Maintaining a personal budget and having a good financial plan associated with your income is a good first step in preparing yourself to get mortgage loan financing. Whether you are buying a home or refinancing, consumer debts matter. It can make or break your situation. Here are some things you might want to give some consideration to when it comes time to refinancing, enhancing, or securing a mortgage to purchase a property.
Your ability to secure financing is going to be directly related to how good your income, credit score equity, and/or cash you have available is. For the purposes of this article, we’re going to be talking about specifically debt. Credit card debt can be detrimental to your ability to secure mortgage loan financing. Credit cards can be a double-edged sword. Credit cards, on one hand of the spectrum, if you handle them responsibly, can make your credit score go up. Whereas if you use them in an irresponsible way, they can make your credit score go down and add to your debt-to-income ratio. Picture this, you’ve applied for mortgage loan financing, and you get the realization that your credit score is different than what you thought it was. Based on your utilization of credit cards your credit score appears to be a little bit lower. Then you pay off those debts, increasing your utilization of credit and then your credit score could bounce back up. This is something you need to be aware of especially when it comes time to getting a mortgage because it can directly affect your interest rate. Your interest rate on the mortgage loan that you’re seeking is directly tied to your credit score. It’s also tied to loan to value, occupancy, and other factors. But the credit score is the main driver of interest rate on any kind of residential mortgage loan including FHA, conventional, and VA financing.
So, what this means for you is that your credit cards want to be managed in such a way where you use them and pay them off in full each month whenever possible. This means if you have multiple credit cards out there with multiple payments consolidating them into one or two credit cards and keeping the other ones open with very little or no activity can help increase your credit score as long as you’re not maxing out any credit card. A good rule of thumb is to keep the credit card balances at 25 percent of the total allowable limit. This will help maintain a high credit score and show low debt-to-income ratio. However, it’s the payments on the credit cards that can also come back to be problematic in the future as it relates to your payment to income ratio. Your payment to income ratio also dubbed as a debt-to-income ratio. Debt-to-income is the amount of expenses you have expressed as a percentage into your monthly income. For example, if you have $300 a month of credit card payments this translates to on average about $50,000 in spending power. It’s the difference between a $500,000 house and a house for $550,000. Therefore, it’s good to keep the credit cards at the 25 percent allowable limit and keep low balances which translates to low payments on those credit cards. By maintaining discipline over your credit cards, you’ll allow yourself to have a higher debt-to-income ratio allowance which improves your borrowing power whether purchasing or refinancing a home as well as maintaining a high credit score.
How do you know which debt to pay off first? Here’s how that works, you want to cherry pick the obligations that have the highest payments with the lowest possible balance. This way it requires as little cash as possible to get a big bang from your buck in terms of spending power and/or debt to income ratio allowance. Not sure where to begin? Work with a local lender who understands the housing market. Someone who understands credit in particular personal finance and they can help walk you through the debts that you have on your credit report so you can improve your borrowing power and your credit score at the same time. Getting you the lowest possible interest rate on the most affordable loan for you and your family.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.