What’s in a Number?

by Tolbert Rowe

Since the British have decided to withdraw from their membership in the European Union, long term mortgage rates have hit historic lows. 15 year fixed rates below 3%, 30 year fixed rates for FHA, VA or Rural Development mortgages at 3% or just above. And with property values beginning to rise, the opportunity for first time buyers has never been better. And for those fortunate enough to qualify for Rural Development financing you can purchase a home with no down payment and sellers are allowed to pay most, if not all of closing costs.

Purchasing a home for $150,000 will cost less than $1,000 per month in mortgage payment at a rate of 3.25%; this includes the escrow for property taxes and home owners insurance. A $200,000 house will cost you a little over $1,200 per month. When you consider what many people are paying in rent it can be cheaper to own.

Before exploring the possibility of buying your first home you have to understand the three most important rules of qualifying for a mortgage to purchase a home. These are listed in order of importance.

First, you must have a job, or a reliable source of income to repay the debt. It is important to have a two year history of gainful employment at the same job, but if not at the same job during this period, at least jobs in the same line of work. If you did have a job change, it was for an increase in pay, better benefits or better opportunity for advancement. Having to get a new job because a company closed or you were laid off is a reason out of your control, so finding a new job is an expectation.

Being a full time student can be substituted for two years of employment as long as the job you currently have is somewhat related to your education. Professions like teaching, nursing or other types of jobs that require full time education to acquire are considered “career professions” where turnover is much less likely than other professions.
For those who are self-employed or in commissioned sales, stable income is much more challenging to establish. You must have a two year history of being paid in that manner with your current employer, or paid in the same way with several employers, in order for the income to be considered “stable” and reliable. It is felt that averaging variable income over a two year period gives a more reliable picture of the income of the borrower.

The second most important component of qualifying for a mortgage is your credit, or more importantly your credit score. Most loan programs require a minimum score of 640 although some lenders will go as low as 620 or possibly even lower.

Having or getting credit in today’s world is the most important financial step a person can make. Trying to function in today’s world without credit, or a credit score, is like trying to fly a plane without an engine. You may glide for a while but you won’t get very far.

There are five components of your credit score; length of time you have had credit, your payment history, and utilization rate of revolving credit accounts, public records/delinquencies/collections, and inquiries.

Your payment history is by far the most important, and the most easily manageable piece of your credit score. Paying something late, where you are incurring late fees, has been the kiss of death for many people who want to buy a home immediately. Being currently past due on a revolving or installment payment will cut 30 to 80 points off of someone’s credit score, or possibly even more. To get those points back could take as long as a year or possibly more. No matter how bad things get, at the very least, make the minimum payment due on revolving accounts.

The longer you have had credit the better your credit scores will be. I recently had a conversation with a young buyer who was proudly telling me that they were “cleaning up” their credit and had closed several accounts that they hadn’t used in a while with the hope of increasing his credit scores. One of the accounts he closed was his very first credit card he received about 10 years ago. Upon reviewing his report I see that his next oldest revolving account he had for 6 years. Upon closing the oldest card with a 10 year history he lost four years of credit history because his next oldest was six years old.

This probably wouldn’t be a big deal for a person who has been using credit for 30 years, but for someone with a relatively new history I assure you that his credit score went down because of it when his intent was for the score to go up.

How much of the available credit you use on revolving accounts can have a huge impact on your credit score. I have seen credit scores drop almost 100 points because someone went over the limit on their credit card. You will see points peel away when the balances get higher than 50% of available credit. If you have a concern for your credit scores and you are trying to move your credit scores higher do not do anything until you speak with someone who understands credit scores. Make sure you know that what you are doing will have a positive impact on credit scores and not a negative one.

It probably doesn’t need to be said but having credit accounts get to a collection status or even worse, a judgment will decrease your credit score, but if the collections are medical, the impact will be less significant and some mortgage programs will allow a person to have medical collections without having to pay them off if the total balances are less than $1,000. Anything other than medical will have a negative impact on your credit score.

The number of inquiries into your credit within the last 120 days is another factor impacting your credit score, but inquiries into your credit for a mortgage or a car loan within a 30 day period are counted as a single inquiry for credit score purposes. This protects borrowers from being negatively impacted because they are shopping for a car or a mortgage. You can’t purchase a car or inquire about a mortgage without the lender, or dealer hitting your credit.

If you want to begin the house buying journey give me a call at 410-819-3005 or cell 410-310-3520.
You may be pleasantly surprised at how qualified you already are.