first time home buyer – owner loan

Greg Roy asked:


In our modern world credit cards have become virtually a necessity. Consumers cannot book an airline flight without a credit card. Nor can they rent a vehicle without one. And while it is possible to make purchases online without a credit card, it is time-consuming and a hassle.

While the vast majority of the population has at least one credit card, it certainly is not the vast majority that use credit cards to their advantage. Like prescription medication, credit cards can be very beneficial. But also like prescription drugs, credit cards can bring great harm to the user when abused.

There are many predatory sharks swimming in the credit card oceans. It is critical for first time home buyers to apply sound, savvy financial management skills in their use of credit card accounts. Your very ability to qualify for a mortgage on your first home will depend upon it.

Here are some simple-to-understand but difficult-to-follow guidelines for the best use of credit cards. The word best in this instance means most financially prudent, or the most beneficial to your overall financial health in the short, medium and long term.

1. Don’t use credit cards to finance the purchase of consumer toys. While some credit cards provide an interest rate that is reasonable, most don’t. Interest can be very, very costly. The bottom line is that if you don’t have the money to purchase that latest electronic device that you want, you shouldn’t charge it on your credit card. Doing so can be very habit forming, and will burden you with excessive debt. The process of qualifying for a home mortgage involves meeting certain debt to income ratios. The less credit card debt that you have, the more easily you will be able to meet those ratios.

2. Pay off your entire credit card balance every month. This is so important and so beneficial, yet so few people do it. The ones that do are the ones that have mastered financial self-discipline and reap a lifetime of rewards. Have you ever seen car dealerships advertise zero-interest loans on certain vehicles. While the offers are valid, most people don’t have a credit score high enough to qualify for the teaser rates. And that’s what they are: teaser rates. You may not qualify for the zero-interest deal, but even if you don’t, the dealer got you into the showroom to find out. And that is the biggest hurdle in selling you a new car. However, if you do pay off your credit card balances every month, you will likely develop that very high credit score. Not only will you qualify for the best rates on your car financing, you’ll also qualify for the best rates on your home financing. It’s win/win in all cases.

3. Get your credit card portfolio established, then leave it be. There are very good reasons for this. Your credit score will be negatively impacted by constantly changing credit card accounts. Long-term stability is rewarded by the credit risk formulas. Who would you rather lend to, a person who has had the same credit card account for the past 10 years and has always made payments on time, or a person who opens and closes a different credit card account every month? Which person do you think is more likely to pay you back?

Additionally, the credit risk formulas penalize people for too many credit checks in their file. A person who is applying for a lot of credit is seen as desperate for credit. That is not helpful. When banks loan money, it is like loaning an umbrella on a sunny day. When it clouds up and begins to look like rain, banks will ask for their umbrella back. That’s just the way it is. Banks are most eager to make safe loans, and those loans would go to people who are flush with cash and don’t need a loan. The people who could be considered “dirt-poor” and penniless are the ones least likely to be able to obtain a loan. To develop a high credit score, you don’t want to be projecting the image you are desperate for credit. And you’ll need a high credit score to help you qualify for that mortgage on your first home.

The bottom line: use credit cards wisely. If you want to qualify for a mortgage to buy your first home, don’t use credit cards to buy things that you cannot afford to buy. Learn to make credit cards a tool for furthering you towards your financial goals. Fail to do that and you’ll likely end up a tool for the credit card companies to make outrageous profits for their upcoming quarterly report.



Javier