When applying for a mortgage, a lender determines how much house you can afford based on your debt to income ratio, not solely your total monthly income. With this in mind, how you manage your debt, specifically credit card payments, is critically important! If a home purchase is on the horizon for you, you’ll want to remember a few key things.
Establishing and maintaining good credit is an important first step. Actively using multiple cards, and paying them off in full each month, is a great way to establish a good credit score. Lenders like to see that you can balance multiple payments over a period of time, so the sooner you can begin to establish this the better! Remember, though, to always use credit cards with caution! Don’t accumulate more debt than you can afford to pay.
Paying off existing credit card debt might also be a good idea when you’re thinking about purchasing a home. You should seek to pay off the cards with the highest monthly payment first, regardless of interest rate, since this affects loan qualification the most. However, once the debt is paid off, you should avoid closing the account. This could adversely affect your credit score, particularly if the card has been used for many years, since length of credit history is considered by lenders.
Additionally, lenders typically like to see a credit utilization rate that’s under 25%, so making any sort of dent in your debt will help reduce the total amount of credit you’re using. Again, refrain from closing any accounts that have been paid off, especially if they had a large credit limit, as in these cases, you could have less debt overall, but a greater credit utilization rate if you close the card.
Finally, if you’ve already been approved for a loan through a lender, avoid making any large purchases on credit, and avoid applying for new credit cards before you’ve closed on your new home. These things could negatively impact your financial standing during this vital period.
Having financial wisdom can take you far in life, and while good credit is always a benefit, there are ways to achieve your dream of homeownership if you’ve had some credit stumbles in the past. Contact one of our bankers to learn more!