If you have a credit card, then you’ve likely heard stories of credit issuers drastically reducing credit limits and wreaking havoc on credit scores. So far, I had been spared, until today when I received the dreaded letter. My case wasn’t as severe as most, but I still called the bank to see if I could get it raised. Here’s what happened.

The Background
First, the background. I’ve had this card since the mid-90s and have carried debt on it twice. As a result of my credit history, I had a ridiculously high credit limit. This, plus other factors, resulted in a very high credit score, which qualified me for an excellent mortgage interest rate.

The Reduced Credit Limit
Today I received a letter that my limit had been cut in half. Half! It’s still high, especially given that I charge maybe $200 a year on the card, but that’s a pretty drastic cut. My first thought went to my credit score. Would it get dinged for this? How would that affect my loan approvals? I’ve read about people having their limits reduced and seeing their scores whacked by 20 points or more.

Bank Conversation
I called the number indicated in the letter to see what I could do. I explained that I’m shopping for a mortgage and was worried about my score. She advised me that you’re supposed to cancel credit lines to qualify for a mortgage. I had to explain to her how the current FICO scoring model works.

She checked my scores and credit history and explained that the bank is reducing limits because many customers weren’t using all the credit they’d been issued. Of course, I know it’s really because they’re terrified everyone will run up balances and default.

She couldn’t increase my limit. She did, however, offer to deposit money into my checking account right now, at 0% interest until February, to help with the down payment on the house. If they’re reducing my limit to reduce risk, why are they offering me an instant loan over the phone? She also helpfully pointed out that my purchase APR is now 1.99%. Again, encouraging me to carry debt on the card, even while they’re trying to reduce risk.

I asked to be transferred to the credit department.

Credit Department Conversation
The credit department answered my call within 30 seconds or so. I actually have never had problems with their customer service, which I realize is rare. I explained to her that I’m pre-approved for a mortgage contingent on my high credit scores and am very worried that this credit limit reduction will hurt then. She reviewed my scores, history, and limit and assured me that my scores won’t be hurt. (Although my highest balance ever is nearly 50% of the new limit, which exceeds the recommendations. She didn’t mention that as a potential issue.)

She also couldn’t raise my limit and said she’s been fielding calls about this for 2-3 months, all with the same concern.

I suppose I was lucky – some people have had their accounts cancelled. I don’t expect that would happen with this account because they have some of my other accounts and probably fear losing me as a customer. It does tell me that I need to make sure I keep all my credit cards active.

When people start looking for a home, house affordability is their biggest concern, especially if most homes in their region aren’t affordable for first time buyers. Before my husband and I started our search, we sat down together to figure out what we can afford on our current budget. Once we had a target budget, we contacted a mortgage broker to get a feel for how that translated into a home price. If you plan on buying a home this year, you need to know what you can really afford. Here’s a more specific look at how we figured out what “affordability” meant to us.

Review Your Budget
First, we looked at our average monthly budget, which we pulled out of Quicken. In this case, we worried less about our monthly cash flow, and more about what we truly spend each month on various expenses. We averaged out things like auto insurance that don’t occur monthly.

We didn’t plan on cutting any expenses in order to afford the mortgage, because that may not be realistic, and because even if we do end up cutting expenses, other expenses will come up.

We did consider the additional tax savings we’ll see as a result of itemizing our mortgage interest. Home prices in our region are high enough that our interest will greatly exceed the standard deduction. Rather than receive a refund, we’ll adjust our withholding to recapture that money on a monthly basis. We included that extra money in our budget.

In addition to the monthly mortgage payment, you also need to consider the cost of property tax and insurance. Most calculators use about 1.85% to 2% for a combined total, or ask you to input a fixed number. Ask around to find out what property tax and insurance typically cost in your area and divide by 12 to come up with an estimate. In most cases, you pay insurance annually and tax bi-annually, but you need to save up for that monthly so it doesn’t come as a surprise.

Review Your Goals
We want a house, but we don’t want to be “house poor.” For us, affordability means we can also meet our other goals, such as retirement, personal savings, and buying a new car for me this year, and him in the next four years. If we want to meet those goals, we can’t spend all of our money on the house. We guesstimated our car loan payments and monthly retirement contributions will be, and included them in the budget as placeholders.

We’re not currently meeting those goals because we’re funneling all of our excess income into a savings account to bulk up our down payment/closing costs/moving costs fund.

