Your Credit Score

When she read that I was talking about buying or building a house, Foundry reader Ethel mailed me and asked if she could write a guest post about an important elephant in the room when making a large purchase: your credit score. Ramit Sethi from I Will Teach You To Be Rich points out that a bad credit score will cost you tens of thousands of dollars over the course of even a modest mortgage.

Take it away, Ethel…

——————————————

Why it’s Frugal to Build a Better Credit Score

A good credit score can make it easier to secure loans and get better interest rates, but what many don’t realize is that a bad credit score can hit your wallet in ways you are not aware of. Besides having to pay higher interest rates on loans and mortgages, a poor credit rating can cause denial of employment, higher insurance premiums, or paying a higher security deposit when renting a house or apartment. Cell phone companies may even require those with a low credit score to pay a security deposit of as much as four or five hundred dollars before they can open an account.

What is a Good Credit Score?

Most credit reporting agencies use what is known as the FICO (Fair Isaac Corporation) model or a version of it to calculate your credit score. Various factors such as your bill payment history, the types of credit you have, the length of your credit history, and recent borrowings are considered in its calculation. A “good” credit score, according to Experian, one of the major credit reporting bureaus in America, depends on the system used by your lender. Most credit scores fall in the range of 600 – 750, and the average score for the United States is around 720. Generally they say, a score of 700 or above suggests that you manage credit well.

How to Improve Your Credit Score

There are several steps you can take to improve your credit score if it’s on the low side. One of the most effective methods is to pay off any outstanding bills and continue to pay them on time in the future. Your history of paying bills makes up 35% of your credit score, so making timely payments can raise it quite quickly.

Another effective way to raise your credit score is through the responsible use of a credit card. If you charge only small amounts which you can pay off in full every month, your credit score will gradually rise. If you aren’t able to pay the full balance, maintaining one of less than 30% of your card’s limit is also effective. For instance, if you have a $1,000 limit on your credit card, make sure you keep the balance at around $300 or below. [ed: NEVER use a credit card if you can’t pay the balance in full each and every month.]

If you don’t qualify for a standard credit card, you can get a secured credit card. You simply deposit an amount of money with your bank, and they will issue you a card with a limit equal to the amount you deposit. You must follow the same practices as with a normal credit card, keeping your balance at below 30% of your limit, or paying it off in full every month when you can in order to increase your credit score.

Raising your credit score is really not that hard. It does require a focused plan and a bit of discipline, but it is well worth the effort it takes. Paying your bills and making loan payments on time can save you from costly penalties or late fees. For those seeking a mortgage, a healthy credit score can save you tens of thousands of dollars over the course of the loan. Why pay more of a security deposit than you need to? A little effort can go a long way, not only towards raising your credit score, but to raising the balance of your bank account as well.

Ethel Wilson is a financial and credit specialist with 12 years experience in the banking, credit scores, and financial industry.  She has advised countless clients on how to improve their credit score rating.  She now shares the best of her credit score rating information as a contributor and editor of creditscoreresource.com

——————————————

Thanks, Ethel! One thing I’d add is to check all 3 credit scores yearly. The official website for checking your scores is annualcreditreport.com. Do NOT use the websites that you see advertised, even if they say “free” they are for-pay services. You can also get your credit score checked for free by 3rd party sites like creditkarma.com. They “guess” your score so it isn’t 100% accurate, but it’s close enough to monitor if you’ve been the victim of identity theft, between your yearly official credit check-ups.

Build? Buy? Buy, then rebuild? (Squat without buying, then prison?)

Once we realized that buying a ready-to-live-in home was just one of many options for us, we soon realized just how many options we have. We’re literally still thinking of new ways to attack the “where are we going to live?” problem. This blog post is an attempt to capture each idea, along with its pros and cons.

0. Buy the house we’re currently renting

Our landlord has repeatedly offered to sell us his house. Just getting this one out of the way first, as Mrs Foundry has already veto’d it.

Pros: no moving. Cut out middlemen to decrease sale price. We’re very aware of the house’s shortcomings
Cons: it’s on a busy street. We’re very aware of the house’s shortcomings.

1. Buy a house that’s ready to live in

This one’s pretty obvious since it’s what most people do. You buy a house that’s been kept up well and/or remodeled recently so it doesn’t need much additional work put into it.

Pros: move in right away. No getting your hands dirty.
Cons: more expensive. No customization. Someone else reaps the sweat equity of remodeling the home.

2. Buy a fixer-upper

Perhaps this one gets the silver medal for obviousness. I haven’t seen too many fixers on the market, but it’s something to consider. I could see us moving into an outmoded—yet functional—house with good bones (picture green shag carpet and harvest gold countertops) and remodeling room by room. We could do many things ourselves and pay to have professionals do the rest.

Pros: move in soonish. Don’t have to start from scratch. A remodel is easier to get permits than new construction.
Cons: fixers are actually pretty expensive. Don’t get to pick the floorpan. Depending on the condition, living in a fixer is probably stressful.

