Understand Your Credit Report

What is Your Credit Score?

Credit card companies and lenders rely on credit scores, which determine someone's chances to borrow money - and how favorable the terms will be. Scores range from 200 to above 800. Scores below 620 are considered risky; 720 and over are excellent.

There are five categories of scoring:

• payment history (35%); 
• amount owed (30%); 
• length of credit history (15%); 
• new credit (10%); 
• and types of credit (10%). 

Lenders receive your score and "reason codes," which are the keys to improving your score.

It is a good idea to check your own score yearly by ordering reports from the three major credit scoring companies: Equifax (www.equifax.com), Experian (www.experian.com), and TransUnion (www.tuc.com).

And be sure to notify the credit bureau of any inaccuracies you find on your report, along with copies of documents that dispute incorrect entries. Close accounts not in use and request that late payments older than seven years be removed. Verify and update accounts and account numbers as well as your address and Social Security number.

To improve your score:

• Pay your bills on time. 
• Reduce outstanding debt. 
• Build up your savings. 
• Don't fall for illegal schemes that help create a new credit identity.

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Wondering if it is the right time for you to buy that new home?  I would be glad to discuss your options with you.  Give me a call today to learn more about the current market in Shreveport / Bossier City or visit my website for more information.

Are You Ready to Buy a House?

Let's take a look at a few ways to get prepared to purchase a house.

Check Your Credit

The highest credit scores garner the lowest down payment requirements and lower house payments. Homebuyers with scores under 620 will find it a challenge to obtain financing and, if they do, they'll pay a higher rate.

You are entitled to a free copy of your credit report once a year. Make sure you order the reports at AnnualCreditReport.com, the only site authorized by the federal government.

When you get your reports, either online or in the mail, go over them, looking for mistakes or anything else you can challenge. It is not at all unusual to move your score up dramatically by disputing and having the agency remove even one negative entry from your credit report.

Pay Your Bills

Lenders determine how much they will loan by using what is known as a debt-to-income ratio (DTI). To determine where you are right now, add up all your monthly payments, including auto loans, credit card payments and any other debt. Don't forget to add in your current mortgage or rent payment.

Divide the sum of your monthly debt payments by your monthly gross (before tax) income and then multiply that result by 100. This is your DTI, expressed as a percent.

What is considered an acceptable DTI varies by lender, but they typically want to see it no higher than 36 percent.

If you find that your DTI is on the high side, pay off some bills or increase the amount you pay each month to bring down the balances. Also, don't take on new debt as this will negatively impact both your DTI and, possibly, your credit score.

Save Your Money

Loans from the Veterans Administration and USDA have no down payment requirements. FHA, on the other

hand, requires 3.5 percent of the purchase price as a down payment, unless your credit score is between 500 and 579, in which case expect to put 10 percent down.

For a conventional loan, you'll need at least 20 percent of the purchase price as a down payment on the house. Again, more is better – the more cash you put down, the better the interest rate. The amount of the down payment may also determine whether or not you'll have to pay for private mortgage insurance.

Don't forget about closing costs as you save – those are all those fees that can pack quite a wallop at the closing table. Some of the fees are negotiable, and the total varies. Use 3 to 4 percent of the loan amount as a ballpark figure

Arrange Your Financing

In many parts of the country investors are snatching up any house that's in decent condition and reasonably priced. Because they typically offer cash, their offers are the cream of the crop to home sellers looking for a clean transaction and a quick close.

Investor offers are mighty hard to compete against – especially if you go into the process unprepared.

When you look over a standard purchase agreement you'll notice a section regarding financing. It will typically state that the buyer has so many days to obtain a mortgage at specified rates and terms. If the buyer hasn't been pre-approved by a lender for a mortgage, there is always a chance that he won't qualify for a loan.

A savvy home seller knows this. Faced with multiple offers on his home, he isn't about to go under contract with a buyer who is a gamble.

