Two Credit Blunders to Avoid When Buying a Home
Today’s post comes courtesy of Melissa Imo-Moffitt, a mortgage loan officer at AECU.
The best part of my job is helping members achieve their goal of homeownership. When I sit across from a member, I see me answering a lot of questions about credit, like what affects my credit and how do I increase my score? Credit and credit scores seem to be one of the great mysteries of life right up there with when does it stop being partly cloudy and start being partly sunny, or at the movie theater, which arm rest is yours?
If you’re considering buying a house soon, how do you “C.U.” preparing your credit? To better assist you, here are two major credit blunders made by first-time homebuyers:
1. Closing Your Accounts: When I have the good fortune of sitting across from really stoked and scared first-time homebuyers, one statement I commonly hear is, “I just closed a few credit cards.” My answer? Don’t do it! The credit bureaus look at your capacity to borrow and the percentage of debt you carry compared to your potential to borrow. The lower your percentage, the higher your credit score.
For example: You have five credit cards and your total credit limit is $50,000. If you only owe $5,000, your total percentage of debt usage is 10%. Not too bad, seeing as you’re generally not to exceed 30% of your available credit! However, if you close all cards except one with a $5,000 limit (or, the amount of debt you currently have), your debt usage is 100%. Your credit score will be dramatically affected.
2. Going credit card crazy: Once you’re preapproved or approved for a mortgage, resist the temptation to run up your line of credit. Throughout the early stages of the loan process, your lender will pull your credit report to get snapshot of your financial situation. However, be wary that your lender may run another check before closing, and if you’ve increased your debt usage, you might miss out on your dream home.
This is quite common as many potential homebuyers gain approval and find their dream home. Couples finance new furniture and decorations, increasing their debt usage and making them ineligible to close their loan.
Sage advice? Pay off your credit cards, keep them open, AND have the discipline to keep your balances low.
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