Is a new home purchase in your long term plans? Maybe you’re getting ready to graduate college and want to be able to have the bases covered, student loans paid off and a dream house in mind within five or six years. If so, don’t make the wrong assumption that the choices and habits you incorporate now with your credit cards won’t affect nearly every aspect of the home buying process. It will.
Tried & True Reminders
There are always the myriad of suggestions and warnings from friends and family. Don’t exceed your credit limit, don’t pay late, try to pay the balance in full each month: these are wise bits, but there’s more too. For instance, if you have three credit cards; two of which you’ve had for a couple years and a third one you’ve had since your college days, do you know which one to close?
If you think it’s the older one, you’re wrong. This is because you want to establish a timeline of your financial habits and the longer you’ve managed a card with impeccable accuracy, the more complete the picture is for a mortgage lender.
Speaking of mortgage lenders, don’t make the mistake of assuming your bank is the right choice when it comes time to secure financing for your house. The traditional bank might be fine for your checking, savings and credit cards, but it’s always wise to shop for the best interest rates.
Establish Credit Before Finding a House
It’s also probably not the best idea to hit the floor running, so to speak, and begin establishing your credit a year before you begin the search for a house to buy. You can actually lower your credit scores if you open more than a single credit card account within a year or two. Lenders might see this as someone who’s not quite ready to make wise financial decisions.
Worse, if you’re carrying a balance on these two or three new credit cards, you really will threaten your credit scores. It might be construed as poor impulse control. This bodes well for the credit card companies, but it could also mean more money paid over the course of your mortgage due to a higher interest rate.
Another common mistake people can make with their credit cards is by keeping their balances too close to their credit limits. This isn’t wise for many reasons, including the possibility that if interest posts before a payment does, you just might go over your limit. This can result in more fees charged by your card company. Not only that, but it’s going to look a bit irresponsible to a lender.
The Three Ds
Be sure to keep your eye on the three Ds: debt, default and delinquency. Any of these are deal breakers for lenders. Too much debt calculates into your income and if your DTI (debt to income) ratio doesn’t fall into the safe zone, you won’t qualify for a new home loan. Default, of course, is something all of us avoid – whether we’re house hunting or not. Delinquency, again, is another one of those deal breakers for lenders.
Once you begin your search, you’ll discover there’s much more to do along with selecting a house and securing financing. You’ll discover appraisal fees, inspections, homeowner’s insurance – and ideally, you’ll cover those expenses with cash versus your credit card. While this won’t necessarily determine whether you’re approved or not, it’s just a great way to begin your journey into home ownership.
Finally, before you even begin the process of purchasing a home, request a copy of your three credit reports. You may have a flawless history, but that doesn’t mean an occasional error can’t make its way onto your report. In fact, it happens quite often. Find problems? Begin the process of cleaning it up before you apply for a home loan. Usually, a phone call begins the process though you’ll likely discover the need to prove an error’s been made. With today’s technology, it’s not as difficult or overwhelming as it once was.