Credit Cards Clash With Home Buying Hopes

Thinking of buying your first home? If you're living life in the fast lane and pegging the plastic to the max, it's time to slow down before your home buying plans come to a screeching halt. Although most home buyers are approved, for others, qualifying for a first home loan can be a tough lesson in financial discipline.

Debt is a fact of life. Most mortgage companies expect the average yuppie couple to have some credit card debt. No harm in that, as long as you pay your bills on time, right? NOT necessarily--the loan officer may frown if your cards are pushed to their credit limits, especially if you have little or no cash in the bank. How about throwing those pre-approved, easy credit card offers in the trash and rediscovering the lost art of planning ahead? If buying a home is more than a passing fancy, it's time to start paying off those cards. The sooner you get your financial house in order, the better.

Apart from avoiding purchasing things with credit cards, or carrying balances for a long time, what are the dos and don'ts for young couples?

# 1 - Start planning for a down payment. Scrimp, save and start hatching a nest egg, a sum large enough for a 10 percent down payment. That means going cold turkey on some of the luxuries you're used to, such as big vacations or fine dining.

# 2 - Think twice about having two new-car loans. Driving around in his and hers BMWs might be chic, but it's definitely frowned upon by the mortgage bank. It locks up too much of your income. The luxury of owning an older car is that it's paid off.

# 3 - Don't make big purchases for now, including furniture for the new home. Any additional debt will cut into your ratio, your debt-to-income ratio, that is. Basically, lenders say that home buyers should spend no more than 36 percent of household income on debt, 28 percent of which is your mortgage payment with the rest going toward other debts.

# 4 - Avoid making a career change until things are final--after your loan is approved and you've closed on the new home. If you're unhappy in your current career, or considering going into business for yourself, hold off for now. Switching careers is a red flag to the lender. Lenders like to see a minimum of 12 months in the same job. Stepping out into your own business is even riskier, in the eyes of the loan officer. You'll need at least two years of self-employment to prove your income is stable.

# 5 - Check into first-time homebuyer programs. If your problem isn't overspending so much as having the money to spend in the first place, remember there are home ownership programs for individuals of low to moderate income. The Federal Housing Administration (FHA) insures loans with down payments of 3 percent or less. Other loans from Fannie Mae reduce the burden of down payments and monthly mortgage payments.

Sources used to create this article include writer Lew Sichelman.