When it comes to buying
a car, deciding on where to go to college, and even vacationing, most
people spend quite a bit of time preparing and learning about their
choices and the costs involved. So why is it that most of us
have no idea what is entailed in one of the biggest investments we
will ever make in our lives? Buying a property and applying for
a mortgage brings with it a change in lifestyle and financial
responsibility, defining the quality of our lives for many decades to
come.
Most people don't go on three dates and make a
commitment to get married, so it has always puzzled me that I would
be expected to visit a home 2-3 times, for 20 minutes, and have to
make a decision to live in it for the next 10-30 years. Besides
the strange ritual of shopping for a property, most buyers have very
little education about what is involved in the process of borrowing.
Borrowing, applying for a mortgage, and purchasing a
property are extremely important milestones, yet most of us have not
heard anything about this from our teachers, parents, or even our
CPA's. Added to the lack of knowledge regarding housing and finance
is the more distant and mysterious category of credit. Considering
the significance credit has on a person's savings and quality of
life, consumers should be learning about it when they pick up
their first cell phone from Mommy's hand bag!
Last week I conducted a seminar to a group of consumers.
Along with my information there were many other speakers offering
their expertise. What I found interesting was that the group of
professionals were just as shocked as the consumers to find out how
credit works. This brings me to a significant point, that if we
could relay some key information about credit early on to our
friends, family, referral sources, and client base about credit, it
could be the difference between approval or rejection, lower mortgage
payments, and reduced frustration level during an already stressful
process.
Recently, a few consumers had contacted us for credit
restoration after being rejected for the financing they needed. One
of these consumers was John, a successful entrepreneur, in the midst
of applying for a mortgage. His banker asked him for a number of
items in order to evaluate his ability to pay for the $1,100,000 loan
he needed to purchase the NYC condo he disired. His current Fico
credit score was a 755 which surpassed the 740 score required for the
loan. However, John often traveled a lot for business and took a very
long time to get all the necessary documents to the banker for loan
approval.
During his paperwork hiatus, John happened to be taking a ride with
his fiancée when he saw a Porsche dealership. A new model caught his
eye, and just for fun, he decided to take it for a test drive. With
12 months of payments still left on his current vehicle, he had no
intention of buying the Porsche. Nonetheless, the car was beautiful
and he fell in love. With the trade in of his current automobile, the
dealership had made him an offer he couldn't refuse. He signed for the
new car and felt thoroughly satisfied with his purchase.
His new car would have went perfectly with a new condo,
but another 50 days had passed before the loan officer had all he
needed from John to get the final approval from the bank. During the
time lapse, the banker had to pull a new credit report which showed a
devastated John his new, much lower credit score of 710. He was in
disbelief because he knew he always made his payments on time. Once
we were referred to him and analyzed his reports, we were able to
explain to him that opening and closing credit could drop scores as
much as 60 points. John was in shock and there was nothing we
could do for him. The only choice he had was to wait until the new
credit became seasoned, which could take anywhere between 1-2 years,
forcing John to walk away from the purchase.
Another example was Steven and Janet who were looking to
leave the bustling city and raise a family in the suburbs. The
successful professionals earned a substantial income and were looking
at a great property in Long Island. They had signed a contract and
were ready to apply for the loan. When the banker pulled their
credit, Janet had a 745 credit score and Steven came in with a 700.
Steven learned from the banker that he had a collection account
showing up on his credit profile. With his credit score a 700, they
still qualified for the loan but the interest rate would be 1.5%
higher.
With
the mortage at $600,000, the cost with the higher 5.75% interest rate
would be $3501 a month, equaling $1,260,519 over the thirty year
loan. Had Steven's score been above a 740 the rate would have
been 4.50% bringing them to $3040 a month, totaling $1,094,446 over
the thirty year period. The savings at the lower rate would be
about $500 a month and over the thirty year period would come to
about $166,000. Obviously they wanted the lower rate and we were
called in to access the situation.
The collection was for a medical bill that Steven had
ignored thinking it was frivolous. We were able to remove the
item from his credit report. This was a positive result for the
couple but it cost time and money to resolve. However, they
were lucky to be able to purchase the property and enjoy the lower
rate loan within a month.
One last example, Jason, was a few years out of college
earning $60,000 at the law firm. He decided since some of the
properties near his office were at excellent purchase prices and his
rent seemed to be increasing, that it was a good time to look into
purchasing a house or condo. He found an excellent property in
Garden City, very close to his office. The seller had accepted his
final offer and he began the loan application process. Unaware that
his lack of credit could be a problem, he not only had a low score
but the bank would not approve the loan. Jason had held only one
credit card, primarily in his name, and at that, only 6 months old.
Many banks in today's environment want to see at least
2-4 trade lines (items of credit) on the credit profile that are in
the borrowers name as the primary credit holder. They also want the
credit to be seasoned (1-2 years old). This was quite
disappointing to Jason, the seller, and the realtor who put all that
effort and work in to find the property. Jason was fortunate
since his parents were willing to co-sign for the loan.
Although the purchase was ultimately a success his parents are now in
a vulnerable position. If Jason loses his job, forgets to make a
mortgage payment, or becomes disabled and can't make the payment his
parents will see their credit scores drop, possibly over 100
points. They are also committed to paying back this mortgage
over the next thirty years even if their son can't.
If Jason had started building credit in his name at the
age of 18 he could have had five accounts that were over four years
old by now and his parents would not have had to take on this
responsibility and risk their credit.
As you can see credit plays an essential part in the
cost of financing and even in the ability of the buyer to get
approval for a loan at any rate. Feel free to share this
article with all that you think might benefit from this insight.
Tips
- Pull
your credit reports and Fico scores 1-2 years before applying
for a loan. www.myfico.com
- Build
four or more primary accounts of credit as young as possible but
at least 2-4 years prior to applying for a loan.
- Do
not open or close any credit within a year before applying for a
loan (unless you don't have enough credit to be approved for
that loan)
- Don't
close credit just because you may not think you will use
it. The older active credit will increase your scores.
- Use
open credit at least 2-3 months a year to keep it active.
- Have
a variety of credit since that adds to increasing your scores.
- Keep
your balances on revolving credit at 7-10% of the limits, at
least 2-3 months prior to applying for a loan.
- Limit
third party reviews of credit profiles.
- Make
timely payments on all credit and resolve any open bad debt
before it affects the credit scores.
- If
you have open collections don't pay them until you speak with us
directly.
- Call
us early and get the help you need to increase your scores and
understand how they work.
"Great credit brings great
opportunity!!"
Copyright 2011
