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YOUR MONEY BRIEFING

Your Money Briefing is your personal-finance and career checklist, with the news
that affects your money and what you do with it. From spending and saving to
investing and taxes, the Wall Street Journal’s finance reporters and experts
break down complicated money questions every weekday to help you make better
decisions about managing your money. Hosted by J.R. Whalen.



FRIDAY, MARCH 31, 2023

3/31/2023 3:00:00 AM
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BUYING A HOME? HERE’S WHAT TO DO BEFORE STARTING YOUR SEARCH

The process of buying a home is often filled with excitement, but also confusion
and sometimes disappointment. The WSJ’s special series “Under Contract: Your
Guide to Home Buying” aims to help buyers on their journey to securing a new
home. In the first installment, “The Money Coach” CEO Lynnette Khalfani-Cox
joins host J.R. Whalen to discuss getting your personal finances in order before
beginning your search.


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FULL TRANSCRIPT

This transcript was prepared by a transcription service. This version may not be
in its final form and may be updated.

J.R. Whalen: This is a special Your Money Briefing for Friday, March 31st. I'm
J.R. Whalen for the Wall Street Journal. It's finally spring, and for many
Americans, the season of renewal means is the season to begin the search for a
new home. We went to an open house last weekend in Denville, New Jersey where we
ran into Nick Bocci. He and his wife have been looking for a home for more than
a year.

Nick Bocci: I was a little surprised to see a 20 person line out front of the 20
or so houses I've seen in the last few months. This is definitely the biggest
line.

J.R. Whalen: Even with mortgage rates a lot higher now than they were a year
ago, Nick says the market is still really competitive.

Nick Bocci: Hope that it would decrease a little bit, but doesn't seem like it's
going to. So hopefully, I think it's just something we got to live with from now
on.

J.R. Whalen: And while the thought of stepping into your new home may be
exciting, the process to get there can be endless and frustrating, and
confusing. But it doesn't have to be, we're launching a five-part home-buying
series. We'll talk to personal finance and housing experts about finding the
best mortgage rate, avoiding common mistakes, and how the quest to buy a home
can play with your head. But let's start at the beginning, the very beginning,
even before you go scrolling through listings, ask yourself this, what can I
afford?

Lynnette Khalfani-Cox: One of the biggest challenges for people when it comes to
homeownership is that they've kind of been taught that it's only about the
mortgage payment and that equals affordability when nothing could be further
from the truth.

J.R. Whalen: My guest today is Lynnette Khalfani-Cox. She's a former financial
news journalist, author, and CEO of The Money Coach, a financial education
company. Hey, Lynnette. Thank you for being with us.

Lynnette Khalfani-Cox: Thank you for having me. My pleasure.

J.R. Whalen: So Lynnette, do people often underestimate the amount of work and
preparation that goes into buying a home?

Lynnette Khalfani-Cox: I really do think that the vast majority of Americans
underestimate not only the amount of work that it takes to go into buying a home
but what it takes to sustain that house because sustainable homeownership is
really what it's all about. We've seen, obviously in recent years through a
number of financial setbacks and recessions that we've had that foreclosures
have hit certain people, whether it's due to job losses, divorce, a whole bunch
of factors, and then not to mention the fact that home prices themselves have
become so out of reach, frankly for a lot of folks.

J.R. Whalen: All right, so let's talk about getting your ducks in order before
starting the process. Now, obviously, money's going to be a pivotal part of the
process and people might sort through their finances to figure out how much
house they can afford, but is there more within that?

Lynnette Khalfani-Cox: I do think there's a lot more than the average person
considers when it comes to weighing home affordability. Certainly, the banks are
going to give you an indication of what they think you can afford, but I'm
always telling people that that's really not the true barometer that you should
use. A bank is going to ask you about your DTI or your debt-to-income ratio.
They're going to assess your overall obligations and then come up with a figure
that they think is manageable. But frankly, the bank doesn't know all of the
rest of what's going on in your personal life. They don't know, for example, if
you plan on maybe going back to school or getting a graduate degree, they don't
know if you might be in the middle of a separation or a divorce. They don't know
if you're planning to have a baby or to add to your family. So you have to
always take into account not just the kind of nuts and bolts in financial terms
of what a lending officer or a bank says that you can afford, but you have to
also think about the stuff that they don't know.

J.R. Whalen: Oh, and the bank won't ask you the stuff that they don't know.

Lynnette Khalfani-Cox: They will ask you the basics around that. And a lot of it
is frankly tied to what they actually see on your credit report. And so when it
comes to a whole host of other things, the bank doesn't know how frequently you
eat out every month, and that's not really their concern. They don't know
whether or not you plan to travel in the summer or at any given point during the
year. They don't know what your holiday gift-giving or spending is like. So all
of those other personal or lifestyle expenditures and considerations really do
need to be taken into account when you think about your overall cost of living
and how that might impact your ability to buy and support a house over the long
term.

