When the bottom dropped out of the market in 2009, people became more careful about spending and accumulating debt. But once the economy started improving, consumers felt more comfortable about spending. Now, eight years later, we are seeing a return to our less careful days of money management. In fact, we’re setting new records of debt.
In June, Americans officially logged their highest collective debt in history. Of the $1.021 trillion in outstanding revolving credit, $1 trillion of it is credit card debt. This tops the previous record of $1.020 trillion, back in the carefree spending days of April, 2008.
Yikes! What does it all mean in the world of mortgages?
For one thing, it could effect your ability to secure your mortgage. According to a recent report, credit card delinquency is up to 4.4% and may be trending toward the 8% or more reached during the recession.
This is a wake-up call to consumers and specifically homebuyers. With more access to credit cards, people are spending money they don’t have and paying a major price for it, both literally and figuratively.
When I work with homebuyers, I look for three things: Credit, Cash and Capacity. Let’s start with credit. Lower credit scores, combined with the loan-to-value ratio, can affect the interest rate that you’d be eligible for. If your credit is not stellar, buying a home is not impossible, and this is where working with me can make a big difference in your homebuying experience.
When it comes to cash, I encourage buyers to make sure they have a cushion beyond the purchase to replace and/or upgrade parts of their home, whether it’s the air conditioning, a new bathroom or an unexpected but necessary home improvement project.
Finally, and perhaps most important, is capacity. Have you developed a saving discipline over time that prepares you to take on your largest debt? For new homebuyers, I look at their bill-paying history from the bottom up. Starting with small monthly debts like rent and utilities; followed by credit cards and auto loans. If you’re having trouble making these monthly payments, I may advise you that now may not be the best time to buy. I feel it’s my responsibility to guide you in the right direction. If I see potential problems with making your monthly mortgage payment, I’ll let you know.
So what can you do if you’re concerned about taking on the debt of a mortgage? Pre-planning is the key. People don’t always jump right into parenthood. They start to learn to nurture at a young age. First a goldfish, then a cat, then a dog, then a baby. The same is true with homebuying. Take the time to pay down your debt and bring up your credit score. Make all your payments early or on time every month. These actions will put you in a more responsibly deserving place to take on debt you can comfortably control and pay off in a timely manner.
Ready to buy a new home or refinance the one you own? Please get in touch and I’ll be happy to answer your questions and help guide you through the process. I look forward to speaking with you.