Buyers think that paying off all their credit card debt is the best move when purchasing a Laguna Hills Home. But wait a second; it’s not an excellent idea! All the steps you think that could help increase your financial capacity such as reducing debts or cancelling your credit cards, would in fact affect your credit score. This will impact your credit to income ratio and cash in the bank. So, before you make any move you should consider these three aspects first.
Credit Card Debts and Cash Reserves
If you are thinking of buying a new home, you might be thinking of saving up more cash for your down payment and closing costs. Think hard before you use your savings to pay off all your debts.
The average price of a home in California this year is around $500,000. You will need at least a 3.5% down payment that would be $17,500 or a 5% of down payment that amounts to $25,000. So, you will need money around $20,000 to $30,000 on hand before you could purchase a new home.
Remember, you will also need cash for moving costs or cash reserves for emergency purposes. Not all lenders require cash reserve, but it is safer if you have available cash in the bank in case you need to pay at least two months of mortgage. Once you have all those funds and you can afford to cover them, paying credit card debts would be a smart move.
Debt to Income Ratio
In order to qualify for a mortgage, your monthly payments on all debts should be no more 56% of your total monthly gross income. Lenders may require lower debt to income ratio on borrowers who may have low credit score and few cash reserves. Also, if your credit card debt is too high, you might not qualify for a mortgage.
Credit Score Issues
Credit scores are important factors to determine whether the borrower is qualified for mortgage or not. It also used to determine the interest rate of the said mortgage. If the borrower has good credit record, his monthly mortgage would be lower than those with bad credit score.
Lenders depend heavily on credit score issues of the borrowers. If your credit score is below 620, you belong to bad credit status and you may need to pay off all your credits to achieve a good credit score of above 720.
When you decide to pay off your debts, make sure you don’t settle debts with just one credit card Company. By doing so, it will hurt your credit score more than just having low balance on several credit cards. It is also an important reminder not to close any your credit card accounts. This will shorten your credit history and reduce all your available credit that could lead to lower credit score.
One of the most effective ways to determine your option is by consulting a financial expert or mortgage expert in your area. If you live near Aliso Viejo, Laguna Hills, or Laguna Beach or in Orange County, we can assist you in your financial option. We will help you understand about credit scores and the ratios you need to maintain and to achieve a good credit score. Contact us today! We love to speak to you at Integrated Realty Group.