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Your Credit Score Has A Major Impact On Loan Approval - 2007-01-20 |
For most Americans, the process of buying a home involves saving up some cash for a down payment, and then borrowing the bulk of the purchase price from a home lender. The good news is that interest rates have remained low so far into this new year, and this Atlanta market currently favors buyers, with sellers willing to be more flexible than ever.
But no matter what kind of deal you negotiate with Mr. Seller, you'll still have to qualify for that new loan before you can buy your next house. And that's where your credit score comes in.
In recent years, lenders have moved to a "risk-based" pricing system for home loans. That means that the greater the lender believes the risk to be that you will not pay as agreed, then the higher the interest rate he will charge. In addition, costs and fees associated with the loan may rise also.
The risk factor that your loan application brings to the table is summarized in a three digit number between about 400 and 900, and it's called your credit score. The higher your credit score, the easier it is to qualify for a home loan, and the lower the interest rate on that loan.
I like to use the old elementary school grading system to explain the
relative credit score ratings and what they mean to lenders:
* If you credit score is 750 or higher, you get an A. You will likely
qualify for all the best rates and the lowest closing costs, and getting a loan should not be a problem. No one has sued you for a debt and won a judgement against you, at least not in the past seven years.
You pay all your bills on time and rarely, if ever, have you missed any
payment deadline. In addition, you probably pay off most or all of your credit card balances monthly. If you carry any credit balances at all, they are well below 50 percent of your credit limit.
From a lender's perspective, you have demonstrated an ability to use credit wisely. All lenders will want to loan you money.
* If your credit score is between 700 and 749, you get a B.
Like your friend above, you generally pay all your credit obligations in a timely fashion, and credit card balances are not a problem in your financial life.
However, there was that one time several years ago when you went to California for a couple weeks, and you ended up a little late on a couple of monthly payments.
In addition, you recently opened accounts with several credit card issuers that offered low introductory rates, then shifted balances from high rate cards to those with lower rates.
While it may have seemed like a smart thing to do financially, shifting
balances raises a question of credit use in the eyes of your home lender.
A major concern of credit granters is this question: Is the applicant moving balances around just to keep from paying them off? Are you living on your credit cards?
Generally, you will qualify for most of the favorable loan programs,
although some lenders may want you to pay off certain credit cards at the closing table in order to qualify. You may pay a slightly higher rate than Mr. A, but not much. All things considered, you are a good credit risk.
* If your score is between 650 and 700, you are pretty much an average consumer. On my scale, you will rate a C.
According to the most recent data from Experian, one of the nation's three major credit reporting agencies, the national average score is 676. And a sampling of scores in Atlanta by the same agency showed an average score here of 667, so we're not far off the mark collectively.
Because the primary driver of your credit score is late payments, your
credit report reveals that there have been more than a couple of times
within the last year when you were slightly late with a revolving payment or missed the deadline for your car note or other installment account.
The good news is that you don't have any bad debts or judgements, and overall you have paid your debts when due.
You will probably qualify for a home loan, but you may have to pay a
somewhat higher interest rate or put down a higher percentage of the purchase price than your friends, Mr. A and Mr. B.
* If your credit score is between 600 and 650, your lender will have to look closely at your application to see whether you will qualify for the loan you want. You are assigned a D on my credit scale.
You forgot about the vacuum cleaner you bought on your department store card. It didn't work, so you returned it after a few months, but the store manager said it was too late to return, so you left it anyway and walked out. It was only $76, but it got charged off against your account.
In addition, late payments are a frequent occurrence. That's because you only pay bills once a month, and the payments sometimes arrive after the deadline.
Your lender may find a loan program for you, but it will be at a
significantly higher interest rate, and it may adjust if rates go up in the future. This loan is acceptable only because it gets you into the house, and your plan should be to clean up your credit and try to refinance as soon as possible.
* If your credit score is below 600, you have some serious credit issues you need to deal with. I hesitate to say you are graded an F, but it's true.
Last year you fell several months behind on your car loan, and your credit cards are maxed out or over-limit frequently. You are one paycheck away from financial difficulties, and you get calls from debt collectors about past medical bills you thought the insurance company should pay.
Under your current circumstances, it's unlikely that any conventional lender would be able to find you a traditional loan that would allow you to buy a house. If your score is relatively close to 600, it's possible that you might find a loan program that would work, but even that loan would likely require a huge down payment, perhaps in the 30 percent range, and that's way beyond your savings at this time.
Next week: How to check your Credit Score, and what you can do to improve it.
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LANDLORD SURVIVAL TRAINING
with John Adams
Tuesday, February 28th
Being a landlord can be a rewarding experience. It can also be a difficult one if you don't have the knowledge and understanding of what the process requires.
Few schools offer degrees in property management, so most landlords learn "on-the-job" through acquired knowledge and on-the-job experience, essentially re-inventing the wheel. This is an expensive and depressing way to learn anything.
Whether you're a full-time landlord or just getting ready to purchase your first rental property, whether you are a licensed Georgia real estate professional or an accidental landlord, this seminar will help you improve your property's value, increase your cash flow and decrease your expenses, from attracting (and retaining) good tenants to maintaining your property to understanding your rights and obligations under the law.
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PROPERTY TAX REDUCTION WORKSHOP
with John Adams
Tuesday, March 27th
One of the significant annual expenses faced by any Georgia property owner is ad valorem property tax. Depending on where you live, it can be as high as three percent of the property's fair market value, and it must be paid year after year after year.
As a result, efforts to minimize this expense are not only worthwhile, they are encouraged by Georgia law. The phrase "ad valorem" means that each property is taxed based only on its value, and no one is required to pay a penny more than the minimum the law demands.
At the Property Tax Reduction Workshop, real estate expert John Adams will review the system he has used for over thirty years to reduce valuations and assessments in Georgia counties and municipalities, saving himself literally hundreds of thousands of dollars over the years.
In this 3 hour information packed seminar, John will teach you how to:
1. Understand the legal process of Property Tax Assessment
2. Meet the newly uniform Tax Deadlines
3. File your own Property Tax Return with a realistic valuation
4. Document your PT-50R with facts to support your case
5. Proactively meet with your Appraiser to reach an agreement
6. Protest your Notice of Assessment in an Intelligent manner
7. Give the Assessor an Opportunity to Save Face
8. Appeal to your Board of Equalization, in person or by mail
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10. Take Your Case to Superior Court if necessary
If you are not doing all these steps now, you are likely costing yourself hundreds or thousands of dollars a year. If you own just one house, you could easily save over a thousand dollars over the next three years. If you own properties valued collectively over a million dollars, you are literally throwing away your profits year after year.
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