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It is something you want to give some thought to - - not an impulse decision. But similar to what a rocket scientist is engaging in, when it comes to buying a home you must
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Part of that preparation is checking out your credit to be sure you have the credit history you need to qualify for a purchase of the magnitude of a home.
You see, while you are thinking this will be "your home," for the first thirty years or so it is also the bank's home. While ultimately you are promising to pay the bank back, it is their money that is at risk - - in the beginning at least. So it is not unreasonable for the source of the funds to want to be relatively sure you can pay them back.
Many people, particularly after being able to score a good job believe that since they have a nice sum of money coming in every month that puts them in a position to buy a home. They are paying rent after all. What's so different about owning a home? You pay for it every month, just like your current apartment.
It is true that income is part of the picture, but a larger part of the picture is the snapshot of how you deal with credit. Do you pay back other loans or credit accounts that you have open? You don't have any open? That means your credit picture looks like this:
Hmmm...a blank page. The good news is that there is nothing bad on that page. The bad news is that there is nothing good either. There is no way to assess how a potential borrower will deal with credit if there is no credit to evaluate.
Your mom always told you to pay your bills in cash. If you can't pay for it, don't buy it. Not bad advice at all, and we love moms. (In fact, some of us are moms.)
However, when it comes to mortgages that advice is out of date. Having no credit score doesn't work for you, not at all. It used to be that lenders could take what was referred to as "alternate credit" for some government loans.( Alternate credit consists of the history of some of the bills you pay every month - - utilities and the like.) You may have heard that is enough. But the truth is those days are done. Taking alternate credit in lieu of consumer credit payments was part of the big mortgage undoing in 2008. While alternate credit may be used to support light credit-alone and of itself it will not get you approved for a mortgage loan.
What lenders are looking for is three consumer credit lines that have been reporting an average of 12 months. So credit cards, student loans, car loans, or any other type of installment debt - - maybe the monthly payments you are making on that big screen television to your local electronics store. If you are in the habit of being somewhat casual about getting the payment to those places on time that will negate all the good work you have done establishing the accounts. So if you take out consumer credit, you need to pay it on time. That will give you a pretty good credit score and the lender a solid snapshot of how you deal with credit.
If you currently have no consumer credit and you wish to buy a home, you are probably minimally nine to twelve months away from that goal. The time is now to begin building credit. You do that one credit card or loan at a time. When you have no credit, it is hard to get credit cards so you may have to obtain a secured card or have obtain a joint card with a co-signer. A secured card is a card that you give money to the credit card company or bank to hold as security against payment of the card. If you do that for a couple of cards the third shouldn't be too hard to obtain. Many banks offer secured cards and you can search online to find companies that offer them. Use them sparingly. I am not advising people to run up big credit card balances. Use them to buy something you would buy anyway-such as one tank of gas. Wait for the bill to come, pay it off and repeat the process.
So what if you don't have any credit cards or consumer debt but you have some collections - - maybe medical? You will still need to obtain positive credit to offset the negative effect those collections will have on your credit reporting. If there was a specific event tied to those medical collections such as an accident or a surgery in which you were underinsured or not insured you may not have to pay them off, it depends on the circumstances and how old they are. But if those collections are utility bills or past collections by landlords - those will need to be paid in full or possibly have payment arrangements made that are in effect prior to you being eligible for a mortgage. If you have an open judgment or tax lien-it has to be paid. Those two items go ahead of the lender's lien on the title to your house. Since the lender is the largest stake holder of your home they want payoff first in the event you sell the house or Heaven forbid, are foreclosed upon.
they won't disappear by themselves.
Nope, no matter how much you fuss about it - those negative items, like unwanted houseguests are there to stay; collections for seven years and any legal or tax related item for ten years. So if you just think, well, okay, I will wait and try again next year, I can assure you, if nothing else has changed, next year will be no different.
Another good thing about making a plan is that if you have any of these pesky items on credit you can deal with them before you have a purchase agreement in effect and have fallen in love with your dream home and then find out that you can't really buy it. (That is probably what those boys pictured above are really wailing about.)
The important idea to take from today's blog is that you need to plan. It might be that your credit is great and you are ready to roll on purchasing a home. But let's face it - - the economy has been tough lately. Some folks need help getting back on the financial horse. So while putting your financial house in order isn't the sexy part of buying a home, it is a necessary component. Until that is in place all the rest is fluff.
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