J.R. Whalen: Lynnette, there's one piece of economic data that buyers and
sellers focusing on, and that's mortgage rates. So let's say someone is setting
out to buy their first home, what should they know about mortgage rates?

Lynnette Khalfani-Cox: Well, for 2023, obviously the big thing is that rates are
unfortunately on the rise. Now, we've seen, of course, recent turmoil in the
banking sector, and so nobody has a crystal ball. But what we can say
unequivocally is we saw rates initially peak back in October of 2022, right
around 7%. They've come down now to maybe six and three-quarters. But overall,
the expectation is of course that rates are certainly far higher now in 2023
than they were a year ago, substantially higher. So given this, you need to be
thinking about your own economic circumstances and whether or not you'd be
comfortable getting into a fixed rate mortgage that is going to be kind of a
plain vanilla, 30 year set it and forget it, or whether or not you'd be willing
to hedge a little bit and to consider an adjustable-rate mortgage or an arm, and
whether that's right for you. I think you should also be thinking about the term
of any loan that you would consider. Certainly, not just for people who are
buying, but even those who are refinancing. You want to be thinking about, do I
want to be in the traditional 30-year note, or would a 20-year better suit me,
or even a 15-year? And again, it's going to be based on each individual's
circumstances and their budget.

J.R. Whalen: Now, the amount you're going to pay off depends on how much money
you've paid upfront, the down payment. And this is where the affordability
question often trips up a lot of people, how much money should a home buyer be
prepared to come up with in a down payment?

Lynnette Khalfani-Cox: Well, I certainly like for people to understand that it's
absolutely not a requirement that you come up with say, a traditional 20% down
payment because a lot of people think, "Well, geez, I'm never going to be able
to afford a house if I had to save up at that level." Especially given regional
variations across the country where we've topped $440,000 or so nationwide in
terms of median home prices. So if you thought about a 20% down payment, 88,000,
maybe $90,000 would be required. But again, that is not required. Depending on
the type of loan that you get, you can put down as little as three and a half
percent if you get a government insured, an FHA loan for example. But you do
need to understand what happens whether or not you go the conventional mortgage
route or the government-insured loan route. And in essence, if you do put down
anything less than 20%, then you're going to have to pay mortgage insurance in
the form of a mortgage insurance premium or PMI, private mortgage insurance. So
you can put down 5%, you can put down 10%. Many lenders will let you put down
15% of course, but if you don't have at least 20% equity when you're walking in
the door, you will have to pay essentially a surcharge every month in the form
of monthly insurance.

J.R. Whalen: So those are some ways to figure out what buying a home would cost
you, but what if your finances aren't where they need to be to make the numbers
add up? We'll talk about how you can get your financial house in order so you
can buy a real one, after the break. So you're thinking of buying a home, you've
thought about a price range, you started building up a down payment, but there's
a lot more that goes into how to afford a home than that. Here's more from my
conversation with Lynnette Khalfani-Cox. Now, you mentioned a credit report
earlier. The other important number in all this for a lot of people is their
credit score. How important is the credit score really in the home-buying
process?

Lynnette Khalfani-Cox: Your credit score is hugely important when it comes to
buying a home these days. So you absolutely want to make sure that your FICO
score is in tip-top shape. And what that means in terms of mortgage lenders is
at a minimum most want to see a FICO score of 620 points or better. That's kind
of like the bare minimum that the cutoff, and again, your FICO score ranges from
300, a lower 300, and we hope you're nowhere down near there to as high as a
perfect 850 FICO score. So 620 is about the minimum to get a yes for most
lenders, but then if you have a 700 or better FICO credit score, then you are
deemed to have good credit and you'll be able to get good loan rates and terms.
I always try to have people be in what I call the perfect credit scoring range,
which is really a 760 to an 850 FICO scoring range. And if you do fall into that
category, banks are going to fall all over themselves to do business with you,
your credit union, et cetera, they will give you the very best loan terms and
rates that are available in the marketplace.

J.R. Whalen: Well, Lynnette, people are dealing with a lot these days.
Inflation's pretty much torn a hole through people's personal finances, and they
might be struggling to keep their credit score in that perfect range or even
close to it to get an ideal mortgage rate. What steps can they take to maybe
boost their credit score?

Lynnette Khalfani-Cox: There are a number of fairly straightforward steps that
anyone can do to boost their credit score and sometimes to do so fairly quickly.
One is if you're already a renter and you have not yet made the leap to
homeownership, you can add your rental payment history to your credit reports.
Now, you personally can't do this, you have to go through a third party to do
it, but many consumers will find that they get a 30, 50, 70 point jump or more
in their FICO credit score just from adding this alternative credit data to
their credit files, the credit files that are maintained by the big three by
Equifax, Experian, and TransUnion. So adding your rental payment history is one
way to boost your credit score. You can do it with other things too, like
utility payments and so forth. Second, you should obviously make sure you focus
on paying all your bills on time every single month without fail. The number one
factor in your FICO credit score, 35% of it is based on how well you pay your
bills on time. And so you never want to have any 30-day late payments on your
credit reports because a single missed payment can drop your FICO credit score
by 50 to a hundred points. So you absolutely never want to miss any payments.
And then third, I would say lower your credit card balances. So 30% of your FICO
credit score is based on the amount of debt that you have outstanding,
specifically that credit card debt that a lot of folks are carrying. So when you
lower your credit card balances, that tends to boost your FICO credit score.

