Monday, August 28, 2006

Credit cards, credit scores, and mortgages....Oh My!

The average American household has $9000 in credit card debt and more households are spending a higher percentage of their income just to stay on top of their credit card bills. Naturally, this effects their spending in other areas of their life, including home purchase decisions. Not only does the amount you owe effect how much of a mortgage you can get, but also can effect the mortgage rate that a bank will give you. All this thanks to a handy little tool called a credit score. A major component of your credit score is related to your credit card habits and can play a big, though somewhat complicated role when you're trying to obtain a mortgage. A history of on-time payments is nothing but positive and that is an important thing to lenders. It's the signs of financial "weakness" in that history that can hurt. Often it's not a single factor that will hurt your credit score, but the combination of those factors. So if you're thinking of buying a home in 3 months or 3 years, a little preparation can't hurt. One easy thing right off the bat is to not apply for new credit cards for at least few months before your home purchase. Simply put, it makes the lender wonder why you need the additional credit. I've always thought it best not to let lenders wonder....they have very vivid imaginations. The other factor to focus on is your utilization rate. Basically, this means how much of your total available credit you use on each card. For example, let's say you have a Visa card with a $5000 credit limit and you have $4000 charged on the card. Divide $4000 in charges divided by the $5000 credit limit and you get .80 or 80%. This is your utilization rate. In an ideal world it's good to be as close as possible to a 50% or less utilization rate. A final factor lenders consider is your "total expense ratio." This is the sum of the mortgage payment, property taxes, insurance, and any other debt service you have including, but not limited to credit cards, student loans, etc, all divided by your gross income. This number ultimately helps the lender determine how much you can afford. The lower the number the better, but even if your number is higher than you like it only effects the amount you can borrow not your actual ability to get a mortgage.

Also, we just added this amazing mortgage dictionary to our website. Check it out and you too can speak the language of mortgages!

If you want to see what your credit score is, here are links for the three major credit reporting agencies....Experian, Transunion, and Equifax. Or you can pull your entire credit report for free at