YAY! You Plan on Buying a Home!
Imagine, you just got pre-qualified for a loan and you are going to buy a house. That is so phenomenally exciting!!! You find your dream home, you apply for your loan and now you sit back and wait for the lender to determine if your loan application will be approved. That’s, well, not exciting. Wouldn’t you prefer to dream about living in your dream home and pulling out your credit card to purchase dreamy furniture that is on sale right now for it, so that you will have the perfect furniture ready when you close on the house and move in? Ah, yes, dreamy, however, does that sound wise to you? I have a feeling you are sitting back saying, nope that doesn’t sound like a good idea. And you are correct because that furniture purchase just increased your debt and might disqualify you from affording your dream home. That would be very sad. It’s been known to happen. The reality is, getting your mortgage has everything to do with your debt to income (DTI) ratio and your ability to repay your loans. Being credit savvy is paramount to obtaining your mortgage, also known as, your dream home.
Pause for Thought:
This is such a factual curiosity, one must have debt, or have had debt, to qualify for more debt. Lenders want to see that you know how to manage your debt. If you demonstrate you cannot manage your debt, lenders can interpret that as an indicator that you could possibly default on a mortgage and therefore might deny your loan. As a rule, try to keep your credit usage to a maximum of 30%, or less, of your credit limit at all times, and do your absolute best to pay it off monthly. This strategy will help you become credit worthy in the eyes of lenders. And credit worthiness will open the door to a new home for you.
Tips for protecting your DTI ratio when getting a mortgage:
- Don’t buy big ticket items – wait till you close on your home first.
- Watch your spending; don’t max out credit cards.
- Don’t apply for more credit – no new loans, no new credit cards. Again, wait till you close on your house.
- Don’t skip payments on anything – not even the gas bill, this will have a negative impact on your credit score.
- Don’t co-sign anything for anyone, this impacts your credit, if they default you have to pay. You can help them after you have closed on your house.
- Don’t change your career while applying, you can change your job within the same career, but if you change your entire career, it’s like you are starting all over again income history wise and this could hurt you.
Surprises:
This may seem counterintuitive but do not close any of your current credit cards when you want to buy a home. This act would actually decrease your credit ceiling which could have a negative impact on your DTI ratio. Credit consolidation is also something you shouldn’t do without talking with your lender first. They will know best if this will improve or actually have a negative impact upon your credit score.
The Bottom Line:
It’s good to have financial goals in life; and it is really good to see a pathway to achieving those goals. You may have already known the information I have shared, but sometimes a little reminding is a very positive thing. When you want to buy a house, you need to make it your financial priority for it to happen. I share this information with you, because people make credit/spending mistakes when they are in the process of buying a house and qualifying for a loan. I don’t want this to happen to you. I want to see you living happily in your dream home. You can do it.
Karen Alsheimer, Realtor®
MRM Associates Realty
For the guidance that moves you.
