On paper, you'd think Teri Roberts, 32, of Chicago, and her husband would live in a McMansion, or at the very least have a home with some elbowroom. "We can't qualify for a mortgage on a cardboard box, let alone a home," says Roberts, a mother of four. That's because Roberts and her husband don't have a credit score that lenders find attractive.
In the late 1990s, both Roberts and her husband worked in the IT field and fell victim to the downfall of the dotcom industry. "For about two years, one or both of us were unemployed for months at a time," she explains. "That did a number on our credit." After years of "cleaning up" their credit scores, the couple started house-hunting early last year. "We had hit the credit score we were told we needed to qualify for a mortgage. But unfortunately, the economy sent the target number up nearly 100 points." So, even with relatively little debt, a so-so credit score, and handsome, six-figure salary, the couple, their four children, and pets (a dog, cat, and bird) are packed into a 1,000-square-foot rental. "It's frustrating, to say the least," she says.The Magic Number
Sylvia Phillips Currin, a mortgage account executive at Crescent State Bank in Raleigh, NC, says Roberts isn't alone. "In the current landscape, your credit score is everything," she explains. It doesn't just dictate your ability to qualify for a mortgage. Your credit score just might determine if you're able to build a dream home or purchase a brand new home. Your credit score can affect the type of program you'll qualify for, and whether you'll be eligible for incentives offered through a builder or realtor," Currin says.
In most cases, the same rules apply when building a new home or purchasing an existing one. "Both require things like a history of stable employment and the ability to pay a mortgage to obtain financing," says Drew Kessler, director of sales for Rand Mortgage in Rockland County, NY. And both also require a good -- maybe even great -- credit score to get your hands on the keys to a new home.
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If your credit is shaky, building a home or purchasing a brand new one from a builder might be a challenge. "Many builders use their own mortgage company," Kessler says. However, Kessler says those companies may not have the flexible guidelines that FHA or other lenders have, "and that might leave a lot of people unable to qualify for 'builder's financing' plans."
The latest survey taken by the National Association of Home Builders indicates that 56 percent of builders are now offering incentives, up from about 45 percent a year ago. In an effort to unload inventories and spark new construction, builders are offering to pay two years of property taxes and insurance or several months of mortgage payments. Other popular incentives include basement and garage upgrades, upgraded appliances and flooring, and the addition of pools. Plus, 15 to 20 percent off the purchase price is being given in many areas.
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The catch: If your credit isn't high enough to qualify for these incentives, it could wind up costing you hundreds, even thousands, in extras that you could have received "for free," or it locks you out of living in a brand new home altogether. According to Kessler, many builders want nothing but hassle-free transactions. "That usually requires a credit score of at least 720."
Currin adds that in addition to appliances and upgrades, "there are sometimes special financing programs available for new and existing homes." The most obvious incentive is the rate, something she notes is reserved for those with the best credit, a score of more than 740. "The rate you see advertised at a bank assumes the best credit possible for a conventional mortgage. If your score is below 720, the rate goes up."Experts agree that if your credit has taken a few hits in the past year or two, or is under 720, opting for an existing home might be your best bet. "Those transactions usually have more flexible financing," says Kessler.