2010 was the year of everything that was historically low - interest rates for buying a home and home prices. And there was a large inventory of homes on the market.
Paradoxically, it was one of the worst years for home sales. Why was 2010 such a bad year? I worked with a number of buyers all year long. The easiest part was viewing homes, the hardest was getting a loan. That left a lot of buyers frustrated, bewildered and angry.
Here were some reasons:
1. Low credit scores. 620 is the magic number. Banks and mortgage companies have made loan requirements stricter - your credit scores have to be 620 or higher to qualify for a loan. I start off every home buyer consultation by asking buyers to check their credit scores with the 3 credit bureaus: Experian, Equifax and TransUnion. There are many websites where you can check them for free like FreeCreditReport.com, CreditReport.com and FreeScoreOnline.com. Credit bureaus provide credit reports for a fee.
But first, check your credit report for accuracy. According to a July 2004 report by the U.S. Public Interest Research Group, 25% of reports contain errors that are serious enough to result in the denial of credit. Be sure to report any inaccuracies to the three credit-reporting agencies.
2. Little or no credit history! I had a buyer who had moved in with her mother to save money for down payment. She had been really cautious about spending, but in the process, she had little or no credit history! That makes her a high risk to lenders. Building credit history takes time and some lenders will consider your rent payments and utility payments as part of your credit history.
3. No money for down payment and closing costs. One couple had great credit scores and both had comfortable jobs. But they had no savings and could not get help from their families for down payment.
Gone are the days when you could get 100% financing. VA loans and the City of Columbia Loan Programs offer loans to credit-worthy home buyers with just $500 or $1,000 for down payment. FHA loans require 3.5% as down payment.
First-time home buyers are often unaware that in addition to down payment, they may also be required to pay for closing costs i.e. costs involved in getting a loan, title search and attorney fees. Sometimes, sellers are willing to pay for closing costs but my advice is to be prepared and ask your lender for an estimate of your closing costs.
So saving up for down payment and closing costs is the smart way to go.
Here are some things to consider for boosting your score:
1. Don't be late. Missed payments lower your score drastically. Late or missed payments, foreclosures and bankruptcies count for one-third of your credit score. So make sure you pay those bills on time. If you already have a late payment on your report, depending on your track record with the company, ask for a "goodwill adjustment". If you're a one-time offender, your wish should be granted.
2. Bring down balances. One-third of your credit score is based on the amount you currently owe in relation to your credit limit. So try to keep your balances at 50% or less of your credit limit.
3. Keep older accounts. Another 15% of your score comes from how long you've been managing credit. Closing old accounts shortens your credit history and lowers your score. Lenders also take into account the average age of your accounts, so an older account can help balance newer credit.
4. Limit new credit. Take on new credit only when you need it. New credit can hurt your score twice. New inquiries for credit count for 10% of your score — and a flurry of new credit requests can lower your score. Also, once a new credit line is secured, the average age of your accounts will shorten, which in turn can drag down your score even more.
For a detailed account, check the Federal Trade Commission’s (FTC) website www.ftc.gov and click on Building a Better Credit Report. Or talk to your lender for recommending a reputable credit counseling organization.
