Buying a House in the New Economy
- Advice For Buyers
by Brandon Cornett
Jean Chatzky, the financial editor
for the Today Show, was on TV recently
to talk to consumers about their
credit scores. She confirmed something
I already knew, but backed it up
with some eye-opening numbers.
Specifically, Jean was explaining
the credit score you need to qualify
for the best mortgage rates when
buying a home. Here is how she broke
it down:
* May 2006 - Borrowers needed
a credit score of 620 to get the
best rates.
* May 2008 - Borrowers needed
a 760 or above to get the best
rates.
That's an increase of 140 points,
which is a significant difference
when you consider that the overall
credit range only goes from 300 -
850.
Recent Economic Changes
Credit has always been important
when buying a house and applying
for a mortgage loan, but today it's
more important than ever. To fully
understand the reasons for this,
we need to look back over recent
economic changes.
The subprime mortgage "meltdown" that
started in 2007 caused widespread
economic changes that we are still
seeing today in 2008. Many lending
institutions went out of business,
and thousands of Americans lost their
homes due to foreclosure. This caused
a general tightening of credit that
affected consumers and businesses
alike.
What It Means for Home Buying
If you are planning to buy a home
in the near future, this has everything
to do with you. As a result of these
and other factors, the process of
buying a house in today's market
is more challenging. As I've already
stated, you will need a higher credit
score for home buying today than
in the past, especially if you want
to quality for the best rates on
your loan.
Additionally, buyers with bad credit
have fewer options today, because
the subprime mortgage is practically
extinct. This makes financial responsibility
all the more important for buyers
in the modern economy.
So what credit score is needed for
home buying in today's economy? Well,
this will still depend on the individual
mortgage lender involved and their
particular lending practices. But
it's important to realize that there's
a big difference between qualifying
for a mortgage loan and getting a
good rate on the loan. For example,
you might get approved for a mortgage
with a credit score of 580. But you
certainly won't get the best rate
at that level. This means you will
pay more each month as long as you
keep the loan.
According to the figures presented
by Jean Chatzky, a couple of years
ago you could have elevated your
score by just 40 points to qualify
for the best interest rates -- i.e.,
you would boost it from a 580 to
a 620. Today, however, you would
have to increase your credit level
by 180 points (from 580 to 760) to
qualify for the best rates. That's
a huge difference!
My Advice to Buyers
The home buyers of today need better
credit than the buyers of, say, three
or four years ago. The federal government
is putting more pressure on lenders.
The mortgage lenders are scrutinizing
borrowers. And borrowers are under
increased pressure to have good credit
scores to qualify for loans.
All of this is unlikely to change
anytime soon. So if you fall into
the bad credit range, my advice to
you is this:
Do not buy a home
until you get your financial "house" in
order. Even if you do get qualified
with
a low score, you are going to pay
a huge amount of interest on the
loan. So instead of rushing out to
buy a home before you're financially
ready, focus instead on improving
your credit score. Pay all of your
bills on time. Minimize your debt.
And start saving money -- the more
of it the better.
About the Author: Brandon
Cornett publishes a blog about home
refinancing as well as several
other real estate websites. Visit
the author online at http://www.mortgage-refinance-advice.com/blog/