Contact a Mortgage Broker
You could use an online calculator to try to guesstimate the home price you can afford based on your targeted monthly mortgage payment, but factors like your credit score and interest rate will affect that. It’s much faster to call a mortgage broker. We used a referral from a friend to find a local broker. I told him our incomes, down payment amount, other loan or debt payments, and targeted monthly payment with property tax and insurance.

As it happens, our targeted monthly payment was exactly at the limit for our maximum debt-to-income ratio (DTI). He then checked our credit and used our DTI to figure out a maximum home price. We used that to guide our open house tour and then conveyed it to our agent so she could guide us to appropriate houses.

When considering affordability, it doesn’t matter what your friends could afford. You may have more or less debt than them, or more or less income, or a higher or lower credit score. Focus on what you can realistically afford and you should be fine.

If you don’t have a good real estate agent, your search could take longer and be more frustrating. In some ways, a bad real estate agent could be worse than no agent. If you’re feeling iffy about your agent, compare his or her performance to this list of good agent qualities. Note, this is for buyers only. I’ve never sold a home, so I can’t comment on that.

Knows Your Needs
This is absolutely the most important. Our real estate agent started by asking us what we wanted. I listed kitchen, three bedrooms, two baths, not a shoebox, and no pool. That was important, because many homes in our area have pools and we definitely don’t want one. She also asked questions about our plans – which neighborhoods we’re interested in, how long we’re planning to stay, do we have children or are we planning to, what’s our budget, what’s our down payment. I sent her a list of homes we’d visited as open houses so she could see our taste, as well.

Knows Competent Professionals
The first thing she did was refer us to a direct lender and a mortgage broker to get loan approvals. We already had one from a broker we know, but we got a second approval from the direct lender as a back-up. Because she has a relationship with the lender, she can call him for updates on approvals, rates, and time to process without our involvement.

Actively Searches for Listings for You
Although sites like Realtor and Redfin make it easy for you to search for homes, you should also let your real estate agent do some of the heavy lifting. I receive Redfin alerts, but she also added me to an automatic listing which she can more readily fine-tune. For example, Redfin does send me pool homes, but she doesn’t. After seeing several homes with us and going to offer (it didn’t come through), she has a good grasp of what we want and can take us to it when it comes on the market.

Previews Homes
The first weekend we went out to look, she took us to four homes that she picked for us, and we said we wanted to see. As we looked, we pointed out things we like and we didn’t. She pointed out things that would need to fixed, checked the condition of the property, and advised us on the costs of various repairs so we knew what we were getting into.

On another occasion, we said we wanted to check out a home, but she went first to make sure it was up to snuff. Turns out it needed $100K worth of work, so we didn’t even bother to look at it.

Aware of Current Value and Market Conditions
Some real estate agents are still stuck back at 2007 values, but ours is aware of current values and the direction the market is going. When we look at a house, she gives us some idea of how much it’s probably actually worth, which helps guide the amount we’d be willing to offer. She wants to make sure we don’t overpay for a property because values are still declining. Should we get into a bidding war, she will advise us of the right time to pull out in order to avoid overpaying.

Knows the Process In and Out
After a second round of looking, we had a long talk that involved a bit of hand-holding to soothe our fears and explained the terms of an offer, timelines, and what happens in each step. She explained what she does, what we do, and what the seller does. If we decide to buy a short sale, she’s intimately familiar with the process. She’s also familiar with buying foreclosures and traditional sales. She knows exactly how to deal with each situation.

Monitors Homes You’re Interested In
This is key, if there’s a home you liked, but didn’t get or isn’t showing at the moment, your agent should monitor it. There’s one we’re interested in that isn’t showing, but she checks up on it regularly to see if the status has changed. If it does, we’ll be there to look at it right away.

Steers You Away from Inappropriate Homes
There was another home we considered going to look at, but she pointed out that it’s on a very busy street and knew we wouldn’t like that after looking at other homes with us.

Responds Quickly to Calls and Emails
Your real estate agent doesn’t have to be available 24/7, but should respond within a reasonable time-frame. Our agent returns emails within 2-3 hours during business hours, usually less, and phone calls within an hour during business hours (not 9-5, more like 9-8.)

Many real estate agents got into the business during the run-up, and have since left the business. Our agent has been doing this a long time, and therefore has experience with declining or typical markets. This is not the time to be working with someone who’s only had fast sales in a rapid market. Don’t go with the first agent you meet. Check out my real estate agent search article. And remember, if he or she seems good but turns out not to be, you can always switch.

I think that’s something I actually want to see. Do you think he’d win? What sort of playoffs are we talking? I can see baseball, maybe not football, though.

This week we have three carnivals to share, so we’ll kick things right off.

