The benefit of debt

I wanted to share a recent article by  Michelle Singletary.  Ms. Singletary offers some wonderful advice to future home buyers and I’d like to provide the lender’s perspective.  In this post, I’ll address the first reader’s question, in which Ms. Singletary advises a potential homebuyer with $12,000 in savings and $11,000 in debt from a consolidation loan to pay $5,000 toward the loan and accelerate remaining payments. 

As a lender, I would recommend leaving the $12,000 in savings.  I agree that there should be 3-month’s worth of reserves removed from the $12,000, so if it helps you to physically put this in a different savings account I would recommend doing so.  Paying down unsecured debt is a great goal, for the most important reason is that this kind of debt generally carries a higher interest rate then a loan with collateral.  Adding extra on the payment when able is a good habit with any kind of monthly obligation as this will allow you to pay the debt off sooner.  The potential home buyer in this example makes it sound as though this consolidation loan is their only debt.  If this loan was heavily paid down with the author’s suggestion, and then rapidly paid off, there would be no more monthly obligation.  This is great, however, credit scores are calculated on several factors, and the factor that carries the most weight in the calculation is Payment History.  If your payment history is no longer being reported because your debt is paid off, then there is no ability to calculate a credit score.  A lender needs a credit score and history, to weigh the risk of what type of borrower you are as of the day the credit report is pulled. 

What I read from the potential home buyer’s question is that they want to buy a home.  I would need to find out more information on how much they are paying to rent the current condo.  Their rent could be more then the cost of having a home of their own.  With the current real estate market, there is no better time than the present to find out how your current rental situation compares to owning a home.  Rates are low, and there are a lot of homes for sale right now.  I have programs available that are geared towards first-time home buyers, or current home owners looking to upgrade.  There is no cost to find out whether home ownership is right for you and no better time to do so.  

Recovering from a major credit event

The current economic climate has put turmoil in the lives of many citizens.  If you have had to choose between paying a bill or buying food, you are not alone.  Based on current data, it appears positive affects from Economic Stabilization are starting show.  If you have been affected by the poor economy and are now looking to buy a home, below are some general ideas of how long to wait after a major event impacted your credit.  Please note, it is not a guarantee if you wait the appropriate time that you will be granted funds to buy a home, they are just general rules that most Government Lenders - Underwriting Guidelines adhere to.

Bankruptcy – Most lenders require a minimum of 2 -4 years after the discharge of the bankruptcy along with re-established credit.  “Re-established credit” refers to to a minimum of 3 accounts reporting to the credit bureau reflecting no late payments, and the trade lines are provided a minimum of 12 months worth of payments.  All three Credit Bureaus will need to reflect a good credit score (680 or higher would be desired). 

Foreclosure Sale – Most lenders will require a minimum of 3 – 4 years from the transfer of title of the foreclosed property.  Written evidence will need to be provided to validate the foreclosure was beyond the borrower’s control.  Re-established credit with 3 or more trade lines with a minimum of 12 months worth of history, along with a good credit score (680 or higher would be desired).

Late Payments – Most lenders require that there be no more than 2 payments that are 30 days late within the most recent 12 months.  The borrower would have to explain and validate the late payment(s) were beyond their control.  There can be no more than 1 payment that is 60 days late within the most recent 24 months.  A good credit score would need to be reflected by all three Credit Bureaus (680 or higher would be desired).

The regulations and guidelines for mortgage lending tend to change quite often to adapt to National Economic Data, so please give me a call when the time is right to review your current situation.