If you are like most of our First Time Home Buyer clients, you are researching and reading everything you can find to be certain you are prepared for the big day when you finally get the keys to your dream home! We incorporate questions in the follow up we send folks who are in the process of buying their first home… it’s our First Time Home Buyer quiz!
We use Brad and Angelina as our fictional “First Time Home Buyers” because it makes me giggle 🙂
What Happens To Your Credit Score?
Brad receives an invitation to apply for a new MasterCard offering a 0% introductory rate. After approval for a $10,000 credit line, Brad transfers his old $7,000 Visa card balance onto the new MasterCard. Brad then closes his Visa card account. What will likely happen to Brad’s credit score?
ANSWER: His credit score will go down. Because he now has more than 50% of the balance charged on his Master Card. He also made a mistake closing his Visa Account. Accounts like that should be used, maybe for a tank of gas, every 4 to 6 months. Some activity, even a little bit of activity, will help your credit score.
BIG NOTE HERE: Many of our First Time Home Buyer clients have very little credit. Some of them open Secured Credit Cards to boost their scores. There’s a new USDA Home Loan credit score guideline that says if you are an AUTHORIZED USER on a credit card account (and we’ve seen plenty of people who use this strategy to boost their scores, we might have a problem.
With the new USDA Home Loan requirements, we have to prove the following for Authorized user accounts only – for all other mortgage types, we are okay with Authorized User accounts.
USDA Loan Credit Score Requirement Authorized User Accounts
- Must Prove Borrower is making the payments on the account for the past 12 months
- Must prove that the account is jointly owned by the borrower’s spouse
- Must prove that the account is jointly owned with someone else who will be on the mortgage
- Must remove the Authorized User Account from the Borrower’s Credit Report and re-score the borrower.
Brad and Angelina found their dream home and were confident the seller would accept $200,000 for it. However, they decided to continue negotiating over the next 90 days in hopes of saving on the purchase price. Sure enough, they were right – and settled at $195,000 – a $5,000 savings.
Meanwhile, over that 90 day period mortgage rates rose by a full point. Assuming Brad and Angelina financed $180,000 in either scenario and planned to live in the home for 20 years, did they make money or lose money by waiting through the negotiation process?
They lost money… Those 90 days cost them thousands more over the long-term in higher interest rates.
What is a home worth?
Ah yes, perhaps the most esoteric and least understood question in all of real estate finance. If you ask this question to three different people, you’re almost guaranteed to get three different answers! But when it comes down to getting your home mortgage approved – only one opinion matters.
The Home Appraiser Holds the Trump Card
Once you’ve selected the home you’d like to buy – and have entered into an agreement with the seller – that’s when things really start heating up on the mortgage front. Lenders, as you can imagine, like to know that the home they’re helping you finance is worth the price you’re paying.
Appraisal Home Buyer Quiz
Brad and Angelina were thrilled to finally locate the home of their dreams – a 3BR/3BA ranch in a quiet subdivision and a great school district. Angelina loved the way the owners had decorated – they had such marvelous taste in furnishings and color schemes. Brad really liked the landscaping out front and how well the owners maintained their yard.
In fact, the owners had just recently painted the interior from top to bottom and lacquered all the hardwood floors. Brad and Angelina’s real estate agent liked the house too – especially because a similar 3BR/3BA had just sold down the street for $25,000 more than the contract price. WHICH OF THE FOLLOWING WILL HAVE THE MOST IMPACT ON AN APPRAISER’S OPINION OF VALUE FOR BRAD AND ANGELINA’S HOME?
a) The previous owner’s exquisite taste in furnishings and decor
b) The home’s exterior landscape and pristine lawn condition
c) The recent home improvements such as new paint and floor lacquer
d) The fact that the home is in a good school district
e) The fact that a similar home had recently sold down the street
If you selected “E” (comparable sale down the street) you are absolutely right! By and large, appraisers will give top consideration to comparable neighborhood home sales within the past 6 months. Aesthetic qualities such as paint color or landscaping might be important to YOU when choosing a home – but appraisers do not give much credence to “subjective” home qualities.
So, no matter how green the grass is, it’s not likely to influence the appraiser’s opinion. I might have tricked you into answering “D” – because school district is a very important factor in determining a Neighborhood’s value. But ultimately, it’s a home’s general condition along with those apples-to-apples home sales that appraisers tend to use when deciding upon a home’s value.
Should You Pay Off Collections?
First Time Home Buyers often look at their credit score before they ever talk to a Mortgage Loan Officer. This lesson is all about unintended consequences – and the importance of having an experienced and knowledgeable mortgage Loan Officer by your side as you navigate through what can sometimes be a confusing process.
Most these riddles have thrown twists and turns at you. Because it’s true – many of the rules of credit are counter-intuitive. And sometimes, even actions with the very best of intentions can result in unintended consequences.
Paying Off Derogatory Credit
Angelina is getting ready to buy a house and needs to qualify for a mortgage. After reviewing her credit report, she notices a delinquent balance to a creditor totaling $750 from three years ago. Worried about how the unpaid balance might look to a lender, Angelina immediately mails a check for the $750. What effect might this transaction have on Angelina’s credit score?
a) Angelina’s credit score will increase since she satisfied an old debt
b) Angelina’s credit score will go down as a result of this recent activity
c) This recent activity should have no impact at all on Angelina’s credit score
If you chose “B” (Angelina’s credit score would go down) – you nailed it! But how could this be, you ask? After all, Angelina was only trying to show responsibility and do the right thing! Well, Angelina’s $750 payment toward an old balance is certainly noble.
However, it could actually lower her credit score. By paying off the account, her credit report would reflect *recent activity* on this old delinquency. The recent active reporting of a delinquent account can be interpreted as a current problem, rather than a three-year old issue.
Angelina should have consulted with her mortgage loan officer to determine if paying off the old delinquent debt will be a condition for her home loan before she pays it off. The $750 may actually have been more beneficial in the form of down payment rather than paying off old accounts! Remember, credit score requirements vary based upon the type of first time home buyer mortgage program you are applying for.
If you have questions about buying your first home, and need some more First Time Home Buyer tips – please call Steve and Eleanor Thorne 919 649 5058. We specialize in First Time Home Buyer Programs, and we would love to help you buy your dream home in North Carolina!!