Wednesday, March 5, 2008

Credit Matters

The recent changes in the market can be attributed to many different variables but none more noticeable than the Sub-Prime Mortgage problem that is affecting current loans and the ability of the home owners/investors to make payments. The sub-prime lending that was rampant about 2-3 years ago made it easier for those with deficient credit history and non-qualifying income to receive a loan. When most of these deals were put into place they came with the caveat that house prices would increase and thus make it possible to refinance into a better loan when a) their credit deficiencies were cleared or b) they could qualify for the loan. Clearly, this was not the case. As things began to turn in late 2006, homes were not moving as quickly as they were being built and the next wave of homebuyers balked at the home prices. Coupled together with rates adjusting on the ARM (adjustable rate mortgage) products and the home-owners inability to make payments and we now find ourselves in a huge market correction that has never before occurred.

What does that have to do with you and the rest of those anxious home buyers? It means that it is important to take the necessary steps to be educated about purchasing a home so that you don't "bite off more than you can chew" in the process. It may seem silly, but maybe the best plan is not to buy your dream house the first, second, or even third time around. It is hard to enjoy the house of your dreams when you are constantly worried if you can make your payment. Trust me, my dream homes is the home owned free and clear. A goal in life should be to find yourself living debt free but that is a subject for a different blog.

Back to credit...

A major component of the loan approval process hinges on your credit score. Underwriters accept what is known as a tri-merged credit report. This report calculates the credit score from each of the three credit reporting agencies (Equifax, Transunion, and Experian). Most investors and lenders will accept the middle score of the three (or your average credit score). There are times when there are large swings in your score, mainly due to the different credit companies reporting procedures, but often the scores are very similar.

Note: You are entitled to one free credit report per year by the Fair Credit Repoting Act. I have used It is the only free site and authorized by the FTC for supplying the reports. It is a good tool to see what you financial debt obligations are and if you have paid them on time.

Your credit score can affect what products you have available to you and what interest rate you may receive. The catchy part is some investors (the ones who purchase the loans if the loan is brokered) don't penalize or better a person's interest rate if their score is above 680+. While others will have different breaks at 700+, 720+, etc. Typically, if your score is 720 or better then your credit will help you in the process. If your credit is <660,>
  • Make payments on time. There are three time frames to consider. 30+, 60+, and 90+. If you are over 30 days late in making your minimum payment on credit cards, car loans, mortgage payments, etc. then you are considered delinquent. These are all reported to the agencies and negatively impact your score. Over 60 days is worse and by 90+ you are in default (really bad for your credit)
  • Total balance on Credit Cards should not exceed 30-35% of the max credit allowed on the card. For example: On a $1000 credit limit, your total balance due at the end of the period (when the agencies are reported to) should not be over $300-$350. Your credit score is linked to the amount of credit used vs. the amount available.
  • Consider signing up with one of the agencies for periodic credit checks. For as little as $10/month you can sign up for a service through either Equifax, Experian, or Transunion where they monitor and give you updates on your credit status. This can help against fraud as well as keep an eye on any other adverse activity that may affect your credit report.
  • Lastly, understand that though you may be discouraged now about your credit situation, you can always improve it. Think of it like this, if you have adverse or deficient credit, it can mean to an underwriter that you were irresponsible with the credit given to you in the past. Credit isn't a free gift but it is an opportunity to prove that you are trustworthy in making payments and handling responsbility. If you haven't handled your past credit efficiently, it may be time to begin taking control of the situation and improving your credit.

    (There are other situations that may impact your score: Bankruptcy, Divorce, Death, Injury...the comment above is not to make light of different situations that may be present that were out of the control of the person(s) involved - sometimes things happen in life that may knock us down, but knowing how to manage issues now may help in the future and allow us to stand a bit taller)

    There are more things to consider with credit and various ways to make changes but these are the basics. If you are in significant debt, maybe focus on eliminating that debt first before moving up or into home ownership. If you have good credit and can afford the home, then get pre-qualified and start house hunting. It is a great time to buy if you are ready for the responsibility.

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