credit. The balance and the minimum payment change from month to month. For a mortgage, the lender counts the minimum monthly payment shown on your credit report in your debt-to-income ratio (DTI), the house payment plus monthly debts divided by gross monthly income.
How each program counts it
FHA uses the payment on the credit report. When the report leaves the payment out, the lender uses the payment on your most recent statement or 5% of the balance.
Conventional (Fannie Mae) uses the minimum payment on the report or supporting documentation. With no minimum shown, the lender uses 5% of the balance, and Fannie Mae's automated system uses the greater of $10 or 5%. A charge card that has to be paid in full every 30 days stays out of the ratio, and the lender checks that you have the cash to cover the balance.
USDA uses 5% of the reported balance when no minimum shows, and a card with a $0 balance needs no payment counted.
VA counts the minimum payment shown on your report or statement, and VA's residual income test, the cash left each month after taxes, debts and the house payment, subtracts that same payment.
A worked example on $4,200 a month
Sam earns $4,200 a month gross. Conventional allows total debts up to 50% of income with an automated approval, or $2,100.
| Card | Balance | Counted payment |
|---|---|---|
| Card 1 | $4,500 | $135 minimum on the report |
| Card 2 | $1,200 | $60 (no minimum shown, 5% of $1,200) |
| Store card | $0 | $0 |
| Total | $195 |
Sam has $1,200 to put toward the cards. Paying card 2 in full frees $60 a month, or $5 of payment for every $100 spent. Card 1's issuer sets its minimum at 3% of the balance ($4,500 × 3% = $135), so the same $1,200 there leaves $3,300 owed and a $99 minimum, freeing only $36. Card 2 is the first payoff.
With card 2 gone, Sam's counted revolving debt falls to $135, and the room for a house payment rises by $60. At a 5.75% rate, $60 of principal and interest carries about $10,000 of loan.
Getting the most from a payoff
- Pay cards to zero. A paid-down card keeps a minimum. A $0 card counts nothing.
- Look for cards with no minimum on the report. The 5% figure is often higher than the real minimum, so a current statement showing the actual payment can lower what counts.
- Keep paid cards open. Fannie Mae doesn't require a paid-off card to be closed, and the open limit helps your credit utilization.
- Time it with your lender. A rapid rescore can post a new $0 balance to your credit report in days.
Enter each card's counted payment in the DTI calculator and zero them out one at a time. For a broker's ranking of which card to pay first, call AAA Capital Funding at 888-601-8344 with your latest statements.