Tag Archives: Credit Scores

TIP TUESDAY: HACKS FOR THE HOME BUYER

November 10, 2015 thefinancialhack Leave a comment

Purchasing a home for most first-time buyers is a wonderful feeling. It’s a sense of accomplishment like no other. No more apartment living, and no more renting. For some a home purchase is seen as a place to start or raise a family. For some, it’s seen an investment. For others, it’s seen as BOTH. Going through the home-buying process can be quite stressful. Presenting W-2’s, check stubs, bank statements, tax returns, paying earnest money, scheduling a home inspection and negotiating with the seller can be overwhelming, but in the end after signing that 1 1/2″ stack of papers at closing and getting the keys to YOUR NEW HOME, you can now breathe a sigh of relief. Here are just a few tips for the FIRST TIME HOME BUYER.

KNOW WHERE YOU STAND REGARDING YOUR CREDIT SCORE: Before you start “looking” for a home, start with obtaining a copy of your credit report. Know your credit score. This will ultimately determine if you qualify for a low interest rate (because of a good credit score) or “subprime” interest rate (because of a lower credit score.) In some cases where a couple, for instance, is purchasing a home together, if the credit score of one of the applicants will in some way negatively affect the application process (i.e. resulting in a higher interest rate,) your loan officer will usually suggest removing him or her all together from the loan application. Also, take this time to “clean up your credit.” Perhaps you have some 30, 60 or 90 day late payments within the past year. This can ultimately impact your credit score and possibly ruin your chances of obtaining any type of financing. Dispute anything on your credit report that may be incorrect such as judgements/liens, etc., and PLEASE PLEASE PLEASE make sure you are current on your student loan payments. I suggest to anyone who may have a few minor bumps and bruises on their credit report to take 1-2 YEARS to make monthly payments ON TIME on all installment accounts/loans and dispute any incorrect information on your credit report. This time can also be taken to save up a down payment, add to your existing down payment, or save additional monies for any upgrades (painting, carpet, etc.,) that may not be included in negotiations. GOOD RULE OF THUMB: If you have any credit card debt, take the time to eliminate it FIRST before making plans to purchase your dream home.
KNOW HOW MUCH HOME YOU CAN AFFORD: There is absolutely NO POINT in looking at homes in the $200K+ range when you now you should be looking for a home in the $120-$150K range. Bank websites will allow you to plug in information such as income, minimum payment on credit card debts, installment loans, etc., and produce what is called a “prequal” (prequalification) letter but beware. Most people like to “stretch the truth” when it comes to providing certain information online, and although some real estate agents won’t show homes in certain price ranges without one, it’s best to obtain a prequalification letter from your loan officer. The loan officer can provide a more accurate picture of how much house you can actually afford. As a good rule of thumb, your mortgage payment should be 28-36% of your monthly income (given certain circumstances.)
KNOW WHAT YOU ARE LOOKING FOR IN A HOME: Most people do their research before they even contact a Real Estate Agent/Broker. Websites such as Trulia (http://trulia.com) and Zillow (http://zillow.com) can provide listings of homes which include listing price, photos, even the MLS number that you can pass along to your Agent. It’s important to have an idea of what you’re looking for when purchasing a property. Is this a starter home? An investment property? What city? Subdivision? Are you looking for a home large enough for a growing family? What about the local school district? Proximity to shopping/retail? How close are you to the nearest freeway/major thoroughfare? How many bedrooms do you require? Is a gourmet kitchen a necessity? A large Master Bedroom/Bath? What about a Game/Media Room? A Study perhaps? A Pool? These are decisions you need to make BEFORE meeting with an agent because your agent will ask the same questions (and I’ll bet you dollars to donuts they’re fingers are crossed upon your initial meeting and/or phone conversation, you already know what your looking for.) FYI: It has been my experience in the Real Estate industry Kitchens and Bathrooms are huge sellers for women. For men, as long as there is a dedicated “man cave” in the home that is all his and he can decorate it any way he chooses, he’ll usually go along with whatever his partner/spouse wants.
KNOW WHAT TYPE OF LOAN IS BEST FOR YOU: I won’t get into loan specifics (I’ll save that for a later posting,) but the Conventional home loan is your best bet. Most lenders assume a 30-year fixed mortgage is what is desired, but inquire about a 15-year fixed rate mortgage. You’ll get a better interest rate, although your mortgage payment will be higher, but you’re also taking less time to pay the loan off. FHA loans are advantageous to the buyer who doesn’t have a large down payment plus the debt-to-income ratio requirements are a little more lax than conventional loans. VA loans are great for Veterans because no down payment is required. Beware however of seller fees. Whether a VA loan is granted depends on the length of time on active duty and the number of past VA loans. STEER CLEAR OF THE FOLLOWING LOANS: ARMs (Adjustable rate Mortgages,) Interest Only Loans and Reverse Mortgages.
KNOW HOW MUCH MONEY YOU PLAN TO HAVE AS A DOWN PAYMENT: After the housing market crash in 07-08, regardless of how excellent your credit score was, some lenders began requiring a 20% down payment. The good thing about putting down 20% is in some cases it exempts the buyer from paying what is called PMI (Private Mortgage Insurance.) If PMI is being paid on your home, if you can demonstrate the home has accumulated a certain amount of equity in it (20% if I’m not mistaken,) the $50-120/mo that is being paid can be removed. What’s ironic about PMI is some buyers believe PMI protects them… WRONG! PMI protects the lender in case the buyer defaults on making payments.
ALWAYS DO YOUR DUE DILIGENCE: The performance of local school districts is one of the main factors potential home buyers pay close attention to whether they have children, intend to have children or have no children. A school district’s rating with the state can positively or negatively impact the desirability of a home and for some buyers can be a “deal breaker.” Also it is up to the buyer to do their due diligence regarding sex offenders who may be living in the neighborhood or residing nearby.
ALWAYS HAVE A QUALIFIED HOME INSPECTION PERFORMED: As the saying goes, NEVER JUDGE A BOOK BY ITS COVER. A home may look good on the outside and even on the inside, but the home could be a potential health hazard. Faulty wiring, signs of mold that an untrained eye may not detect, pipe leaks underneath the home, and the infamous “foundation issues” can result in costly repairs all of which aren’t always covered by your insurance carrier.
ALWAYS ANTICIPATE INCURRING ADDITIONAL COSTS WHEN IT COMES TO HOME AMENITIES/UPGRADES: Take into consideration the size of your home and how many A/C units the home will have. A 4000+ square foot home will have at minimum TWO units. And if you’re running both units in the summer, just wait until you get that first electric bill. Does your home have an in-ground swimming pool? If it does, guess what? The pool isn’t going to clean and maintain itself which means either you’ll have to do it yourself or hire someone to do it for you. Even if you choose to maintain the pool on your own, the chemicals aren’t cheap, however doing it yourself will still save money.
CHOOSE A KNOWLEDGEABLE REAL ESTATE AGENT/BROKER: This is self explanatory. Find a realtor who is familiar with the area(s) you’re looking to purchase a home in. They should have “Comps and Analysis” of homes in your price range and with similar amenities that have sold recently in the area. An Agent/Broker may be working with multiple clients at a time, but that is no excuse for poor customer service. That person is working for you and you deserve nothing less than the best buying experience. Never allow an agent pressure you to make an offer on a home you’re uncertain about it. When you find the “right home,” you’ll know. Trust me on this one.
MAKE SURE YOUR HOME IS PROPERLY INSURED: The worst thing that can happen if a catastrophic event occurs (God forbid) is that the homeowner is “underinsured.” Always check with your insurance provider to make sure you are properly insured. Start with the company that insures your vehicles. Insurance companies such as State Farm, Allstate, Nationwide, Farmers, etc. will usually provide a discount for allowing them the privilege to get that additional commission (cough cough,) I mean insuring your property as well. Shop around to make sure you’re getting the best rate. It’s also a good idea each year to make an appointment with your insurance agent to review your policy and make any changes if necessary.

