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My parents have offered to pay off my credit card debt so that I can buy a home. They will pay it off and then I will close all but one credit card. They are not asking for repayment of the money. How will the mortgage company look at this? I will not qualify for a mortgage without this debt being paid off. I am a school teacher moving to an area where no rentals are availabe, so I have no choice but to buy a home now. Please let me know if you have any experience with mortgage lenders underwriting criteria as it pertains to this issue....
@Sandestin1 wrote:My parents have offered to pay off my credit card debt so that I can buy a home. They will pay it off and then I will close all but one credit card. They are not asking for repayment of the money. How will the mortgage company look at this? I will not qualify for a mortgage without this debt being paid off. I am a school teacher moving to an area where no rentals are availabe, so I have no choice but to buy a home now. Please let me know if you have any experience with mortgage lenders underwriting criteria as it pertains to this issue....
Do not close your credit cards. It will drop your score like a rock if you close the accounts even if they are all paid off. You can close the cards after you close on the house to satisfy any conditions by your parents.
FICO is based on the amount of utilization of your credit cards. The lower the better. So having the cards paid off is a great thing for you. Just don't close those accounts until you have completed the entire mortgage process including closing. Naturally you don't want to use the credit cards either. Keep them at zero.
By the way you want a balance on one card only, but it can be small like $25. Keep it paid on time but you want one card to report a balance not to exceed 9% of your credit line to optimize your score. Keep all the others at zero.
Thanks for the info - if I have credit available on these credit cards, will the mortgage lender assume I can tap into them and count any of this in my debt to income. jo
@Sandestin1 wrote:Thanks for the info - if I have credit available on these credit cards, will the mortgage lender assume I can tap into them and count any of this in my debt to income. jo
No. And if they do, find another lender. They use the min payment due on your card to calculate the DTI. Still it is best to keep all the cards at zero except for the very small balance discussed above.
One last question - will the mortgage company want to "source" the funds that paid of the credit cards? I know if I deposit the funds into my checking and then pay off credit cards, I will need to source the deposits, but does it work the same way for debt reductions?
If you are seeking to apply immediatly after pay off, then yes. The lender will want to source the funds. It isn't a problem as you can show that they are gift funds from a relative. What the lender would want to know is 1) where the funds came from to pay off your debt 2) the fact that you don't have to repay the funds so they will have your parents sign a gift letter.