Buying a House in the New Economy - Advice For Buyers

by Brandon Cornett

Jean Chatzky, the financial editor for the Today Show, was on TV recently to talk to consumers about their credit scores. She confirmed something I already knew, but backed it up with some eye-opening numbers.

Specifically, Jean was explaining the credit score you need to qualify for the best mortgage rates when buying a home. Here is how she broke it down:

* May 2006 - Borrowers needed a credit score of 620 to get the best rates.

* May 2008 - Borrowers needed a 760 or above to get the best rates.

That's an increase of 140 points, which is a significant difference when you consider that the overall credit range only goes from 300 - 850.

Recent Economic Changes

Credit has always been important when buying a house and applying for a mortgage loan, but today it's more important than ever. To fully understand the reasons for this, we need to look back over recent economic changes.

The subprime mortgage "meltdown" that started in 2007 caused widespread economic changes that we are still seeing today in 2008. Many lending institutions went out of business, and thousands of Americans lost their homes due to foreclosure. This caused a general tightening of credit that affected consumers and businesses alike.

What It Means for Home Buying

If you are planning to buy a home in the near future, this has everything to do with you. As a result of these and other factors, the process of buying a house in today's market is more challenging. As I've already stated, you will need a higher credit score for home buying today than in the past, especially if you want to quality for the best rates on your loan.

Additionally, buyers with bad credit have fewer options today, because the subprime mortgage is practically extinct. This makes financial responsibility all the more important for buyers in the modern economy.

So what credit score is needed for home buying in today's economy? Well, this will still depend on the individual mortgage lender involved and their particular lending practices. But it's important to realize that there's a big difference between qualifying for a mortgage loan and getting a good rate on the loan. For example, you might get approved for a mortgage with a credit score of 580. But you certainly won't get the best rate at that level. This means you will pay more each month as long as you keep the loan.

According to the figures presented by Jean Chatzky, a couple of years ago you could have elevated your score by just 40 points to qualify for the best interest rates -- i.e., you would boost it from a 580 to a 620. Today, however, you would have to increase your credit level by 180 points (from 580 to 760) to qualify for the best rates. That's a huge difference!

My Advice to Buyers

The home buyers of today need better credit than the buyers of, say, three or four years ago. The federal government is putting more pressure on lenders. The mortgage lenders are scrutinizing borrowers. And borrowers are under increased pressure to have good credit scores to qualify for loans.

All of this is unlikely to change anytime soon. So if you fall into the bad credit range, my advice to you is this:

Do not buy a home until you get your financial "house" in order. Even if you do get qualified with a low score, you are going to pay a huge amount of interest on the loan. So instead of rushing out to buy a home before you're financially ready, focus instead on improving your credit score. Pay all of your bills on time. Minimize your debt. And start saving money -- the more of it the better.

About the Author: Brandon Cornett is the publisher of Home Buying Institute, a website for first-time home buyers with advice on credit scores, home loans, online lender quotes and more. Learn more by visiting the Institute at http://www.homebuyinginstitute.com