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If you are a first time home buyer in Montgomery County Pennsylvania you should know that your credit score will have a significant impact on your ability to qualify for a loan – especially for FHA mortgages.  Although most buyers are aware of this fact, many are unaware that some of the actions they take when trying to improve their credit often end up with having opposite result. 

In this series of articles I will try to dispel some of the credit myths that exist and why you should know the facts.

Myth: You should pay off and close as many credit card accounts as possible if you are planning to buy a home.

Fact:  This is actually not the case – for two significant reasons.  The first is that you should be in a cash accumulation mode when looking to buy a home.  There will be costs associated with buying a home that many first time buyers don’t anticipate.  Some examples would be appliances, window coverings (it’s not comfortable hopping out of a shower with no shades on the windows ) and even additional money for a down payment.  If you use all of your available funds to pay off your credit cards, there is a pretty good chance you will just be charging them up after closing anyway because you will be cutting your available cash so low.  I usually tell people to hold onto that cash and if they feel so inclined, they can pay all of those debts off the day after closing.

One more consideration:  If you are looking to purchase your first home in, say, the next 3 months to take advantage of the First Time Home Buyer Tax Credit, and you have a balance of $1,000 with an interest rate of 10% on that credit card you will only pay about $25 of interest by the time you get to closing over that three months.  If there is a risk that you might need that $1,000 at or just after closing most buyers feel that it is worth the $25 to keep that money available.

Another mistake that many first time home buyers make is to actually close those credit card accounts once they’ve paid them off.  This can be disastrous to your credit so the recommendation is to avoid doing this.  True, if your credit scores are very high and you have a long, positive credit payment history this may not impact you as much. However, most first time buyers are in the process of establishing credit and closing any credit accounts will actually bring your score down!  The reason for this is that when you close an account, the positive history of that account stops increasing your credit score (don’t get excited – the negative information remains and still impacts your score!).  If you close accounts that have positive payment history you can actually reduce your credit score at the very time when you most need the highest score possible to be able to buy a home.

Most importantly, before you make any credit decisions, pay off or close accounts I would strongly urge you to contact your mortgage professional to get advice about what impact those decisions may have on your ability to purchase a home.

As always, we are always available to help guide our borrowers through these decisions with as much information as possible.  If we can help in any way – please give us a call or shoot us an email.

Lending responsibly and here to help!

Jason Klaskin
215-513-1332
jklaskin (at) in-mortgage.com
www.in-mortgage.com