Several weeks before the holiday season sets in, we begin to see those commercials I absolute dread. You know, the luxury cars with giant red bows on them…the recipient gushes, “you shouldn’t have!”… and they’re right, the gift giver probably should not have – especially if they’re considering buying or refinancing a home.
It can be so exciting to give what we consider to be desirable presents to our loved ones – or even to splurge on ourselves. However, a new car or even that spendy exercise equipment that will help you obtain your goals for the new year, will impact your credit if you’re financing it and/or impact your debt to income ratios for qualifying.
A salesperson who says that your credit will just take a quick dip is probably on Santa’s naughty list. They are just interested in making a sale.
When you obtain a new debt, there will be a credit inquiry. How this impacts your score depends on how many inquiries have been made. Credit inquiries may stay on your credit record up to two years and you’ll have the opportunity to explain each individual inquiry to your mortgage lender, including whether or not new debt was obtained.
Credit scores are also impacted by new credit. New credit can be a significant ding. Credit scoring favors older, established credit. That new car or new financed whatever will lower your score for months.
Not only is it a new addition of debt to your credit record, it’s also showing as a debt at 100% of the debt limit – which is another whammo. Even if you put 50% down on a car, if the car loan is $40,000 and you owe $40,000, then it’s treated as a new debt with 100% of the credit limit balance. Ideally, you want to have your accounts at 30% or lower of the credit limit.
Let’s talk payments! Using rates last quoted by Freddie Mac, a $500 car payment may reduce your qualifying power by $108,000 in a mortgage. A $58 indoor bicycle payment is about $13,000 for a mortgage. By the way, it doesn’t matter if your new debt has zero interest or no payments due for a while – lenders still have to factor the payment.
It’s not only new debts that can set back your home buying (or refinancing) goals… overusing your credit cards can be damaging as well. Going over your credit limit, or using more than 50% of your credit limit can drop your scores. Of course having a late payment will also hurt your scores and may cause your transaction to be delayed.
Even if you’re not thinking of buying or refinancing a home, I encourage you to really consider what your spending for the holidays and try to keep it in check. It feels wonderful during the holidays to splurge however, the financial hang-over when the party is over simply isn’t worth it!
If you’re considering buying a home or refinancing your home located anywhere in Washington state, I’m happy to help you!
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