Homeowner of the Month: Peter Christenson

Who would have thunk it? Peter is on his way to building wealth, and he only makes about $40 G's a year! His credit isn't stellar, either (Sorry for blowing up your spot my dear), but here is another Home Buying Scenario that we can dissect and use as an example of financing a Real Estate Purchase AND Refinance.

So here's what we know:
Peter's Gross Income (as opposed to Net Income) is about $40,000/yr or $3,333/mo. He has a couple Trade Lines such as a Credit Card and Debit Card. Like my earlier Article on Credit Scores mentioned, Credit Bureaus like to see 3-5 Trade Lines that have been open for 24 months or more. This is why Peter's Credit Score is not in the 700s. As for monthly obligations such as Credit Card payments and/or car payments, he has close to none, besides his monthly rent. Lenders like to see that you have been renting for a continuous period, preferably for the last 2 years, and the way they Verify that is through a Verification of Rent/Mortgage form. Lenders prefer that you can handle a huge monthly obligation like paying Rent and therefore want to be able to Verify it(have your Landlord sign a document stating how much Rent you pay, blah blah). Peter had been renting for the last year and throughout college so in that aspect, he is fine.

The fourth category Lenders look at is your Assets, which Peter had plenty of. Lenders like to see 6 months of PITI m(principal, interest, taxes, and insurance) seasoned for two months in a checking/savings/stock account for 2 or more months. Lenders want to be sure that you have some extra back-up funds to pay that Mortgage if you unexpectedly get fired or injured or have a nervous breakdown and move to Nicaragua. In Peter's case, he put $300,000 down on the house so that his remaining Loan Amount was $85,000, a 22% LTV (loan to value) ratio. Because of his significant Down Payment and low LTV ratio, Lenders will have no problem issuing him a Loan. He has a 6.5% Interest Rate on his $85,000 loan amortized for 30 years which is $540/mo. His monthly Property Taxes comes to about $400/mo and his Homeowners Insurance is about $70/mo. There is also an HOA fee(homeowners association) which is an account set aside for maintenance of common grounds or payment of utilities like water and sewer in the co-op or condominium complex. This usually runs about $100-250/mo depending on the amenities of your building. Thus, Peter's total monthly outlay is about $1160/mo, which is TADA! probably how much you are paying for Rent.

Ideally,Peter should keep his Co-Op for at least 2 years. Real Estate Tax Law(thank you George Bush) states that you can claim up to $250,000 TAX FREE PROFIT from the sale of your home if you have lived in it for 2 or more years and $500,000 TAX FREE PROFIT if you have someone else on Title (like your husband or wife). If this LAW wasn't in place, you could get taxed up to 50% of the Profits! Poo Poo Uncle Sam shame on you. Thus, for Peter to re-coup his $300,000 down payment TAX FREE, he should add his mom or dad or boyfriend or best friend on Title as Joint Tenant with established Equitable Interest in the property, which takes the form of Mortgage payments. Peter, we'll chat more about that later.

BOTTOM LINE is:If you are thinking about buying property, ask yourself a couple questions: Am I planning on living here for at least 2 years? Do I have a secret Trust Fund Aunt Sherry started for me? Will my parents lend me a couple thousand bucks for a Down Payment or at least an Escrow Deposit? Have I checked my Credit Score lately? Do I have an Investment Plan or Goals? Yada Yada, you get it. This shit takes some planning. As my Uncle Bill always says, an ounce of prevention is worth 10 lbs of cure. So start taking steps now so that when you do decide to buy, you don't get screwed by the BANK.

To see Peter's full NY Times Article, please visit the web site below:

http://www.nytimes.com/2006/11/12/realestate/12hunt.html?ex=1164085200&en=7b7b1ae81763a98e&ei=5070&emc=eta1

Your Credit Score is GOLD.

When applying for a Loan, Lender's look at 4 criteria:

Income, Debt, Assets, and Credit Score.

Now, you're probably thinking: I only make $40,000 a year, I'm knee deep in credit card debt (damn you Best Buy) and the only Asset I have is my beat up 1990 Volvo Station Wagon. Don't fret. There are tons of different loan programs out there to fit various financial situations. The most important factor is, yes you guessed it, your CREDIT SCORE.

Components of a Credit Score
Generally speaking, your credit score is based upon the following criteria in order of importance:
· Payment history (this is where delinquencies will hurt you).
· Responsibility regarding credit usage (how maxed out are your accounts).
· Credit age (how long have you had your credit accounts).
· Number of credit inquiry requests.
· Credit diversity.
These quantifiable aspects, once accumulated, typically result in a number between 350 and 850. The bottom line is the higher the number, the more likely you are to pay back the loan and hence, the lower the interest rate the lender will bestow upon you.

A Closer Look at the Players Involved
There are three separate credit bureaus which keep track of your score, Experian®, TransUnion®, and Equifax. If you've heard your score referred to as a "FICO" score it's because all three bureaus use software developed by Fair Isaac Corporation. FICO is an acronym taken from that name. It's important to know most lenders look at all three scores when making a decision on your loan, since scores can and often do vary.

Here are some Credit tips to keep in mind:
1. Pay your bills in a timely manner - Paying bills on time for one month can raise your credit score as much as 20 points. Don't be a stoner about this.
2. Control the balances on your credit cards - Maxing out credit cards can lower your score as much as 70 points. So skip the $80 bartab at 4100 Bar on a Tuesday Night and head to the Roost instead.

3. Don't open new lines of credit you don't need - New accounts lower your average account age which, in turn, may lower your score as much as 10 points. Say NO to that American Apparel Credit Card.
4. No credit is bad credit - Having a few (3-5) credit cards which you manage responsibly is a good thing. Having no credit cards will reflect negatively on your credit report. So go to your local bank or credit union, find a Credit Card with ZERO APR for the first 12 months and practice some fiscal responsibility.

5. Don't start closing accounts - Closed accounts still show up on credit reports and can lower your score. If you must, cut up that card, burn it but do not close it out! Unless you consult with a Mortgage Professional (like myself) and he/she tells you to. Then you basically do whatever they tell you. Sit. Jump. Point taken.

Improving Your Score
Now that we've explored the nuts and bolts of credit scoring, let's examine how you can improve your score. If a proactive approach appeals to you, log on to http://www.annualcreditreport.com/ and obtain a free copy of your credit report. You are allowed one free report a year. Read it, get confused, call me @ (323) 823-1246 and let's get that score up to 700. Cheers.