Although this posting was quite lengthy, the information given should get you started on your quest to a successful home buying experience. CONGRATULATIONS…YOU ARE ON YOUR WAY!!!!

Please feel free to leave any and all comments below. If you have a specific question, email me at Andrea.Coleman@TheFinancialHack.com.

Financial Fitness Boot Camp

FINANCIAL FITNESS BOOT CAMP WEEK 10: WHAT’S ALL THE “BROUHAHA” ABOUT MY FICO SCORE ANYWAY?

November 9, 2015 thefinancialhack Leave a comment

Credit score this, FICO score that. Blah Blah Blah. Our ability on whether credit is extended to us (or not) can hinge on our FICO/Credit score. What is a Credit/FICO Score? Why is it so important? Some of you may be reading this and thinking, “I already understand credit, it’s importance and how it works.” If you are that person, that’s great. This post isn’t for you. This posting is for the person who doesn’t know what a FICO score is, doesn’t quite understand the importance of the FICO/Credit score, how to mange credit responsibly and how it can impact variables such as interest rates on loans (home, car etc.,) whether additional credit will be extended to you, whether a deposit is required for certain utilities, whether you’re in contention for a job offer, and even car insurance rates. How is it that an insurance underwriter is able to assume because someone’s credit score is fair/poor they are prone to being involved in more car accidents or more susceptible to irresponsible/reckless driving? The same holds true for a potential employer who dismisses an applicant because their credit score is “less than stellar.” Is the employer taking into consideration WHY a person’s credit score is what they deem to be “less than stellar” when making the selection process even though the applicant is qualified for the job? These are serious questions that require serious answers, but let’s not get ahead of ourselves. Let’s first understand what a FICO/Credit Score is.