J.R. Whalen: And so whether you're adding in your rental payments into the
formula to try to boost your score by maybe 70 points, maybe you've got some
late payments and you might lose 150. That point spread in your credit score can
be a real difference maker.

Lynnette Khalfani-Cox: Absolutely. I mean, think about folks who might be at the
margins. If you were at a 700 and you had a late payment, for example, and you
got dropped down to the 620, 630/40 category. Now, all of a sudden you're in a
different credit tier and a lender is not going to give you good interest rates.
So you really do want to make sure you're paying those obligations on time. Even
being though at a say a 720, if you have good credit and you're able to boost
your credit score further, maybe by 40 points or so by adding rent payment or
other alternative credit data to your credit report, that might put you in the
very best of tiers to get the optimal interest rates that are available to
consumers in the marketplace. So by all means, do everything in your power to
boost those credit scores. I would add also, J.R. that there's one other
technique that helps in fairly short order to boost one's FICO credit score, and
that's a technique called piggybacking. And that's essentially where you get
added as an authorized user on someone else's credit card accounts. We've done
this with our adult children who are in their early twenties, added them as an
authorized user on our credit cards that we've had say for 20 years. And they
benefit by essentially kind of inherit, if you will, the good long paying track
record and history that my husband and I have on those cards, our two older kids
get the benefit of that, and that's boosted their credit scores as well.

J.R. Whalen: Oh, so sort of benefit by association.

Lynnette Khalfani-Cox: Absolutely. That's exactly how you could look at it.

J.R. Whalen: All right, so you've got the down payment, the mortgage, the
insurance, those are all big expenses that can be the difference maker when
trying to buy a home. But what other expenses should people be aware of to get a
better picture of their ability to buy a home?

Lynnette Khalfani-Cox: Well, one of the biggest challenges for people when it
comes to homeownership is that they've kind of been taught that it's only about
the mortgage payment and that equals affordability when nothing could be further
from the truth. I have an expression that I use where I say, "It's a pity that
it's not just piti." And what I mean by that is it's a pity, it's a shame that
it's not just P-I-T-I, principle, interest, interest, taxes, and insurance. In
reality, there's everything from moving costs, which can be considerable, to
furniture, to decorating a home, to repairs, to upgrades, to utility costs, and
more when it comes to navigating the homeownership process. So don't ever think
for a moment that, "Oh, I can afford the house payment. I'm good. Everything is
going to be fine." No, every homeowner can tell you you're going to have to do
some repair that was unexpected. You're going to have some unanticipated cost,
whether it's plumbing that needs to be done, electrical work, a leaky roof, or
something else. Which is why it's a smart idea if you can swing it to have a
cash reserve where you have 1, 2% or so of the value of your home put aside to
deal with emergencies, repairs, upgrades, renovations, other things that you
might want to or need to do to maintain and to keep your home.

J.R. Whalen: All right, that's Lynnette Khalfani-Cox, founder and CEO of The
Money Coach. Lynnette, thanks so much for being with us.

Lynnette Khalfani-Cox: My pleasure, J.R.

J.R. Whalen: And once you have your finances in order, it's time to find a home.
Join us next Friday for Episode 2 of Your Money Briefing's Home Buying series
where we'll take a snapshot of the current housing market, how have falling
mortgage rates shifted the balance of power between buyers and sellers, and
what's led us to the current nationwide housing shortage. We'll examine what you
can expect and what you need to know. And that's it for Your Money Briefing this
week. Your Money Briefing was produced this week by Ariana Aspuru. This episode
was mixed by Jess Fenton. Our supervising producer is Melony Roy, and our
executive producer is Chris Zinsli. I'm your host, J.R. Whalen. Thanks for
listening and have a great weekend.

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HOSTED BY


J.R. WHALEN


HOST AND PRODUCER, WSJ PODCASTS, THE WALL STREET JOURNAL



J.R. Whalen is host and producer of The Wall Street Journal’s Your Money
Briefing and Minute Briefing podcasts. He joined WSJ Podcasts in 2017 after
nearly a decade of producing news and business programming for the WSJ’s video
department. Before joining the WSJ, J.R. held positions at CBS News, CBS Sports,
HBO, the Associated Press and Who Wants to Be a Millionaire, where he was
responsible for assigning dollar values to the questions. He began his career at
WVIP-AM/FM in Mount Kisco, N.Y., as news and sports director. He is a graduate
of Syracuse University, and owns about 100 pairs of cufflinks.




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