3. Buy a too-small house and add an addition

Mrs. Foundry thought of this one last night. For instance, we could buy a small rambler and plop a 2nd story on top of it. Probably easier said than done. There are lots of combinations of existing homes and possible additions (build into the back yard, build a 2nd story, build a tree fort with a zipline into the house)

Pros: Expands the selection of homes to choose from. Potential cost savings? A remodel is easier to get permits.
Cons: Have to work around the constraints of the existing structure. Potentially time-consuming.

4. Buy a teardown

Buy Bob’s Crusty Shotgun Shack and host a sledgehammer party. Then, see Option 5.

Pros: doens’t matter what the house looks like as long as the lot is nice and foundation is solid. Companies like Re-Store will pick up demolished materials for a tax write-off. There’s already a foundation, utility connections, etc. Building the new home could be considered a remodel, which is easier to get permits for.
Cons: extreme shortage of these. I think I’ve seen a total of two teardowns on the market in the past four months. You still pay for the value of the house, and then pay again to have it demolished.

5. Buy land

Like Option #4 without the sledgehammer party.

Pros: don’t have to pay for demolition. Can start completely from scratch. Get to choose everything, a completely custom home.
Cons: shortage of vacant lots in Seattle. Need to do more work ahead of building, such as geotechnical reports and foundation. More permitting red-tape.

So it’s five options, that’s not too many, right? Wrong! Each of the options that involve building (either an addition or an entire house), also involve sub-options!

1. Stick-built

Apparently when you build a house on-site, it’s called stick-built. This is what everyone pictures when they think of building a house so I won’t go into too much detail.

Pros: everyone understands this process. Easier to get loans (compared to prefabricated, see below).
Cons: materials get damaged by weather, stuff gets stolen, can take a while

2. Prefabricated

Prefrab gets a bad rap because many people think of mobile and manufactured homes. But “prefab” simply means building some of the house offsite. The house itself can still look awesome when it’s done. Prefab includes “modular,” where the house is built 90% offsite and lifted onto the foundation. I’d call this the “legos” school of homebuilding. There’s also Structural Insulated Panels, or SIPs, which are like pre-built walls. I’d call this the “construx” school of homebuilding (remember those?). Those are just two of the many ways that some (or most) of the home can be built offsite.

Pros and cons here are less straightforward because it’s really on a case-by-case basis. Furthermore, you’ll rarely get a straight answer from professionals because most of them have skin in the game for one or the other. Proponents of prefab will tell you “you wouldn’t send a team of mechanics to build your car from raw materials in your driveway, so why do the same for your home?” Detractors will point out that for single-family homes, the economies of scale just aren’t present to make prefab a cost savings approach.

Then there’s financing. Fewer lenders are willing to make loans for prefabricated homes, so there’s less competition in the market which drives mortgage rates up. Apparently the modules are considered “personal property” until they’re installed on the lot. Only then are they considered “real property.” Personal property is riskier to lend money for (that’s one reason credit card rates are higher than mortgage rates), and banks are understandably skittish about loaning money for enormous, hundred-thousand-dollar cubes of wood that are literally trucked across the country on the back of flatbeds.

Conclusion

So there you have it. About a dozen different approaches to owning a home. We’re keeping our options open (you don’t even want to see how many spreadsheets and saved real estate searches I have going), but there will come a time where we’ll need to pull the trigger and start the journey down one of the aforementioned paths.

Anyone have experience with any of the non-traditional routes?

What if this was a blog about building a house?

Mrs. Foundry and I are on month four of a house-hunt in the Seattle area. I enjoy looking at real-estate, weighing pros/cons of various floor-plans and neighborhoods, figuring out mortgages, etc. However, it’s a time-consuming and sometimes frustrating process. For those not familiar with the parcularities of the Seattle area, we’re experiencing an unprecedented shortage of homes for sale, which is driving up prices and generally making it a less-than-awesome time to look for a house.*

We’re working with an awesome agent, Sheley, who is being patient with us, since we’re being very picky about where we spend a gajillion dollars and park our tuchases for the next few decades.

I recently got turned on to the blog A House By The Park, which details a local dot.com millionaire’s process of buying land and building a very expensive modern home. Even though we have a fraction of his budget, the thoroughness of his writing inspired me to check this option out. In addition, I have a soft spot for modern home architecture, but always assumed it was out of my price range.  Since housing is artificially inflated by low inventory, wouldn’t that make building a home a relatively cost-efficient thing to do?**

And why not blog about it along the way? I figured my blog name is already appropriate: the “foundry” being the home and the “forest” being Seattle. I can write about how we’re challenging the status quo in order to save money, which is pretty much my favorite thing to do and to write about.

So please pardon the mission creep, and indulge me while I write about buying, remodeling, and/or building a home, from identifying the property right up until moving in. Maybe some readers have experience with this already? Either way, I think we’re all in for a wild ride.

* An architect/builder friend explained that banks aren’t lending money for high-density condos, so developers are building lower-density townhomes and single-family homes. The lower density leads to less properties for sale, which leads to the classic supply-and-demand problem that isn’t unique to housing. I’m sure this is a simplified view of the situation, but it’s a more satisfying hypotheses than “nobody wants to sell their house right now.”

** This statement only applies to the house itself. Apparently I’m not the only person in town who came to the conclusion to build, as Vacant lots are also being subjected to the current mini-bubble.