Renting? Thinking about buying a home? Get your financial house in order to begin the home buying process. Become the architect of your financial future. Here’s how. Determine what monthly payment is affordable to you and what type of mortgage you qualify for. Lenders use ratios and credit scores to determine what maximum payment is affordable to you and at what rate. Lenders make loans based on FICO scores (Fair Isaac Corporation). Typically anything 720 or above is considered excellent. A score in the 650-700 range is considered good and one below 620 is considered marginal. The point system is a positive for you if you apply for a loan and have a good credit score. It’s a negative if you don’t have a good credit score. A negative score means you may be denied credit or pay a higher interest rate on your home (or auto) loan. Remember that T-shirt you got for free this summer by signing up for a credit card at that festival you attended? That T-shirt may have lowered your credit score by 5 points because applying for credit affects credit scores. A credit score is really a mathematical model. The credit score model shows that borrowers with a credit score of 800 and above have a delinquency rate of 1 percent; for borrowers in the 500-549 range the delinquency rate is 71 percent. Which borrower would you make a loan to? To be a successful home buyer you must manage your finances and credit score. Simply stated, limit your credit and pay your bills on time. I do believe that to be easier said than done — it is something that takes discipline and organization, and a plan if you have a bad credit score now. This is business and lenders get to set the rules. Don’t whine about the rules. Instead, develop a plan and the discipline to do something about your situation. Do it to improve your or your family’s financial future. Stay away from predatory lenders that charge more than market rate. If your credit score requires a higher rate, work with a lender and establish a plan to get your credit score to the 650 range. If it will take three years to get your house (pardon the pun) in order, then develop a plan to improve your credit score and buy a home in three years. It is very difficult for home buyers to save “ahead” of inflation. Buyers often believe they have to have more than 5 percent down or want to have 20 percent to avoid paying private mortgage insurance (PMI). I don’t subscribe to that line of thinking. In fact, just over 56 percent of first-time buyers make down payments under 5 percent. Roughly 32 percent put 5-10 percent down. Getting one’s financial house in order is not a fun or easy thing to do, but if you ask questions of qualified people and develop a plan to obtain the lowest cost mortgage possible, you’ve taken the second step to home ownership. Now you know two things about the home buying process from my two columns. One: Unless you have a signed contract with a real estate agent the agent works for the seller, not you. Two: Lenders make decisions based on credit scores. Knowledge is power.
by Michael D. Holloway