Navigating the credit minefield

Posted on 08 Jan 2009 at 10:43am
By Rich Lopez | lopez@dallasvoice.com
Jeff Updike

Buying a house can be a scary thing. It requires getting a lot of ducks in a row before heading into years of monthly payments and sometimes that’s not so easy.

And with today’s tighter lending restrictions, that would apply to a lot more people than ever before.

"Buying a house is most everyone’s biggest transaction in their lives," Jeff Updike says.

For those with great credit, it is still fairly easy to move forward with home buying just not as quick. Approval was just a mouse click away and three days later a payment plan was getting started. It’s a bit more formal now — and that’s a good thing.

"Some new consumer disclosure laws went into effect last month and now it’s about 20 days at the shortest. I think there are a lot of benefits in doing that because it provides good consumer protection," he says.

Protection that saves the buyer from missing out on some of the fine print details as well as from disreputable lenders looking to get things done quickly.

But for everyone else, including the good credit people, Updike says first and foremost to resolve all credit issues, no matter how small.

"Make the minimum payment on everything. Period. Proactively reduce credit card debt and pay on time without fail. And don’t fall for traps where lenders offer to reduce your credit line," he says.

Credit line reduction may sound like a godsend but it only increases the debt ratio. According to Updike, debt should be less than 50 percent of the limit. That alone can immediately improve a credit score by several points.

That’s just the starting point.

"People with bad credit struggle for the next 18 months. Buyers with a credit score below 620 will struggle to find a mortgage that makes sense for them to do," he says.

For those who have declared bankruptcy, lenders won’t even consider giving a loan for two to five years out. Despite the positives of credit counseling, it can detract from a buyer’s potential. Lenders see these as people who demonstrated they couldn’t manage their finances. Lenders will wait to see how it is turned around.

It may sound like the odds are stacked against anyone with a blemished record but it’s not impossible to become a home owner.

"It used to be strongly credit score based but now, lenders will look at loans from a layering of risk. A consumer may have 680 score—at their job for a year — make a good income — but has high debt. These are layers of risk," Updike says.

What that means is there are ways of still looking good to a lender. A long tenure at the job is favorable. Cash in the bank is considered one of the strongest points by lender. 401(k)s are easily built up because employers tend to match contributions when offered through their company.

"Home buying is hard to understand and to get details right all the way through. Find a Realtor but look for longevity to indicate stability," he says.

This will keep the new buyers from some of those scarier lenders out there. An established Realtor will have viable relationships with lenders. That’s plural because people still have to do their research.

"There is a strong value between good lenders and good Realtors. A good Realtor should refer you to their best lenders so go to at least three different ones," Updike says.

That alone is one big step through that credit minefield.

This article appeared in the Defining Homes magazine presented by Dallas Voice on October 9, 2009.

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