Jim's Credit Corner - November 3

Dear Jim,

Our lease is expiring in a couple of months and we are ready to buy our first home. We do not have a lot of furniture, so we would like to buy a few items prior to moving in. From your previous articles we know to keep our credit card balances low, but we would like to purchase a few items such as a washer and dryer. What are the things we should and should not be doing leading up to buying our first home?

Brett & Corina

Dear Brett & Corina,

Congratulations on your plans to purchase you first home! It is exciting that you will now be building equity for your future instead of doing this for your landlord.

I understand why you may want to purchase furniture, washer and dryer, etc., prior to moving into your new home but you need to keep your current debt to a minimum as mortgage lenders will qualify you based on your debt-to-income ratio. The Front ratio is your new mortgage payment (including principal, interest, hazard insurance, taxes, mortgage insurance and HOA) divided by your gross income. The Back ratio includes your mortgage payment and your existing debt including credit card payments, auto payments, student loans, etc. divided by your gross income. Each loan program uses different ratios, but a good rule is to keep your Back ratio to 45-50 percent of your gross income. If your gross income is $5,000 per month and your new house payment will be $1,400 per month, you should keep your existing payments on credit cards, auto's, etc. to $1,100 or less.

In the time leading up to your mortgage application, please do not apply for any new loans for furniture, appliances or other items. You could pay cash for these items, but make sure you have enough funds in your checking and savings accounts to cover your closing costs and down payment at closing. Most important, after you have applied for a mortgage loan, do not apply for any new loans or buy that new car you have dreamed about.

Your credit score can impact your interest rate and mortgage insurance. In most cases, the higher the credit score the better your rates. The perfect mix of credit is two installment loans and three revolving accounts (credit cards, lines of credit) with balances less than 30 percent of the high credit limit. If you pay off any accounts, please do not close them. Over 50 percent of your credit score is based on payment history and the length of the payment history, but only on open accounts.

If you plan to use that cash in your safe or hidden under the mattress, I'm sorry to say, but these funds cannot be used towards your down payment and/or closing costs. Any large deposits into your checking or savings account will need to be verified and/or seasoned (in your account for up to a year). I encourage you not to move funds around between accounts or you will need to explain and prove where the money came from and why.

This is the perfect time to start collecting all the items your lender will require for your loan application. The sooner you provide this information, the sooner you may be able to close on your new home. This would include your most recent 30 days of pay stubs (consecutive), your W-2's and tax returns for the most recent two years, bank statements for the most recent two months. Other documentation that may apply (if applicable) includes a signed Gift Letter if you have been given funds, Social security, retirement or disability income documentation, divorce decree, child support and/or maintenance and bankruptcy paperwork, including petition, schedule of debts and discharge paperwork

To avoid any surprises, this is the perfect time to get a current credit report for free through annualcreditreport.com. Why wait for the lender to surprise you with information on your credit report such as collections or other debt you may not have been aware of that will need to be addressed before you proceed. Review your credit now so everything is accurate, and you will avoid any delays in the loan process.

Thank you again for a great question. Congratulations again on your upcoming new home purchase!

Jim Kaiser

Branch Manager, NMLS

#1721861

Cherry Creek Mortgage

Jimkaisermortgages.com

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