Tips for Credit Card Crazed Home Buyers

Attention, all spendthrift consumers who fail to pay their debts, Fannie Mae has a message for you: It's time to get your finances under control, or you can say sayonara to any hope of buying a home, at least right away. Fortunately, there's a bright side. Even if you have a bad credit record, you can rehabilitate your credit if you start cleaning up your act now.

What is Fannie Mae?
Only the largest secondary mortgage company in the U.S. Why should you care? Fannie Mae controls a large portion of the home loan market by setting financial guidelines that lenders must fellow in approving loans. So when Fannie says many consumers are basically ignorant about how bad credit hurts their chances of qualifying for a home loan, lenders listen. And that's exactly what came out of a national survey sponsored by Fannie last summer--many of us like to max out our credit cards. And occasionally we miss a few payments.

Maybe it's a sign of our booming economy, or part of our free spending culture but we don't fully understand the consequences until we apply for a home loan. That's when a nasty credit report reaches the lender and our home buying hopes are put on the back burner.

If you're considering buying a home, request a copy of Fannie Mae's brochure "Knowing and Understanding Your Credit." Even if you don't have major credit problems or bad spending habits, this easy-to-read brochure has lots of great information for homebuyers. Call (800)541-5200 for a free copy. El numero en espanol es (800)541-6300. Among other things, the brochure explodes some myths and misunderstandings about credit. For example, a debt doesn't disappear simply because the creditor has stopped sending notices. The reality is the bill may have been turned over to a collection agency. That's bad news because once that's happened, the bad debt is sure to show up on your credit report.

For the credit-impaired, there's the possibility of still qualifying for a mortgage but you'll probably be charged a higher interest rate. For example, an additional two percentage points on a $80,000 loan raises your monthly payment by approximately $112. The alternative, of course, is taking a year or two to pay off your debts in a timely manner to clean up your credit.

Even if you're not pegging your plastic to the max, owning too many credit cards can still put you in a less than positive light with a lender. If you succumb to temptation and respond to that almost daily credit card offer with a "low introductory rate" or "free gift," you're skating on thin ice. "Your application may raise a red flag that you may be having cash flow problems," says Fannie. "Avoid applying for credit cards just for fun."

It's a good idea to start lowering your credit card debt as soon as possible, although the credit card companies just love it when you make the minimum payment. For example, a $1,000 purchase takes 7 1/2 years to pay off if you make only a minimum payment of $20 per month. By that time, you've paid an extra $800 in interest. Guess who's laughing all the way to the bank? Instead, dig a little deeper every month and pay more than the minimum and you'll gradually free yourself of card debt.