Credit for Buying Real Estate is Different than Credit for Buying Cars

Forget what you've been told about credit.

You may be shocked at some of these tips because this information runs contrary to what other so called experts tell you. Qualifying for a real estate purchase requires different credit than automobile financing or retail credit.

Common Credit Myths

1. You need to pay off your credit cards
2. You need to close credit accounts
3. You need perfect or good credit to buy a house

Credit Facts

1. Paying off your credit cards lowers your credit score
2. Closing credit accounts lowers your credit score
3. You don't need perfect credit to buy real estate

Why not pay off credit cards? Because paid off credit cards do not compute in your credit score. Real estate lenders like to see open, active accounts with low balances.

Why not close accounts? Closing accounts before the payoff often costs consumers more money because credit card companies raise interest on closed accounts.

You can buy real estate with poor credit, but you will save thousands in loan costs if you maintain good credit. A bad credit report leaves homebuyers with sub-prime loans which have higher point charges, prepayment penalties, and higher interest charges, which therefore cost more money. For instance, a mortgage loan of $150,000, 30-year, fixed-rate mortgage, interest rate of about 5.72 percent costs around $870 a month; poor credit scores raise the interest rate over 9 percent and the payments over $1,200.

As you see from these payment differences, good credit means that you can finance a more expensive house with the same income, or save $330 each month.

Credit Requirements for Mortgages

Credit needed to buy real estate is not the same as good credit. Besides your credit score, mortgage lenders consider your debt-to-income ratio and other credit matters, unlike other credit grantors. Your debt-to-income ratio is the comparison of mortgage payment, including taxes, interest, and insurance to your total gross monthly income. Real estate lenders also consider your employment qualifications and your overall debt ratios.

Understanding the difference between good credit and the credit needed to obtain real estate financing helps you buy houses!

(c) Copyright 2004, Jeanette J. Fisher. All rights reserved.