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Question
I would like to buy a home for my family. We intend to live in it, not resell it. I am hearing mixed messages regarding whether it’s a good time to buy. Should I buy, and how can I get started? I have a bad credit history, low credit scores, and no revolving accounts to show whether I have improved on making on-time payments. Would a larger down payment make it easier to get financing? And if I get approved, would the interest rate be so high that I’d be paying for the equivalent of three houses?
Answer
If you want a house, you’re willing to maintain it, and you have the financial wherewithal to keep up the payments, then now is indeed a good time to buy.
Home prices are low. Very, very low. Those prices may indeed stay low for awhile, but that shouldn’t matter for someone planning to live in the home. I have no idea when the housing market will recover. But I do know that it will recover, which means that at some point, homes will cost a lot more than they do now. So if only for economic reasons, now is a fine time to buy a home.
Unfortunately, obtaining financing can prove more difficult than finding a good house for an attractive price. Start the process by talking to a banker about a loan. Lay out the facts for a loan officer at your own bank and find out whether you can qualify for a loan. The banker can tell you about state or federal loan programs.
These days, most banks won’t make mortgage loans with super-high rates. It’s easier and safer simply to deny the loan. A large down payment will indeed make it easier to obtain the loan. If the first bank won’t lend to you, try a couple others. But if three banks turn you down, talking to five more probably won’t make a difference.
If the loan officer says “no,” then take some steps to make it easier for her to say “yes” next time you apply. It took some time to mess up your finances, and it will take some time to fix them up. If you have a bankruptcy or a 90-day-late payment on your record, you may need a year or more to reinvent yourself financially.
Still game? Here are a few ideas:
Pay your bills on time. Every bill, every time. This is the most important determinant of your credit score, and probably always will be. Limit your use of credit. Banks prefer customers who have access to credit lines, but they get nervous when you tap into more than one-third of that available credit. Don’t cancel old accounts unless you have more than a half-dozen – but don’t borrow against them, either. Obtain a copy of your credit report, preferably from all three of the major credit bureaus. The Federal Trade Commission makes it easy to request free copies. If you find inaccurate information on the report, contact the credit bureaus and insist that they fix it. Avoid credit-repair scams. Nobody can salvage your credit better than you can do it yourself, simply by changing the way you manage your money. Any business that claims it can remove accurate negative information from your credit report is telling you a fib. Pay off consumer debt as fast as possible. Yes, lenders prefer borrowers with existing credit. But if you owe finance companies or other institutions that lend money with nothing down, those lenders are less impressed. Address past credit problems. If you have past-due debts, ask the creditors or collection agencies to mark the accounts “paid as agreed” or with similar language. Get these agreements in writing, as collection agencies are notorious for forgetting about quid pro quo after they receive payment.
Limit your spending, pay your bills before they come due, and diligently pay off your existing debt to lower your debt-to-available-credit ratio. Your credit score will improve over time, as will your chance of obtaining a mortgage loan.
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