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Credit scores and the housing slump
It’s not often that I recommend articles (or anything else) from the local newspaper, but Rita Savard has an excellent and timely piece today about the adverse impact of credit scores on the home mortgage market. For months lawyers and others in real estate have told me of potential home buyers who’ve been pre-approved by lenders, had signed P&S agreements and have been only days away from closing only to have their financing pulled because of some blip on their credit score – something as simple as buying a new appliance on a credit card. My sense is that the credit agencies and the lenders, once so lax that all that was needed to qualify for a big loan was to be standing upright and breathing, have now gone too far in the other direction and are contributing to the current stagnation in real estate with excessively strict evaluation of risk.
Contrary to your “sense” ( or lack thereof), I believe that a ‘blip’ on a credit score is clear evidence of inability to manage one s finances – i.e., failure to pay bills on time. What better reason for a lender to reject a mortgage loan. That to me is not “going too far in the other direction”.
So Doug, when you buy a new washer at Lowe’s and put it on your charge card and your credit score changes, that’s “clear evidence of inability to manage [your] finances”?
I’m not talking about someone who defaults on payments or is otherwise clearly in financial difficulty. If the lenders had avoided handing hundreds of thousands of dollars to people in that position five years ago we wouldn’t be in the disastrous economic straights we’ve experienced for the past two years.
I’m talking about a slavish devotion to a relatively arbitrary mathematical process that is currently keeping people who are good credit risks from purchasing homes. Here’s a real world example: A guy has a $10K credit limit on his charge card and is carrying $5K of charges and has never been late on a payment and has never had a blemish on his credit record. He transfers the balance to another card and that bank decides to drop his credit limit to $5K. Well on his credit score, he’s gone from having 50% available credit usage to having 100% available usage and his credit score plummets. But what’s changed? I’d argue he’s now a better credit risk because he can’t suddenly ring up another $5K in charges but that’s not the way the system works. Suddenly, he’s no longer eligible for the $150K home mortgage he was pre-approved for and the P&S agreement he had signed falls through. That’s what’s happening these days, over and over again.
Dick – I do appreciate your perspective, but I disagree with your analysis. When you purchase anything using your credit card, you should expect that a reduction in your credit worthiness. People with good credit ratings will always be able to buy a home – if it meets the bank established criteria. Arbitrary – yes – perhaps – but real world – absolutely. Without dating myself, I struggled with qualifying or my first home – I needed 25% down of my take home pay (or 33% of my gross). I must have worked the numbers HUNDREDS of times before deciding on a lesser home than I wanted but perfectly suited to my family’s needs. And….this was before I ever had a credit card!!!.
We may have evolved to “a slavish devotion to a relatively arbitrary mathematical process”, but the alternatives suck.
Citing your example, someone with a 10K credit limit owing 5K sounds an alarm for me – especially if he/she opens a new credit card – what is this person trying to prove????.
Again, lots of room for debate here, but remember how far we have evolved from just a generation ago where people actually lost sleep when they fell in arrears.