Applying for a Mortgage or Refinance? Don’t Do This

Many borrowers think that closing out one or two credit cards prior to applying for a mortgage will enhance their credit scores and make them more attractive candidates for new loans.

Contrary to the thought that removing credit card spending temptations will favor getting the best loan, lenders look more favorably upon borrowers who keep credit accounts open and resist the urge to use them. The bottom line is that good credit scores are awarded to those who barely use their credit.

There has been extensive analysis by FICO, the firm that is the root of credit score formulas, on the subject of what would be a low-risk borrower. They have concluded that consumers who have access to a lot of credit but use it frugally are the best candidates for loans.

Approximately one-third of your credit score is the result of taking your total debt and dividing it by how much credit you could carry if you used all of your available credit. This is the debt utilization ratio. Financial advisors recommend that you try to keep this ratio under 30%, so keeping cards with zero balances will help this ratio that is so important in determining your FICO score.

When you prepare to get a new loan or refinance, work on paying off your credit cards, but don’t close the accounts. Your best loan terms will come when you can get your FICO score to 760 or higher.

If you do need to close a credit account because of excessive fees and non-use, pay down your other credit at the same time so your debt utilization ratio isn’t impacted. Good payment history on any closed account will follow you for 10 years.

Please give me a call so I can help you analyze your credit report and see where you can make improvements for the best loan terms possible.

Down Payment Assistance May Be Available to You

Many first-time home buyers are unable to come up with the down payment needed to buy a home. It can take years to save the funds needed to close on a home. With home values on the rise, the cost of a down payment rises proportionately.

Down payment assistance (DPA) programs are offered by most local county, city and state governments. It will depend on where you live as to what is available.

There are two categories of DPA loans. Most programs will involve incorporating the down payment assistance into a small loan. If you were attempting to save a 20% down payment on a $200,000 home, your local government entity may have a program where it would loan you a percentage of the $40,000 down payment, allowing you to step into a home purchase sooner. The other type of DPA is where the assistance is given to you in the form of a grant.

Generally, DPA programs are limited to first-time buyers. Some programs may have certain income requirements in an effort to help lower-income families. The home must be owner-occupied, not a rental. Each program is different, with some requiring you to contribute a percentage of your own cash to close.

If you qualify for a down payment assistance program, it will enable you to be a homeowner much sooner than if you had to devote more years to saving. Please contact me so I can see what programs are available and if you qualify.