Many of us dream of the day we’ll sign on the dotted line and get our first home. However, what is not necessarily a part of these dreams are the financial obligations that accompany the process, a process that can be made even more daunting if you have credit card debts that are unsettled. Before you embark on your home buying journey, understand how credit works along with what the impact is on your mortgage rate.
Does my credit card balance impact my ability to get a favorable mortgage rate?
Yes. Most lenders want to know that you have cash to clear your credit balance. If you do not have the cash, you will be subjected to higher interest rates.
Credit score is a vital determinant on your ability to secure a loan. If you have been paying your credit card balances without a hitch for some time, you put yourself in a good position. However, if your credit report shows default, you may have some work to do as this could actually prevent you from securing a loan.
Keep in mind that most lenders check your credit during the final stages of loan approval. Therefore, you would be best to avoid running up a credit card debt before you close the deal. It doesn’t matter that you’ve already been approved for the loan; your lender could cancel it in the event that the above situation happens.
Does lack of credit impact my future mortgage opportunities?
It may. You have ways to secure a mortgage, even without credit. One way is to apply for a government-backed mortgage, which is designed to help out low-income earner and first-time homebuyers. There is a lot of paperwork involved such as providing proof that you’ve paid rent, bills, etc. You are also required to put down a larger amount than is required with a normal loan as you are looking at 20% down compared with as little as 3.5% in some cases.
While not always recommended, you can also request a family member or friend with a good credit to co-sign the loan for you. However, your loan payment is going to also affect their credit for the duration of the loan.
If the above is not an option for you, then FHA is not right for you. Consider waiting for six to twelve months to establish a good credit report.
What is the best way to pay off credit card debt?
While there’s no right way, there are a variety of approaches. You can transfer balances from the high-interest credit cards to those with low-interest rates. You will incur transfer fees of around 3% to 5% of the balance amount.
Of course, cutting out unnecessary expenditures will help. Even minimal savings can add up and help you clear up your balance faster.
Finally, be sure to pay more than just the minimum payment during any payment in order to avoid maximum interest payments and to help keep your credit score healthy.