Credit
Advice for Home Buyers
Don't Pay off Credit Cards
by Jeanette Joy Fisher
Credit needed for real estate mortgage financing differs from
credit needed for consumer loans. If you need help getting a home mortgage,
these credit tips will help you.
Contrary to what many credit advisors say, paying off credit
cards each month is not always the best action to take. When making credit card
payments, don't pay the balance in full each month -- let a little roll over.
Carry a balance on your credit card every other month --as little as a dollar.
Paying balances in full does not increase your credit score; paying balances in
full may in fact lower your credit score. Accounts with zero balances do not
compute significantly in your total score. For instance, a credit card with a
perfect payment history and no balance will not raise your credit score as much
as a credit card with a low balance. Any balance keeps the card active so it
computes in your credit score.
You most likely have been advised to cut up your credit cards
and close your accounts. Following this advice degrades many credit scores.
Canceling Credit Cards
Canceling credit cards can lower your credit score. Keep your
longest-term credit card account open to show long-term credit history. If this
account has prior late notations, negotiate with the creditor to drop negative
reporting on your credit history file. Slowly close out newer accounts after
they are paid off. Keep your best accounts open -- those paid on time or
reporting "pays as agreed" and with the longest history.
Credit card companies may raise your rate if you cancel a card
before it is paid off; it is best to keep accounts with outstanding balances
open until you pay them off.
Perfect Balance of Credit
1.
Mortgage over one year old with all payments on time
2. Visa
Card or Master Card with less than 10% of available credit as balance due
3.
Discover or American Express Card with less than 10% of available credit as
balance due
4. Auto
loan either paid off or paid down with low payments compared to monthly income.
Debt-to-Income Ratio
Credit scores do not reflect income -- credit bureaus do not
have income reported to them. However, real estate lenders look at the consumer
debt-to-income ratio -- the amount of monthly debts in relation to the amount of
earnings. Consumer debt is more highly regarded/scores higher if total debt is
under 20% of net income, or total monthly payments on all debts is less than 35%
of monthly gross income.
Qualifying Ratios
Lenders want the total debt ratio (the percentage of total
monthly payments, including the new mortgage, to income) to be less than 33% for
a typical conventional mortgage.
This means the new mortgage payment, credit card payments, and
all other monthly debt payments should not equal more than about one-third of
the monthly income. Lenders want the mortgage debt ratio (the percentage of the
new mortgage payment to income) to be less than 28%.
Non-prime loans have lower standards; some lenders allow
debt-to- income ratios as high as 55%. Borrowers with less than perfect credit
qualify more easily for a non-prime loan compared to an "A-paper" loan.
Once you total your monthly expenses and determine your debt
ratio, you can estimate how much you can afford for a house payment. For
example, if your income is around $3,000 per month, you can afford a home with
payments around $1,000 per month (including taxes and insurance) with a
conventional loan, if your other debt does not total more than 5% of your
income.
For investors, these equations change. Lenders expect 10%-25%
down on investment property and allow about 75% of the rental income to offset
the debt ratio.
Understanding your credit helps you manage your credit so you
can obtain real estate financing, either for the house of your dreams or for
your financial future.
Professor Jeanette Fisher is the author of "Credit Help! Get the Credit You Need
to Buy Real Estate," "Doghouse to Dollhouse for Dollars: Using Design Psychology
to Increase Real Estate Profits," and other books. Forget what you've been told
about credit. Get the credit you need to buy real estate. Visit Real Estate
Credit Help Center:
http://recredithelp.com/