Low Credit Score Folks Who Don’t Want to Miss Out

July 9, 2009 · Posted in News For Homebuyers

“Is it possible to jump from a 520 to a 620 in 3-5 months? I want to buy a house…”

This is a question I’m seeing more and more of lately and they are starting to give me a flash back to 2006. Rolling Stone has a top songs of the year l gnarlsbarkley ist and in 2006 it was “Crazy” by Gnarls Barkley. Very appropriate as this is when the sub-prime market started to unravel.

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, etc., then you can feel you can proceed. Use a service like SmartyPig 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.