Repairing Your Credit To Prepare For A Home Purchase 3 Of 4

Dated: 04/11/2017

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Payoff any/all debt

A high debt load will hurt your credit score and your ability to qualify for a home loan. A mortgage lender will look for a "back-end" debt-to-income (DTI) ratio of about 33% to 43% depending upon down payment and loan type. That means that ALL of your debts, including mortgage, property taxes, association dues and home owner's insurance account for no more than 33% to 43% of your monthly gross income. Knowing that you need to keep your debt including car loans, credit cards, child support, student loans and any other debt that involves a monthly payment and is reported to the credit bureaus to approximately 8% to 10% of your gross income, again depending upon the loan program and down payment, leaving approximately 33% for your home related expenses (Mortgage, property insurance, homeowner's insurance and any association fees).

If your debt load is higher than that consider "outside-the-box" ideas to payoff/down debt.

  • Hold garage sales

  • 2nd or 3rd temporary job

  • Temporarily reduce expenses (Do you spend $5/day on Starbucks, 4 days a week? that's $80 per month you could put toward your debt, at least temporarily. How bad do you want that house?)

Once you payoff or reduce your debt DO NOT CLOSE ANY CREDIT ACCOUNTS, at least not without discussing the impact with your loan officer. Let's say you have two credit cards. One has a limit of $2000. You have charged $500 on that card so your available credit on that card is $1500.00. Your second card has a limit of $5000 and you have not charged anything on that card so your available credit on that card is still $5000. Your total available credit then is $6,500 on both cards. Your debt to available credit is 8%. Now let's say you choose to close your account with a zero balance ($5000). Your available credit becomes $1500.00. Your debt to available credit jumps to 33%!

Your debt (amount charged or loaned) to credit limit should never be higher than 50% of the card limit. Once you begin to use more than 50% of your credit limit your credit score begins to take a hit. Below that, as long as you are making your payments on-time, you should not receive hits to your credit. Just keep in mind that if 49% of your credit limit is more than 33% of your gross income you may not be able to qualify for the mortgage you want regardless of your credit score.

If you have a hard time controlling your spending without closing accounts, cut up those credit cards or put them in a safe deposit box but don't close the accounts.

Once again, ultimately, if you are looking to purchase a home in the next 3 to 6 months THE FIRST thing you should do is contact a highly qualified lender to pull your credit and walk you through what you should do and when to be in a position to purchase when you are ready.

There are a ton of loan officers out there and it really does matter who you choose. Don't wait any longer contact me today! I am here to help you become a proud home owner!

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Regina McKinney

Regina McKinney is dual licensed, meaning she holds real estate licenses in both New Mexico and Arizona and she actively works in both markets. She is an "outside-the-box" thinker with her finger on t....

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