Question About Buying Our First Home

Updated on February 23, 2011
M.M. asks from Duluth, MN
9 answers

My husband will be graduating physican assistant school in late May and we are excited to start the process of purchasing our first home. Over the past several years, we have racked up a lot of credit card debt (some from medical and school expenses, some from poor spending habits). We are putting all extra money towards our payments right now (we have two cards). My question is this- will the amount of credit card debt that we have affect our approval for our home loan? In my husbands new job, he will be making a considerable amount more than we do now and so we will NOT be relying on credit cards like we have in the past. In fact, both of our cards are already cut up and we don't intend to use them again. I am just worried that when we are applying for our home loan, it will reflect poorly on us that we have a high balance on our cards, and they will assume we cannot manage our finances properly. I know there are a number of factors that are consdered in the approval important is this credit card issue? I would like to be putting some of our extra money towards other things (savings plans, small projects, ect), but for now ALL extra has been going towards the cards. We are always on time with payments. We also have 2 auto loans that we are still paying on, as well as some student loans. Thank you SO much for any advice!

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answers from Dallas on

I am a Licensed Mortgage Loan Originator in Texas, and have been originating loans for over 12 years. (I'm not licensed in GA, so this is NOT a solicitation for your business, only my professional opinion).

Your mortgage professional will pull your credit and count all of your monthly payment obligations (credit cards, car and student loans, etc), plus the new mortgage payment (Principal, Interest, Taxes, Insurance, and if applicable, Mortgage Insurance and Homeowner's Association dues) against your gross income to establish your debt to income ratio. In our current lending environment, it is common to not allow in excess of 41%. The balances are somewhat less important than the monthly payments, but the balances are indicative of overall strength of your file.

You will need a down payment and reserves in savings. Your down payment can range from 3.5% on up, depending on the type of loan you are applying for. It can also be a gift, under certain programs, but you will need reserves in savings.

I would highly encourage you to leave your unsecured cards OPEN, even if you cut them up. If you close the card, you are reducing the longevity of your credit file. Also, closed cards with balances can fire negatively with the Automated Underwriting System.

Now is the perfect time for you to select your mortgage professional and begin the pre-qualification process. They will begin with pulling your credit and analyzing it in relation to your income and assets. They will also tell you, based on the aforementioned debt to income ratio, what your max purchase price will be. Like I said, the balances are less important, but the overall debt to income ratio will be affected, and likewise the amount of house you can qualify for, because the higher the balances, the higher the monthly payments. Keep in mind, they will pull your credit once now and once when you are nearing putting in your offer on a property and this does NOT lower your credit score. It is the act of multiple lenders in a short period of time pulling credit that can negatively affect your scores.

I wish I could offer a referral to someone in Georgia, but I don't know anyone. Our industry has had a world of change in the past years, and is drastically changing again, this year. I would suggest interviewing your Originator and ask about their time in the business, are they licensed under the new laws (vs. operating under a provisional license), whether they handle predominately purchase or refinance business, and I always encourage people to get a personal referral from a trusted source.

I hope this helps! Best of luck to you. Message me if you have additional questions.

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answers from Dallas on

First, do you have money saved for a down payment?

Your credit score is VERY important. So, is the amount of credit you carry.
You should only be carrying a quarter or less of your limit. So, it your limit is 10,000, you should not be carrying more then 2,500. Anything more looks bad to lenders. We got a below 6% interest rate on our home, because of our credit. Bad/low FICO scores raise your interest rate substantially. You NEED to know your credit history. See if there are any errors that you can fix. There were errors on my credit report. My social security number is very similar to my sister's and her school loans were on my report. It brought my credit score down, until they removed it. Fixing errors can bring uo your score.

You really need to fix your credit, before you attempt to buy a home. Because of the recession, it's very difficult to find a loan on bad credit.

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answers from Pittsburgh on

I believe your credit score will be affected by your credit card debt. Your credit score looks at the credit available to you and then how much of that available credit is used. I believe the more that is used the lower your score.

Once those credit cards are paid for you do not want to close them. At one time I thought otherwise but learned that the longstanding relationship you have with those creditors will help raise yoru credit score.

I know I wasn't able to answer all of your questions but hope this does help. Congratulations and good luck!

PS. Although I have never read Dave Ramsey's books many people highly recommend them on this site so you may want to borrow them from the library and read up on what he has to say about paying down debt etc.

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answers from Washington DC on

CONGRATULATIONS on becoming a home owner!!!

Yes, your debt to income ratio will be considered in your pre-approval for your mortgage.

You need to get pre-approved for the home loan. They will base it on what you are currently earning - not what an offer letter says...they MAY consider this - but to be honest - until he's held the job for 6 to 12 months - they probably will NOT consider the "new" income as part of the process.....the pre-approval will tell you what the banks believe you can afford to buy. Keep in mind that buying a home - you need to consider things like home owners associations dues, new furniture, blinds, may consider requesting them to put it all under one loan - pay off the cards and cars and just have the mortgage. However, you MUST be studious in order to NOT use your credit cards and ONLY use cash!!

Best of luck!

The credit card issue is important - especially in today's economy...if you have late payments on anything in the last 24 months - this will affect your interest rate as well as the type of loan you can get, down payment, etc.

Trust me - if you are using credit cards to get by now - it's a habit and it's a VERY hard habit to break - we stopped using credit cards in 2006 - it was a HARD habit to break - but we HAD to do it. We are a cash only family. The only debt we have is our mortgage - and if we hadn't refinanced and taken money out - we would've had it paid of in 18 months from now. That's sad!!!!

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answers from New York on

The credit card issue is extremely important. A lot of what goes into determining on whether or not you will get approved for a loan in your credit score. Part of your credit score is determined to the ratio of the amount of credit available compared to the balance used. It should be under 50%. Keeping that in mind, do not close any of credit card accounts you currently have.

Note: one of the things that really hurts your credit is late payments.

I think it's great that you're paying down your credit cards. However, are you saving any money? Do you have enough saved up for a down payment and closing costs? Do you have enough saved up for emergenies (home repairs, car repairs, etc)? This will also effect your ability to qualify for a loan.

There are a lot a great articles on under the money section. You may want to read a few.



answers from New York on

Yes- your credit score will be significantly impacted by your existing debts... all of them. The credit card issue is a huge one, so I would not start applying for loans until you have paid them off. Your credit score is a ratio of "available credit", including the credit you have accessed so all of those "store cards" that you "only use to access a sale" count against you too!

When we were looking to buy our first home, I cancelled ALL of my store cards b/c even though there were no balances on those cards, the credit was extended to me and therefore could cut into my "available funds" to pay the mortgage.



answers from Springfield on

I'm not completely sure either, but when we met with the loan officer it was my understanding that our credit card balances effected the amount we were approved for. They used our credit scores to determine the rate. I'm not positive, but that was my understanding.

Make an appointment to talk to a loan officer. They won't run a credit check until you approve it and pay for it. But you can still meet with one and aks some basic questions.



answers from Washington DC on

I'm sorry that I can't directly answer your question. I hope that your credit issue doesn't affect the purchase of your home! Sounds like you are on the right road to getting your finances in order. Dave Ramsey's book "The Total Money Makeover" is really helpful. I help people earn residual income from home, so if an additional income stream might be of help in reaching your goals, feel free to contact me for more. Good luck!



answers from Athens on

Yup, all your debt at the time you apply for a loan is factored into whether or not you get approved. The banks are not so quick these days to lend money, so the less you owe, the better.

It seems to me that you are on the right track by paying off the cards. Keep up the good work.

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