FICO score and Credit score are usually used interchangeably. Most people call it your “Credit Score” but allow me to give you a bit of background on what the term FICO stands for and what it consists of.

FICO was founded in 1956 as “Fair, Isaac and Company” hence the name FICO by engineer William Fair and mathematician Earl Isaac. The two met while working at the Stanford Research Institute in Menlo Park, CA. Selling its first credit scoring system two years after the company’s creation, FICO pitched its system to fifty American lenders.

FICO went public in 1986 and is traded on the New York Stock Exchange. The company debuted its first general-purpose FICO score in 1989. Scores are based on credit reporting and range from 300 to 850. (Historical information taken from Wikipedia.)

Lenders use FICO scores to gauge a potential borrower’s creditworthiness. Scores are provided by the three credit bureau reporting agencies, Experian, Equifax and TransUnion. There are FIVE components that make up a person’s FICO/Credit score.

Payment History (35%)
Debt/Amounts Owed (30%)
Length of Credit History (15%)
New Credit/Inquiries (10%)
Types of Credit (10%)

FICO SCORE BREAKDOWN:

The two categories of the five that are the most important are Payment History (how long you’ve had your credit account(s) such as a credit card) for instance, and Amounts Owed (debt-to income.) Be careful of “maxing out” credit cards or keeping a balance that is too close to your credit limit. As a good rule of thumb, your credit balance SHOULD NOT exceed 50% of your credit card’s limit. Any balance above 50% of your credit limit can actually lower your credit score. It’s always good to have a good mix of credit: Installment Credit (home/car loans,) Revolving Credit (credit cards,) Charge Credit (the balance is due IN FULL at the end of the month) and Service Credit (Utilities, gym memberships, etc.) NOTE: Service credit is not always reported to credit bureaus however a letter can be provided to a potential creditor by the company if necessary.

Having a good credit score can get you better interest rates on homes, cars and even credit cards whereas less than stellar credit will yield higher rates simply because the risk to the lender is much greater.

NOW LET’S GET TO THE NITTY GRITTY…..

A lot of people brag about having a good credit score and having a good credit score is certainly important but please bear this in mind: A CREDIT SCORE IS MERELY AN INDICATOR TO THE LENDER OF HOW WELL A PERSON CAN HANDLE DEBT. I know people who have EXCELLENT credit scores but are up to their eyeballs in debt. A high credit score IS NOT an indicator of wealth. It simply means some people are better managers of their debt. A person with a good credit score can look great on paper, but in some cases that’s pretty much the extent of it.

Now let’s take a look at the person who has a fair/poor credit score. Bankruptcy, divorce, unemployment, disability, medical issues, or death of a loved one are among many factors that can play a role in a declining credit score. Don’t misunderstand me. Irresponsibility, immaturity, mismanagement and just plain ole ignorance are culprits as well. Before you discredit the person who has a fair/poor credit score, find out why. We automatically assume it’s because the person is irresponsible, immature or even broke. Think again.

FICO SCORES ARE INTERPRETED A LITTLE SOMETHING LIKE THIS:

You are entitled to one FREE copy of your credit report. Go to http://www.MyFreeCreditReport.com to order yours. If you are denied credit for any reason, the lender/creditor is required to inform you (via letter) their reason(s) for making their decision. You are then given a report number you can use to access a copy (free of charge) of your credit report as well. IT’S IMPORTANT TO KNOW WHERE YOU STAND.

I hope this posting gave you some introductory insight regarding credit and how it works. Next week we’ll delve a bit deeper into how to read a credit report, what can help your credit score, what can hurt your credit score and ways you can improve your credit score. YES, YOU CAN REPAIR YOUR OWN CREDIT!!!

As always, I appreciate you taking the time to read this posting. Feel free to comment below. If you have any direct questions, email me at Andrea.Coleman@TheFinancialHack.com.

Money, Relationships

ARE YOU TWO COMPATIBLE? CHECK YOUR CREDIT SCORES.

October 12, 2015 thefinancialhack Leave a comment

Here’s an article to piggyback my post this past Thursday regarding Nerds vs Free Spirits. See what Michelle Singletary, Washington Post Columnist, and writer of the nationally syndicated personal finance column, “The Color of Money” has to say about credit scores and compatibility.

Follow her on Twitter @SingletaryM