Poor Credit Clouds Hopes For a Bargain

By Dina ElBoghdady
Washington Post Staff Writer
Sunday, March 25, 2007

A few months ago, Mark Dozier started shopping around for a home mortgage so that he and his fiancee could move out of their apartment in Bowie and into a house of their own this fall.

But the best his mortgage broker could do for him was a loan with a $5,000 monthly payment. Even the broker advised against it.

"He was very upfront about it," said Dozier, 36, who works for a government contracting firm in Crystal City. "He said: 'This is the worst loan you can possibly get.' "

Financial planner Barry Glassman of Cassaday & Co. in McLean doubts that Dozier can do better than that today, if he can get a loan at all.

Dozier's choice of mortgages is limited mostly because of his credit score, which is the three-digit figure that lenders use to decide how likely a person is to pay back a loan in a timely manner. The more risk a person poses, the less likely that person is to get a loan with a low interest rate and favorable terms.

By that measure, Dozier is a risk. He filed for personal bankruptcy in 2000, which wrecked his credit record. A divorce later that year further squeezed his finances. Some late payments on bills since then have added to his credit woes.

Still, with the bankruptcy years behind him, Dozier was optimistic about his chances of buying a $600,000 house in central Prince George's County soon after his apartment lease ends in October.

When he spoke to Glassman, however, his hopes dimmed.

"Strongly consider waiting," Glassman told him. "You need to hold off on buying a house for another two or three years. By the time you're 40, you can be in a single-family house that you can afford."

Dozier earns about $103,000 a year. His fiancee, LaSharn Belt, is a consultant for a Web provider and earns about $65,000. Her income alone cannot support the kind of house they want.

So why the rush to buy now?

"In this real estate market, we wanted to take advantage of the fact that many [sellers] are paying closing costs," Dozier said. "Our goal is to get a mortgage around $3,500 to $4,000 a month and I could handle that payment. . . . My fiancee can handle all our living expenses."

Belt, 33, seeks other benefits, mostly psychic ones.

While Dozier has owned two homes previously, Belt has been an apartment dweller most of her life. She yearns for the comfort and security of homeownership.

"I grew up in an apartment and my parents bought their first townhome when I was 12," said Belt, who was raised in Prince George's County. "There are so many issues with apartment living. . . . We're looking to have a family soon and living in an apartment is not going to be comfortable."

That is why the couple plans to set aside $2,000 a month in savings after their wedding in May. By October, they should have $8,000. They thought that would be a decent down payment on a house.

But that is not nearly enough for their situation, Glassman told them.

"That's almost like having no money down at all," which will mean expensive financing terms for a mortgage, Glassman said. The more money down, the better the terms.

"This couple is cash-flow positive, they can actually save $2,000 a month, which is terrific," Glassman said after speaking to Dozier. They can fatten up their down payment to a much heftier $50,000 if they wait just two years after their October target date.

The benefit of having a larger down payment outweighs any savings gained from having the seller kick in closing costs, Glassman said. That's because even if the seller picks up the tab, the couple would pay 2 to 3 percentage points more on the large mortgage they would need.

Waiting a few more years has other advantages: It would help repair Dozier's credit if he is disciplined about his finances, Glassman said.

Under the nation's most widely used scoring system, called FICO, the median score is 723, meaning half of consumers score better and half score worse. The higher the number, the better the score. The maximum is 850.

Dozier's score falls below the median, at 571. It also falls below the cutoff point, usually about 660, that lenders typically use to distinguish creditworthy "prime" borrowers from risky "subprime" borrowers. Borrowers in the latter group generally pays a few more percentage points in interest on a mortgage.

Dozier can boost his score by paying his bills on time, since on-time payments make up 35 percent of a FICO score, and distancing himself from the negative information on his record. The longer Dozier stays on track, the less damaging his bankruptcy and late payments.

Most negative information on a credit report, such as a bankruptcy, has a life of seven years. For the FICO score, however, the most critical period is the most recent one to two years.

"In time, [Dozier] should be in a much better position to obtain a higher quality loan," Glassman said. "If he enters the subprime market, he's going to pay for it."

Besides, given today's lending climate, Glassman highly doubts that Dozier could get even a subprime loan. That is because some subprime lenders started toughening up their lending standards after the housing market cooled, and more borrowers began missing payments and defaulting.

For all those reasons, Dozier and Belt decided they can wait.

"Two years should pass in no time," Dozier said. "Hopefully, we'll one day be cash rich instead of house poor."