How Credit Cards Affect Home Purchase

"Should we pay off our credit cards before saving for a down payment?

On the positive side, a history of timely payments on credit cards builds a positive credit history and a correspondingly high credit score. That's important when you start applying for a home mortgage.

On the other hand, when there are indications of financial stress in your credit-card history, this will reduce your credit score, even though you may be making all payments on time.

Indications of stress include getting new credit cards, high balances on your cards-- credit being maxxed out based on balance and credit given.

As you plan ahead for a home purchase, get your credit cards below 50% of what your credit limit is and avoid taking out new cards.

Credit cards can also affect your ability to qualify for the loan you want because the required monthly credit card payments are added to the payments associated with the mortgage in determining how much you can afford.

The "total expense ratio" calculated by lenders and used in qualifying borrowers is the sum total of the proposed mortgage payment, property taxes, homeowners' insurance payment, and other debt service, which includ credit cards, all of this is then divided by the borrower's gross income.

So, when you can keep your total monthly debt payments below 8 percent of your gross income, it will not limit the amount you can borrow.

You will need some cash to buy a house, for down payment and closing costs.

At the end of the day, when your credit card utilization is below 50 percent, and your total debt service payments below 8 percent of your gross income, and your target down payment is in hand, you are ready!

With the different programs that are out there it is ALWAYS best to speak to your mortgage person and have them tell you in more detail what is best for you and your situation.

This information just gives you a brief overview as to how they look at your credit and spending habits.