If a new home purchase is in your future, or you’re currently under contract to purchase a new home soon, please read this! ‘Tis the season to spend, spend, spend. It’s hard sometimes not to get overwhelmed with the Holiday gift giving spirit.
Shoppers around the country say they are planning to spend an average of $882 for gifts this holiday season, up from $861 last year according to the 31st annual survey on holiday spending from the American Research Group, Inc. Of that $882, a good portion of it usually goes on a credit card. Typically, this is not a big deal, but if you’re currently under contract to purchase a home or have the intent to buy a home in the near future, be aware of the debt you are adding up.
If you are using a bank to help finance your home purchase, realize the amount of credit card debt you rack up during the Holiday’s will affect your debt to income ratios as a lender reviews your ability to repay the loan back. A debt to income ratio is where a lender is reviewing your current unpaid balances of credit cards, student loans, merchant credit cards and car payments. All the outstanding debt that you owe is added up and then evaluated against your current income. The ratio is calculated based on the loan you are approved for and the ratio itself can fluctuate depending on the loan program and bank you use, the important piece is this… if you currently are under contract to purchase a new home, changes in the debt that you owe could tip your possibility of getting a final approval in your new home purchase.
Please remember your credit is constantly being evaluated during the home buying process and even though you were able to obtain a credit approval letter from your bank (preapproval letter). You MUST maintain those ratios past the actual closing day. A review of your credit rating, debt, and an income verification are usually done 1 day prior to closing or on the day of closing. Any changes even small could affect your ability to buy the home you waited so long to purchase. Yes, there’s lots of great deals out there especially if you apply for a merchant credit card while making your purchases.
In everyday purchases, it’s great to save an extra 10-20% when you open up a merchant credit card, but if you’re buying a home soon or in the middle of your home purchase, the extra credit pull on your credit could bring your score below the acceptable number for your purchase. Now, if you’re credit rating is high 780+ it may not disqualify you from the entire purchase of the home, but it may require you to explain why the new credit inquiry can be seen on your credit report. A required explanation of debt could hold up your closing and could potentially cost you either in a fee for delaying the closing, or complete cancelation of the purchase. Although, tempting the rule of thumb when purchasing a home is, ‘just don’t touch your credit,’ pay your bills as agreed, don’t take out any new debt, don’t close current or revolving debt (even if you paid the balance off!), don’t add to the current debt you have.
There are exceptions to these rules, but regardless you should ALWAYS consult with your lender before changing anything with your credit. If you’re planning to purchase a home in the next few months to a year, follow the same rules. Pay your balances on time, if you can pay a little extra on a balance here and there, do so, the credit bureau will give you a better number if they see you are paying more than the minimum and keeping your credit card balances at 1/3 of the limit.
As mentioned above, if you have cards with zero balances (especially if they have a long credit history) don’t close them! Lenders like to see at least three positive lines of revolving debt even if it’s a card with a zero balance. Regardless if you’re in the middle of a new home purchase or planning to…. the debt you are accumulating is debt that needs to be paid on a monthly basis. Adding a mortgage payment, your taxes, insurance, and a possible HOA (homeowner’s Association Fee) if applicable, could put you over your monthly budget. Keeping expenses low especially for the first year of new home ownership will help you ease into the new expenses. The last thing as a Professional Realtor I want to see is a new homeowner that’s over their head with new home expenses.
Please read the full post in my Realty Times
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