Credit Scores and Your Home Loan

James Duffy

Everyone knows credit scores are an important part of getting a mortgage. And with the recent turbulence in the mortgage market credit scores have gotten even more important, as most lenders have had to raise minimum credit scores on all loan programs.

And everyone knows that the dream of buying a home requires work, or at least attention to their credit. Just like we know we should exercise. Just like we know we should eat right. Just like we know…well, lots of things that we don’t yet do.

A lot of it comes from not knowing what to do first. Credit just seems like a mystery, a puzzle that you look at dumped on the dining room table and now knowing how to put that thing together. I know some people love puzzles. They give me anxiety. And I get it if the thought of working on your credit score does the same in you.

I have a friend who was considering a New Year’s resolution last year to go to the gym every day. But he was honest with himself and knew he would not, in part because he was completely out of the habit of exercising, and in part because he had no idea what a good workout routine would look like.

So, he instead made a resolution to do one pushup every morning. One pushup. Because he knew he could do that. He knew that every day he could get up and do one, single pushup. And he also knew that if he were there doing one pushup, well, why not do ten?

And starting from that one solitary pushup that he knew he could do; he developed that into, eventually, going to the gym every day.

Working on credit can be similar. You just have to commit to start – and you don’t have to know the whole road nor the final outcome. Just commit to start. A single pushup. Log onto Experian and check your credit report. I just did that, and it took about 4 minutes and I had the report, the credit score, and some helpful tips to get started on improving the score. One pushup.

The next pushup is simple and will take you in one of two directions. If your score is at or very near a 600 or higher, then you may want to make loan application with a lender. I can help if you live in – or are moving to – South Carolina, Florida or Georgia. I can refer you to someone who can help in any other state.

We will run a report direct from the credit bureaus that tells you the exact steps to do to raise your score. Beginning with 600+, most of the time we can get you ready for a mortgage pretty quickly.

Plan B if your score is mid to low 500s, or below, is to pull in the expert help. A good, reputable and effective credit repair company. I have seen very good results with, and highly recommend them.

They will do the heavy lifting for you, guiding you each step of the way on the next step. Your personal trainer at the gym, if you will.

And, an insight, because it is not really complicated: they will work on removing negative marks on your report; while simultaneously guiding you in establishing new, positive credit. That simple. Eliminate the negative and create the positive.

The biggest stopping point that I see when presented with Plan B is that these companies charge a fee. A lot of people don’t want to pay that fee.

Assuming you can afford it, I would encourage you to not hold back for that small fee. And the reason is the missed equity you are not building by putting off buying for a much longer time than is needed.

I call this the Cost of Waiting to buy. Let’s take a quick look at what waiting is costing you and compare it to the fee that the credit repair company will charge.

A couple wants to buy their first home, and is looking at one they really like. The seller is asking $300,000 for the home. If they are ready, they can buy now and lock in these historic rates.

But, they may have to work on credit and cannot yet; or they may be worried that with everything going on, home prices may come down. Would it be a mistake to buy now, or should they wait?

Take a look. They could buy now for $300k, or wait and hope they are right and buy the same home for 10% less next year, saving $30,000. That’s substantial.

But, if home prices are tumbling, that likely means that the Federal Reserve ran out of ammunition to try to prop up the economy, and stopped buying mortgage bonds to help keep mortgage interest rates low (something the Fed is currently doing at average purchase of $8 billion a day).  Were that they case, we might see rates back to where they were just 18 months ago, around 4.75%.

Here’s what buying now vs waiting would look like:

Yes, getting a price cut of 10% on the home will cost an extra $141 a month on the mortgage payment. And here is the interest difference. Buying now, assuming that price drop but also assuming interest rates rise, would cost you an additional $18,000 in interest over the first 5 years of owning the home.

It’s a more stark comparison if you go out 5 years. Notice the interest saved over having waited to buy, and seeing rates increase in the meantime.

And finally over 15 years there is nearly a $68,000 difference. More than double the initial savings by having waited for a price drop – or a credit score improvement – to happen.

Those are big numbers, and make the few hundred dollars that the couple will spend on credit repair seem, well, money well spent to get into the home sooner.

If that is you who are dreaming of owning your own home but just not sure what to do about credit, the just do one pushup. Another will follow, and soon you will be in your home.

About The Author

For years, 18 as of this writing, I have walked beside average men and women of all ages on a specific journey. The journey of home ownership.
And what I have discovered in opening up the financial reality of thousands of individuals & couples is a constant mix if fear, hope, confusion and achievement. It really is an exhilarating journey!
And I have read innumerable books on personal finance, read the blogs and listened to the podcasts, and spoken to the experts. And there always seems to be a bit of a disconnect between the theory of ‘personal finance’ and the lived reality of what is, truly, personal finance.

This is a place where real life meets real money. I hope you will come along on the journey to explore Finance, on the Front Line.


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