Credit needed for real estate mortgage financing differs from
credit needed for consumer loans. If you need help getting a home
mortgage, these credit tips will help you.
 
Contrary to what many credit advisors say, paying off credit
cards each month is not always the best action to take. When
making credit card payments, don't pay the balance in full each
month -- let a little roll over. Carry a balance on your credit
card every other month --as little as a dollar. Paying balances
in full does not increase your credit score; paying balances in
full may in fact lower your credit score. Accounts with zero
balances do not compute significantly in your total score. For
instance, a credit card with a perfect payment history and no
balance will not raise your credit score as much as a credit card
with a low balance. Any balance keeps the card active so it
computes in your credit score.
 
You most likely have been advised to cut up your credit cards and
close your accounts. Following this advice degrades many credit
scores.
 
Canceling Credit Cards
 
Canceling credit cards can lower your credit score. Keep your
longest-term credit card account open to show long-term credit
history. If this account has prior late notations, negotiate with
the creditor to drop negative reporting on your credit history
file. Slowly close out newer accounts after they are paid off.
Keep your best accounts open -- those paid on time or reporting
"pays as agreed" and with the longest history.
 
Credit card companies may raise your rate if you cancel a card
before it is paid off; it is best to keep accounts with
outstanding balances open until you pay them off.
 
Perfect Balance of Credit
 
1. Mortgage over one year old with all payments on time
 
2. Visa Card or Master Card with less than 10% of available
credit as balance due
 
3. Discover or American Express Card with less than 10% of
available credit as balance due
 
4. Auto loan either paid off or paid down with low payments
compared to monthly income.
 
Debt-to-Income Ratio
 
Credit scores do not reflect income -- credit bureaus do not have
income reported to them. However, real estate lenders look at the
consumer debt-to-income ratio -- the amount of monthly debts in
relation to the amount of earnings. Consumer debt is more highly
regarded/scores higher if total debt is under 20% of net income,
or total monthly payments on all debts is less than 35% of
monthly gross income.
 
Qualifying Ratios
 
Lenders want the total debt ratio (the percentage of total
monthly payments, including the new mortgage, to income) to be
less than 33% for a typical conventional mortgage. This means the
new mortgage payment, credit card payments, and all other monthly
debt payments should not equal more than about one-third of the
monthly income.
 
Lenders want the mortgage debt ratio (the percentage of the new
mortgage payment to income) to be less than 28%.
 
Non-prime loans have lower standards; some lenders allow debt-to-
income ratios as high as 55%. Borrowers with less than perfect
credit qualify more easily for a non-prime loan compared to an
"A-paper" loan.
 
Once you total your monthly expenses and determine your debt
ratio, you can estimate how much you can afford for a house
payment. For example, if your income is around $3,000 per month,
you can afford a home with payments around $1,000 per month
(including taxes and insurance) with a conventional loan, if your
other debt does not total more than 5% of your income.
 
For investors, these equations change. Lenders expect 10%-25%
down on investment property and allow about 75% of the rental
income to offset the debt ratio.
 
Understanding your credit helps you manage your credit so you can
obtain real estate financing, either for the house of your dreams
or for your financial future. 

Professor Jeanette Fisher is the author of "Credit Help! Get the
Credit You Need to Buy Real Estate,"  "Doghouse to Dollhouse for
Dollars: Using Design Psychology to Increase Real Estate
Profits," and other books. Forget what you've been told about
credit. Get the credit you need to buy real estate. Visit Real
Estate Credit Help Center:  http://recredithelp.com/