Buyers Need a Higher Credit Score for Home Buying
Hi folks. Captain Credit here, with another update in the ongoing saga about mortgages, credit scores, and home buying! This time we will talk about the increasing need for good credit during the home buying process.
A few days ago, I was watching Jean Chatzky on the Today Show. She is the financial editor for the show, and she confirmed something that I already knew:
Home buyers today need higher credit scores for home buying than they did a few years ago. And if you want to get the best interest rate on a loan, you will need a significantly higher score than only two years ago.
We will get into the specifics of how this happened soon enough. But first, let's look at the numbers presented in this recent report.
Specifically, Jean was explaining the credit score you need to qualify for the best mortgage rates when buying a home. Here is how she broke it down:
That's an increase of 140 points, which is a significant difference when you consider that the credit score range only goes from 300 - 850. Why is the best-case scenario so hard to reach these days? Let's take a closer look...
Why do buyers need better credit for home buying today? What has changed? To answer these questions, we must understand the history of the subprime mortgage crisis that came to a head in late 2007 (and of which we are still feeling the effects today). Here is a "nutshell" version of what happened:
Through the 1990's, a lot of mortgage lenders were offering subprime mortgage loans to borrowers with bad credit scores -- the type of credit score that normally wouldn't suffice for home buying and mortgage approval. The lenders offered low initial rates on the loans, often referred to as "teaser" rates. Of course, most of these loans had adjustable rates as well, and those low introductory rates soon reset into much larger payments.
Long story short, many of those homeowners could not afford the steeper mortgage payments each month, and legions of them went into foreclosure. This is why we've had record numbers of home foreclosures over the last few years.
When all of this "easy lending" was taking place, the federal government mostly turned a blind eye and ignored the warnings of economists. After all, the mortgage companies are powerful lobbyists that contributed large sums of money to the campaigns of George W. Bush, Arnold Schwarzenegger, and other political decision makers.
But these days, in light of the mortgage meltdown (that was much predicted) and all of the economic havoc it has caused, the federal government has changed its "out of sight, out of mind" strategy. Now the government is tightening restrictions on mortgage lenders, particularly in the area of subprime loans. In fact, many of the subprime giants of the 90's have since gone out of business. Their business model is no longer viable!
If you are planning to buy a home in the near future, this has everything to do with you. Basically, it means that you will need a higher credit score for home buying today than in the past.
The exact score you need to quality for a loan will vary from one lender to the next, from one state to the next, etc. But it's important to realize that there's a big difference between qualifying for a mortgage loan and getting a good rate on the loan. For example, you might get approved for a mortgage with a credit score of 580. But you certainly won't get the best rate with that score. This means you will pay more each month as long as you keep the loan.
A couple of years ago in 2006 (according to the figures presented by Jean Chatzky), you could have elevated your score by just 40 points to qualify for the best interest rates -- i.e., you would boost your credit score from a 580 to a 620. Today, however, you would have to increase the score by 180 points (from 580 to 760) to qualify for the best rates. That's a huge difference!
Here's the gist of all this...
The home buyers of today need a higher credit score for home buying than the buyer's of, say, three or four years ago. The federal government is putting more pressure on lenders. The mortgage lenders are scrutinizing borrowers. And borrowers are under increased pressure to have good credit scores for home buying purposes.
It's not going to change anytime soon. So if you fall into the bad credit range, my advice to you is this: Do not buy a home until you get your financial "house" in order. Even if you do get qualified with a low credit score, you are going to pay a huge amount of interest on the loan (especially in light of recent events). So instead of rushing out to buy a home before you're financially ready, focus instead on improving your credit score.
A few days ago, I was watching Jean Chatzky on the Today Show. She is the financial editor for the show, and she confirmed something that I already knew:Home buyers today need higher credit scores for home buying than they did a few years ago. And if you want to get the best interest rate on a loan, you will need a significantly higher score than only two years ago.
We will get into the specifics of how this happened soon enough. But first, let's look at the numbers presented in this recent report.
Specifically, Jean was explaining the credit score you need to qualify for the best mortgage rates when buying a home. Here is how she broke it down:
- May 2006 - Needed a credit score of 620 to get the best rates.
- May 2008 - Need a score of 760 to get the best mortgage rates.
That's an increase of 140 points, which is a significant difference when you consider that the credit score range only goes from 300 - 850. Why is the best-case scenario so hard to reach these days? Let's take a closer look...
Why Did This Happen?
Why do buyers need better credit for home buying today? What has changed? To answer these questions, we must understand the history of the subprime mortgage crisis that came to a head in late 2007 (and of which we are still feeling the effects today). Here is a "nutshell" version of what happened:
Through the 1990's, a lot of mortgage lenders were offering subprime mortgage loans to borrowers with bad credit scores -- the type of credit score that normally wouldn't suffice for home buying and mortgage approval. The lenders offered low initial rates on the loans, often referred to as "teaser" rates. Of course, most of these loans had adjustable rates as well, and those low introductory rates soon reset into much larger payments.
Long story short, many of those homeowners could not afford the steeper mortgage payments each month, and legions of them went into foreclosure. This is why we've had record numbers of home foreclosures over the last few years.
When all of this "easy lending" was taking place, the federal government mostly turned a blind eye and ignored the warnings of economists. After all, the mortgage companies are powerful lobbyists that contributed large sums of money to the campaigns of George W. Bush, Arnold Schwarzenegger, and other political decision makers.
But these days, in light of the mortgage meltdown (that was much predicted) and all of the economic havoc it has caused, the federal government has changed its "out of sight, out of mind" strategy. Now the government is tightening restrictions on mortgage lenders, particularly in the area of subprime loans. In fact, many of the subprime giants of the 90's have since gone out of business. Their business model is no longer viable!
How This Applies to Home Buying
If you are planning to buy a home in the near future, this has everything to do with you. Basically, it means that you will need a higher credit score for home buying today than in the past.
The exact score you need to quality for a loan will vary from one lender to the next, from one state to the next, etc. But it's important to realize that there's a big difference between qualifying for a mortgage loan and getting a good rate on the loan. For example, you might get approved for a mortgage with a credit score of 580. But you certainly won't get the best rate with that score. This means you will pay more each month as long as you keep the loan.
A couple of years ago in 2006 (according to the figures presented by Jean Chatzky), you could have elevated your score by just 40 points to qualify for the best interest rates -- i.e., you would boost your credit score from a 580 to a 620. Today, however, you would have to increase the score by 180 points (from 580 to 760) to qualify for the best rates. That's a huge difference!
Here's the gist of all this...
The home buyers of today need a higher credit score for home buying than the buyer's of, say, three or four years ago. The federal government is putting more pressure on lenders. The mortgage lenders are scrutinizing borrowers. And borrowers are under increased pressure to have good credit scores for home buying purposes.
It's not going to change anytime soon. So if you fall into the bad credit range, my advice to you is this: Do not buy a home until you get your financial "house" in order. Even if you do get qualified with a low credit score, you are going to pay a huge amount of interest on the loan (especially in light of recent events). So instead of rushing out to buy a home before you're financially ready, focus instead on improving your credit score.
Labels: Credit scores
posted by Brandon at
2:39 PM