Rule number one, then, when considering the purchase of a home, is to see a lender to get your mortgage preapproved. No, this doesn't put you ahead of an investor with cash, but it puts you in front of other buyers who don't have their financing arranged.

Make up Your Mind

As you get closer to finalizing the first steps toward buying a home, it's time to determine just what it is you want. One story or two? Condo or single-family home? Urban or rural? Determine how many bedrooms and bathrooms you simply must have and any other features that you can't live without.

Hire a Real Estate Agent

There is absolutely no reason to not hire an agent when purchasing a home. The commission is paid by the seller at the close of escrow, so the services cost you nothing. Not a bad price to pay for expert representation by someone who is legally required to protect your interests.

A good real estate agent is, overall, available to show you homes at your convenience. He or she is also familiar with the areas you've chosen for your house hunt. The right agent will follow your wish list to the letter, not wasting your time showing you homes that don't fit your criteria.

Congratulations on your decision to buy a home.

      

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What is Debt-to-Income Ratio?

The debt-to-income ratio is, simply, the way that mortgage lenders decide how much money you can comfortably afford to borrow. It is the percentage of your monthly gross income (before taxes) that is used to pay your monthly debts (not your monthly living expenses). Two calculations are involved, a front ratio and a back ratio, written in ratio form, i.e., 33/38.

The first number indicates the percentage of your monthly gross income used to pay housing costs, such as principal, interest, taxes, insurance, mortgage insurance and homeowners' association dues. The second number indicates your monthly consumer debt, such as car payments, credit card debt, installment loans, etc. Other living expenses are not considered debt.

So a debt-to-income ratio of 33/38 means that 33 percent of your monthly gross income is used to pay your monthly housing costs, and 5 percent of your monthly gross income is used to pay your consumer debt - so your housing costs plus your consumer debt equals 38 percent.

33/38 is a common guideline for debt-to-income ratios. Depending on your down payment and credit score, the guidelines can be looser or tighter, and guidelines also vary according to program. The FHA, for instance, requires no better than a 29/41 qualifying ratio, while the VA guidelines require no front ratio but a back ratio of 41.

What if you already have a house or don't plan to buy a house for a good period of time? You still need to know and control your debt-to-income ratio so you can avoid creeping indebtedness, or the gradual rising of debt. Impulse buying and routine use of credit cards for small, daily purchases can easily lead to unmanageable debt.
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Debt-to-income ratio not only affects your ability to buy a home, but other purchases as well. Debt-to-income ratios are powerful indicators of creditworthiness and financial health. Know your ratio and keep it low. Your consumer-debt number should never go higher than 20 percent regardless. If you let it rise above 20 percent, you may:

• jeopardize your ability to make major purchases: cars, homes, and major appliances.
• not get the lowest possible interest rates and best credit terms. 
• have difficulty getting additional credit in emergencies.

If you keep a stranglehold on your spending habits and therefore your debt-to-income ratio, you can: make sound buying decisions, and refrain from frivolous credit purchases and loans.

Interest Rates on the Rise

You may have heard the rumors that the federal reserve may quit buying bonds. This seems to be a point of some speculation, but interest rates have begun to rise nonetheless and are not likely to go back down.

So, what does this mean for the real estate market?

For Buyers, this means that on a $100,000 loan the payment would go up $30.00 per month just for principal and interest for a total of $10,800 over a 30 year period.  On a $200,000 loan these numbers double.  Buyers should consider locking in their rates if they have not already done so.  There could be a cost to lock in which is dependent on the lender and length of the lock in.  Contact your real estate agent to discuss what this means and to get more information.

For Sellers, the impact is much greater.  It is possible some potential buyers may be lost because the payment has gone up.  If selling and purchasing a new home at the same time, consider dropping the asking price.  If the asking price is dropped by $3000 and then the new home is purchased, this would save approximately $18,600 because they would have gotten the locked in interest rate on the purchase of their new home. 

The statement "now is the time to buy" has never been more true.  Rates will most likely continue to rise and may never be below 4% again.  Contact your real estate agent today find out more about what this means for you and to discuss your options.