Low Credit scores as we all know can impact your ability to receive loans, so what can we do about it? You need to raise your score 100 points overnight? Whoah, is it possible or not?
Unless you win lotto it’s not likely to happen, but you can change things.
“Is it in any way possible to jump from a 530 to a 630 in under 6 months? I want to get a home loan and buy a house”
This is a question we are seeing more and more of lately and they are starting to give me a flash back to 2005. Rolling Stone had the top song of the year and in 2006 it was a song called “Crazy”. Very appropriate as this is when the sub-prime market started to unravel and fall apart at the seams.
In July 2009, people are scrambling to take advantage of low house prices – down 20-30% – in some areas, and low interest rates. This means people are starting to say, “the hell with my low credit score, I want to buy a house now”. People with 600 type scores are looking to buy! A few months ago, the lenders would have scoffed, but what happens if the lending starts to flow more freely?
Here’s the math a potential buyer needs to consider: if you buy a house today with a 620 credit score, on average, you are probably going to get a rate of 6.55% for a $300K mortgage 30 year fixed. If you had a 760+ you might be able to get a 4.980% rate.
So what if you wait? Let’s say interest rates rise a full percentage point. Now that 760+ credit score would get you a 5.980% rate. So, if you could raise your credit score to the top tier, you’d still be better off – if prices don’t change.
Will home prices change? Many economists don’t think so. I saw a market study that shows that prices are going to be stable in most markets for the next five years.
To the folks with low credit scores, I have three pieces of advice:
- Get your credit score higher. How? Pay on time, and lower your amounts owed. Wait until your credit score improves to consider home ownership.
- Use a true home cost calculator to show yourself you can afford it.
- Prove you can afford it, by paying into savings that money for several months. If you don’t have to go into credit card debt to afford the house, maintenance, taxes, and so on, then you can feel you can proceed. Use a service like Smarty Pig to set up a savings goal to prove you can save the difference.
For people with great credit AND a big savings account for 20% down, this is a great time to buy a house. If you start to hear things like “we can work around this item in your credit report”, you should feel like you are back in 2006. That’s where you should catch yourself and be honest with yourself. Don’t chase a train just because your neighbors are doing it. Figure out what’s right for you and be smart. Home ownership is great, but it’s not for everyone at every moment in time.
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