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New Credit Advice: Dont Pay off Those Credit Cards!
Credit needed for real estate mortgage financing differs from credit needed for consumer loans. If you need help getting a home mortgage, these credit tips will help you. Contrary to what many credit advisors say, paying off credit cards each month is not always the best action to take. When making credit card payments, don't pay the balance in full each month -- let a little roll over. Carry a balance on your credit card every other month --as little as a dollar. Paying balances in full does not increase your credit score; paying balances in full may in fact lower your credit score. Accounts with zero balances do not compute significantly in your total score. For instance, a credit card with a perfect payment history and no balance will not raise your credit score as much as a credit card with a low balance. Any balance keeps the card active so it computes in your credit score. You most likely have been advised to cut up your credit cards and close your accounts. Following this advice degrades many credit scores. Canceling Credit Cards Canceling credit cards can lower your credit score. Keep your longest-term credit card account open to show long-term credit history. If this account has prior late notations, negotiate with the creditor to drop negative reporting on your credit history file. Slowly close out newer accounts after they are paid off. Keep your best accounts open -- those paid on time or reporting "pays as agreed" and with the longest history. Credit card companies may raise your rate if you cancel a card before it is paid off; it is best to keep accounts with outstanding balances open until you pay them off. Perfect Balance of Credit 1. Mortgage over one year old with all payments on time 2. Visa Card or Master Card with less than 10% of available credit as balance due 3. Discover or American Express Card with less than 10% of available credit as balance due 4. Auto loan either paid off or paid down with low payments compared to monthly income. Debt-to-Income Ratio Credit scores do not reflect income -- credit bureaus do not have income reported to them. However, real estate lenders look at the consumer debt-to-income ratio -- the amount of monthly debts in relation to the amount of earnings. Consumer debt is more highly regarded/scores higher if total debt is under 20% of net income, or total monthly payments on all debts is less than 35% of monthly gross income. Qualifying Ratios Lenders want the total debt ratio (the percentage of total monthly payments, including the new mortgage, to income) to be less than 33% for a typical conventional mortgage. This means the new mortgage payment, credit card payments, and all other monthly debt payments should not equal more than about one-third of the monthly income. Lenders want the mortgage debt ratio (the percentage of the new mortgage payment to income) to be less than 28%. Non-prime loans have lower standards; some lenders allow debt-to-income ratios as high as 55%. Borrowers with less than perfect credit qualify more easily for a non-prime loan compared to an "A-paper" loan. Once you total your monthly expenses and determine your debt ratio, you can estimate how much you can afford for a house payment. For example, if your income is around $3,000 per month, you can afford a home with payments around $1,000 per month (including taxes and insurance) with a conventional loan, if your other debt does not total more than 5% of your income. For investors, these equations change. Lenders expect 10%-25% down on investment property and allow about 75% of the rental income to offset the debt ratio. Understanding your credit helps you manage your credit so you can obtain real estate financing, either for the house of your dreams or for your financial future. (c) Copyright 2005 Jeanette J. Fisher. All rights reserved. Professor Jeanette Fisher is the author of "Credit Help! Get the Credit You Need to Buy Real Estate," "Doghouse to Dollhouse for Dollars: Using Design Psychology to Increase Real Estate Profits," and other books. Jeanette and her husband chose real estate investing to be able to care for their daughter with special needs. While buying and selling millions of dollars worth of real estate, the Fishers were forced into becoming credit experts. Forget what you've been told about credit. Get the credit you need to buy real estate. Visit Real Estate Credit Help Center: http://recredithelp.com/
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RELATED ARTICLES
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Finding the Right Credit Card There are so many credit cards out there to choose from that deciding which one to get can feel really daunting. What makes one offer better than the hundreds of others you've seen? Take this little quiz to find out what you should look for in a card. The Right Way To Credit Repair If you have a bad credit rating, then you might find that your ability to get financing, loans, and even some jobs is greatly diminished.Once you have a bad credit rating, it might seem like there's nothing that you can do about it? but you don't have to believe that. SuperCharged Secret 5, Credit Card Utopia LIVING IN CREDIT CARD UTOPIALet's just take a brief moment to recap:If you've been following along on this journey with me, learning the 5 Super-Charged secrets to Credit Card Utopia, then you now know 4 very important things:You now know how to take advantage of zero to low interest credit card offers.You now know that there is safety in numbers, and you know the magic "Who's Who" of the major credit card companies. What is a Credit Card? A credit card allows you to buy things even though you might not have the money to pay for it right away. The company that gave you the card lets you spend up to an agreed sum and then makes additional money available to you as you pay off what you've spent. Online, Phone, U.S. Mail or In-Person: Where is Your Credit Card and Personal Identify Safest? Identity theft is the fastest growing crime according to the Federal Trade Commission (FTC). 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