It’s a wise choice to get a solid grip on your finances when you start the planning stages of buying a home. Not only can it help you determine how much you can afford to spend, but it can also help you strengthen your credit as you pull your reports, examine them for blemishes, and then work with the reporting agencies to fix them. Anything you can do to strengthen your credit report and increase your credit score works in your favor, but the one thing you think might be the best step – namely, paying off your credit cards and closing your revolving accounts – may not be the wisest choice.
Though it seems counter-intuitive, there’s a method to this madness. To start, when lenders look at your credit report, they want to see that you have open revolving accounts – provided you’re responsible in how you handle them. And that’s the key. If you’ve got a number of revolving accounts open and most of them are late or in collections, this raises a red flag for lenders considering you as a loan candidate. On the other hand, showing lenders that you have a reasonable amount of revolving accounts that are well-managed and paid on time shows them that you’re a viable lending prospect.
Remember that having a lower ratio between your debt and income actually works to your favor. After all, taking on a mortgage is a huge financial responsibility, and if you’re capable of showing that you’ve been managing your finances well up to this point, lenders will look at that as you being ready for a new financial step. Having too high of a debt-to-income ratio can work against you, as it may limit your loan choices and even impede your road to homeownership. While it’s possible to find certain lenders who will work with buyers who have credit issues, you’d be wise to work on getting your credit in a better place before you buy so you’re better prepared to become a homeowner.
If you have too many revolving accounts that are in arrears, you’d be smart to pare down your list by paying them off, but not closing the account. Closed accounts actually register negatively on your credit score and also shorten the history on your credit report, which looks bad to lenders. If you really want to close accounts, it’s wise to wait until after you’ve secured your loan, gone through the closing process and moved into your new home. That way you’ll be finished with having to share your credit report and score with anyone who’s essentially a gatekeeper on your path to buying a home.
Another thing to consider if you want to knock out your credit card debt: it’s not a good idea to take low balances on a handful of cards and transfer them all to one higher-balance card in a bid to reduce your debt or make it more manageable. This is an action that raises red flags for lenders, and can also negatively affect your credit score.
If ever you’re in doubt on how to handle your credit card debt as you’re working on buying a home, make sure you talk with your lender for support, advice and assistance. They can help you make the right plan to manage it all.