Many people who feel they are prepared to enter the real estate market by purchasing their first home have experienced a roadblock to good mortgage rates – their credit cards. Credit cards can play a positive, but also a negative role in the process of purchasing a home.
There is not a doubt that having a credit card can work highly in your favor when it comes time to shop around for your first home. If you have a consistent history of timely credit card payments this builds a strong credit rating. Having a high credit score not only will secure you a mortgage quickly, but one with very competitive rates.
Your credit card can be very influential when determining what mortgage you are seeking because the credit card payments are added to what the payments ‘would be’ on a possible mortgage to determine how much can be afforded.
Purchasing a house requires you to have a certain percentage of cash for the down payment and affiliated costs (such as legal fees). Generally speaking, the more cash you can put toward the down payment the lower the mortgage cost.
For those who may not be in such a desirable position, they need to examine their loan-to-debt ratio. First, take a look at your monthly gross income. Lenders use terminology including front-end ratios. What this means is that a front-end ratio is the payment a purchaser can afford from the lender’s perspective, regardless of what you may want to pay monthly. The back-end ratio reflects the mortgage payment plus all debt.
If your credit card carries a high balance or if there have been some recent struggles paying the credit card monthly payment by the due date, this may not be such a good time to consider shopping for your first home. This will reflect on the lender’s outlook at your ability to be financially responsible in paying a mortgage. There are inevitably some high-risk lenders who exist and are willing to take a chance on what is considered a risky mortgage loan, but the interest rates will reflect this by being much higher; therefore the monthly payment may be more than what is realistically affordable.
Some first-time home buyers ask if they can have their credit card debt added to the mortgage they are seeking so that it eliminates this debt. The answer is no. When you buy a house, the mortgage is secured by ‘collateral’ and that is the house. A lender will not provide a loan for anything other than the collateral.
Some people have made a serious mistake by taking cash advances from their credit cards to use as a down payment. This cannot be stressed enough – not only can this become a financial disaster to the individual, it is breaking the rules. Those who are determined to break these rules have taken out cash advances well in advance of buying their first home and have put this money into a savings account. The only way this can work is if the cash advance is taken out more than two months before applying for a mortgage and have that cash sit in the bank. The money then avoids questioning from the lender because any length of time shorter than that means you will have to come up with the required documentation to validate the source of the money.
While there are ways around the rules, it is really important to understand why these rules exist – they are designed to prevent people from doing this because it ultimately ends up becoming a serious financial nightmare.
Bottom line; keep your credit cards in good shape by maintaining a consistent history of timely credit card payments and a low balance. The reward in doing so will help the first time home buyer in obtaining the best-available mortgage.
And thank you for making me Your Orange County Real Estate Connection.
Michael Caruso, Broker ABR ABRM CLHMS CRB CRS GREEN GRI
Past President, Orange County Association of Realtors (949) 753-7900