Credit score is king; you should have a 740

By Emily Ford

eford@salisburypost.com

Having an excellent credit score is crucial when buying a home, bankers told Catawba College students.

“I can’t emphasize it enough — in today’s environment, credit score is king,” said Bob Setzer, vice president for mortgage lending at F&M Bank. “You are going to have to have a very, very good credit score to qualify for the best loan.”

Three years ago, a score of 620 would have obtained an excellent interest rate on a mortgage, Setzer said. But since the economic crisis, people who have scores of less than 660 may be declined for any mortgage, he said.

Potential homeowners need a score of 740 or above to get the best interest rates. Paying bills on time is one of the best ways to maintain a high credit score or improve a low one.

Mortgage lenders also will consider an applicant’s debt-to-income ratio, Setzer said. Monthly house payments should not surpass 25 percent to 30 percent of monthly income, and an applicant’s total debt (including credit cards) should not surpass about 36 percent of monthly income, he said.

Lenders also rely on an appraisal of a home’s value to determine an interest rate for a mortgage.

“We have seen a definite decline in values over the last couple years,” Setzer said.

The decline has been greater in the upper end, with homes worth $500,000 and more decreasing as much as 20 percent to 25 percent in value, he said. Values of homes under $200,000 have decreased but not as significantly, he said.

“I would say that without question it’s a buyer’s market right now,” Setzer said.

Lenders will consider income, work history, stability at a residence and more when considering whether to approve a home loan, said Pamela Abernathy, assistant vice president for mortgage banking at F&M Bank.

“We basically look at your life history, your life story, when you apply for a mortgage,” she said. “This is the most major purchase of your life.”

When comparing rates between lenders, Setzer said applicants should ask about closing costs, origination fees and discount points to insure they are comparing apples to apples. He encouraged students to consider buying a home if they plan to stay in it for several years.

“You guys are going to be able to take advantage of housing prices at an all-time low and interest rates at all-time low,” he said. “Now is a good time to buy.”

Retired Professor Al Carter gave his students this quiz on home ownership:

1. In purchasing a home the price should not exceed:

a. Your gross income.

b. Two and a half times your gross income.

c. A loan that requires 45 percent of your gross income.

d. Two times the closing cost of the loan.

2. If your loan is $90,000 and the lender is charging 2 points on the loan, your charge is:

a. $900

b. $1,800

c. $90

d. Points are not allowed in a North Carolina loan.

3. Closing costs on a home loan include:

a. Originating fee

b. Appraisal fee

c. Points

d. All of these

e. All but one of these

4. Private Mortgage Insurance (PMI) protects the

a. Homeowner

b. Lender

c. FDIC

d. Federal Reserve

5. The monthly payment on a typical mortgage includes:

a. Property taxes

b. Home insurance

c. Mortgage payment

d. All but one of these

e. all of these

6. Mortgages to borrowers without sufficient down payment or income is:

a. Rent to buy loan

b. ARM loan at a fixed rate

c. Subprime mortgage

d. A cap loan to lower priced homes

7. You find three homes in your area have sold for a. $120,000 with 1,400 sq. feet, b. $110,000 with 1,300 sq. feet, and c. $130,000 with 1,600 sq. feet. Your home has 1,500 sq. feet. What is the estimated value of your home?

a. $116,000

b. $126,000

c. $132,000

d. None of these

8. The difference between a 5 percent and a 7 percent loan on a $100,000, 30 year loan is about $140 per month. Over the life of the loan, you paid an additional:

a. $1,600

b. $10,080

c. $50,400

d. $210,400

9. If you purchase a home for $80,000 at 6 percent interest for 30 years you will pay a total of _____ in mortgage payments:

a. $86,000

b. $172,800

c. $180,000

d. $210,400

10. The difference in the total mortgage ($75,000) payment between a 6 percent 30-year loan and a 15 year 6 percent loan is how much over the duration of the loan:

a. $30,000

b. $38,000

c. $49,000

d. $58,000

Answers:

1. B

2. B

3. E

4. B

5. E

6. C

7. B

8. C

9. C

10. C.

Contact reporter Emily Ford at 704-797-4264.