Don’t make major credit purchases before buying a home

Here’s a quick tip for you as a buyer. If you know you’re going to be buying a home soon, and especially if you’ve already applied for a loan, it’s very important to refrain from making major credit purchases. It can seriously affect how much you qualify for, or even whether you qualify at all in some cases.

What many people don’t realize is that the monthly payments they are making for those credit obligations can dramatically decrease the size of loan they qualify for by a ratio of about 100:1. That’s a large amount of home buying power to give up just because you really wanted that cool ATV, or a new car.

Here’s an example. Suppose you take on a new car payment of $300/mo. The amount of money you are qualified to borrow from most lenders will be about $30,000 less (100 x $300) than what you might have been able to borrow without that car loan.

If you had been able to qualify for a $200,000 house before purchasing that car, now you can only qualify for a $170,000 house. This is a 15% reduction in home price for merely a $300/mo. credit obligation, so it’s important to consider.

The same ratio is true for consumer credit such as personal loans, major credit cards, department store cards, etc.

It’s usually best to pay cash for items you need in order to keep your monthly credit payments as low as possible, especially if you are already in escrow. Another fact that many buyers don’t realize is that making a major credit purchase anytime before the home loan settles in escrow could throw the whole loan approval into question. Decide now to pay cash whenever possible, and you’ll qualify for a better loan on a better house, and be better off financially for it!