The Carnival of Personal Finance #202 hosted by Fire Finance. In addition to my post on cheap summer vacations, I recommend Keep My Dollar’s list of cheap things to do with your kids.

Next up, the Festival of Frugality hosted by Paycheck Chronicles. In addition to mypost about 5 ways to go green in a bad economy, Family Balance Sheet has several more ways to save your wallet and the earth.

Lastly, the Money Hacks Carnival #62 hosted by Financial Highway. In addition to my tips for keeping your credit cards active, I recommend Destroy Debt’s tale of his recent credit limit reduction, below his current balance. Yikes!

Looking for a home is exhausting, especially in a market like this one. We’ve been hunting since January and only recently made it to the offer stage. I found the process insanely stressful, to the point where I lost sleep, obsessively clicked reload on my email, and hemmed and hawed for days.

The Stress of Deciding Whether to Make an Offer
There have been a couple of homes where we considered making an offer. The first was gorgeous, but oddly arranged. It was also a steal. We seriously considered making an offer for a few hours, but one night of cooking in my own kitchen was enough to tell me that their kitchen layout just wouldn’t work.

The next offer we considered was a major fixer. On that one, we hemmed and hawed for days on making the offer. I started to view it as an investment rather than a place I had to live. Ultimately I decided that I shouldn’t make an offer because I’d been undecided for three days.

When we finally went to offer, we knew right away that we wanted to do it. We slept on it overnight, but we were ready to make an offer and had a price in mind within six hours of seeing the house.

The Stress of Waiting for the Counter
It’s rare for an offer to be accepted out of the gate. Everyone wants to see if they can get the best price, so there’s negotiating. However, waiting for the counter to come back can be agonizing. Will they reject the offer? Will they send a ridiculous counter? Will they accept? How motivated are they to sell?

I found myself trying to “time” the response and mark out when different offers would go out and come in. I tried to guess the counter/re-counter prices and at what point one of us would be willing to accept.

I again lost sleep and felt sick to my stomach. Once again, I had to remind myself not to get carried away. This is a buyer’s market. There will be other homes on the market (just as soon as the banks get around to listing them.) I have time to buy. If rates go up slightly, prices will come down because we haven’t hit bottom yet. We will find something we like just as much.

The first night we went to offer I started dreaming about paint colors and the house hunt finally being over. Within a few days, I started to doubt how much I really wanted the house. I looked at photos to remind myself what I loved. However, I was mentally preparing myself to walk away if the deal couldn’t be made.

The Stress of the Re-Counter
If the seller comes in with a high counter, there’s no reason you can’t re-counter. There’s no limit on the number of counters. An agent friend of mine had an offer go back and forth 8 times as they worked out the details. 8 times is rare, but it’s a great illustration that there’s no “right” number of offers and counters.

Still, re-countering is stressful. How much should you offer? How much will the seller come down? Will the seller refuse to come down?

When re-countering, you need to know your top number. Personally, I wouldn’t re-counter at that number the first time out, but don’t get so swept up that you go past that number.

I’ve read that some buyers feel obligated to accept an offer at some point because they’ve put so much effort into offering and countering. They don’t want to feel like they’ve wasted their time. Don’t let yourself give in just because you’re tired. This is a negotiation and you have to be strong enough to walk away if the numbers don’t work. There are always more houses.

Combatting the Stress
It’s hard, but here are a few ways to combat the stress of the offer process:

Get your mind off of it. I know it’s hard, but watch TV, see a movie, read a book, let work distract you. Unless you’re dealing with a builder or a bank, most sellers can only deal with offers in the evenings, so you’re unlikely to get an answer in the middle of the day. If you’re dealing with a bank or a builder, don’t wait for the phone to ring at 9 PM. Go about your business.

Think of reasons to walk. That will make you feel like you have more power if you can create a list of reasons why the deal won’t work for you.

Keep looking. If the seller is dragging their feet, there’s no reason you can’t keep checking the listings. Consider going to a few open houses if things really drag out. You may just find something you like better.

Remember, that even in a seller’s market, the buyer has more power. The seller has to get someone to make an offer, but the buyer is the one with more power unless you absolutely must move by a certain date. If that’s not the case, the most a seller can do is say no. Then you keep looking. If you can’t make a deal work, then it’s not meant to be your house anyway.

A home in an emotional investment, but it’s also a business transaction. Don’t get so caught up that you forget that. Yes, you need to love the house, but don’t love it so much that you can’t give it up if the terms don’t work. That’s the most important thing you can do to reduce your stress.

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