Tuesday, May 4, 2010

Apartment Hunting

If you're about to go apartment hunting, here are some helpful hints:

1. Know your credit score
2. Know your total income from last year and the year before
3. Have $500 cash readily available
4. If you have bad credit, have your guarantor lined up
5. Be ready to negotiate

1. KNOW your credit score!

If you're dealing with a broker, one of the first questions they'll ask is "how is your credit?"

If you haven't checked it lately, or ever, you should. Refer to the post on getting your credit score.

And if you're not dealing with a broker and you work directly with the owner of the apartment, they will want to know if you have good credit as well. Chances are, anyone who rents to you will run your credit report. So you should run it yourself before you even go look at places just to make sure all is well and that there aren't any mistakes or blemishes on it.

2. You HAVE to know your total income from the past two years. Better yet, you should have a copy of your tax returns for the past two years with you when you go apartment hunting. When you have all of you paperwork ready, it makes the broker, apartment manager, or owner take a much more serious look at you and will motivate them to get you the apartment.

3. Have $500 cash available. You might even want to have it on you when you shop. If you find an apartment you like, chances are other people will like it too. And in Manhattan, apartments go fast. I mean FAST. I looked at a place last year. I liked it. I told the broker I wanted to go look at another place just to make sure. I took a half an hour to go do that. By the time I got back to the broker about the first place I wanted, it was gone. Another broker had shown up and his client took it. His client had cash and all his paperwork ready to go and his application was taken right away.

4. If you have bad credit, have your guarantor's paperwork ready to go. What does that entail? Have copies of their taxes from the last two years, including W2's. Have copies of their last two month's worth of paystubs. Have their social security number. Their drivers license number. And ALL of their contact info.

5. Be ready to negotiate. Being a real estate agent, I can tell you that EVERY company out there is willing to negotiate down on their price by $50 to $200. There was a recent article in the NY Times about how rents are starting to slowly creep back up. But landlords are still willing to negotiate. And if you're shopping in Astoria/queens for an apartment, you can negotiate the broker's fee. Lots of times they'll take 80% of a month's fee or even 50%.

In Manhattan and Brooklyn lots of brokers have access to "NO-FEE" apartments. Just ask ahead of time. If you know for sure that you don't want to pay a fee, tell them on the phone so they don't waist your time showing you places that collect a fee.

Debt To Income Ratio

Okay, another ratio you NEED to know about: Debt To Income.

What does it mean? I promise it's super easy.

You add up all the debt you have in terms of monthly obligations. Let's say you have a minimum payment of $130 on your credit card. Your car loan costs you $140 a month. And your student loan is $185 a month. That's a total of $455 a month in what's known as "debt servicing."

Now, let's say you have a monthly income of $3,200. So divide $455 by $3,200 and voila! 14.2%

When figuring out your monthly debt expenses (debt service) you do NOT include rent, utilities, cable, internet, cell phone, or any other kinds of costs.

HOWEVER: if you have a mortgage you include the monthly payment, plus interest, plus homeowners insurance, plus property taxes.... and all of those costs are usually lumped into one payment or sum anyway.

When you live in Manhattan and are about to purchase a coop to live in, most coop boards (which are a HUGE pain in the neck in some buildings) will be ok with a debt to income ratio of no more than 33%

The same is true for renters. If you are going to rent an apartment on your own.. you should know what your debt to income ratio is.

Same holds true if you plan to purchase a car and use financing to pay for it. If you're already at 33%, you may run into trouble getting financing for a car that costs a lot of money.

More to come on car and home buying in the future.

Debt To Credit Ratio

Many people would like to know what exactly is a "debt to credit ratio."

It's really easy:

Let's say you have a credit card with a line of credit for $10,000. And now let's say you owe $2,000 on that card. Assuming that card is the ONLY line of credit you have and you don't owe ANY other money to anyone else... then your debt to credit ratio is 20%.

$2,000 divided by $10,000 is 20%, right?

So, if you have three credit cards with a total line of credit of $20,000 and you owe $8,000 on those cards.. then your debt to credit ratio is? 40%

Most lending institutions would like to see this ratio be no higher than 30% as mentioned in yesterday's finance for actors post.

Raising Credit Scores

Today, as my groceries were being bagged at Trader Joe's, the checkout clerk asked what my plans were for the night. "A little reading, I think, after I cook my awesome dinner of course." "Oh? What are you reading?" "Well, I'm reading a book about entrepreneurship and another one about personal finance." "Are you an accountant?" "No, just a nerd. I'm also consulting actors and teaching them about personal finance." "Wow! Great idea!" She was intrigued. Her biggest question had to do with credit scores. "Can you raise a credit score?" "You bet!"

She wanted to know HOW does one raise their credit score. In the one minute I had left to explain it to her I gave her the most basic and important elements. "Don't borrow more than 30% of your available credit. Which means, if you have a credit card with a $1,000 line of credit, don't ever charge more than $300 dollars on it." And if you do have a balance on your card or possess any other kind of loan (car, mortgage, student) NEVER miss a payment." She thought it all sounded pretty easy. And she was right. It really is easy if you are diligent and stick to your financial plan.

A big part of your plan HAS to be making sure you never miss payments on any of your loans or credit cards or bills. If you always make payments on time, your score will do nothing but go higher. Of course, you have to obey the 30% rule on your lines of credit. Student loans are a different story. You borrow the full amount and you're still ok. Just make sure that when you're in "repayment status" that you always make your payments on time. Do you see a trend here? I'm not a fan of beating dead horses, but that's just how important it is to never miss payments.

Also, if you have several credit cards, it's not a terrible thing. Let's say you have a TOTAL of $30,000 worth of credit lines between four credit cards. If you never borrow more than $9,000 on those cards, you're credit score will remain high. HOWEVER!!! If you have one card that's WAY over the 30% rule, you could hurt your score until that card is back in the 30% range.

For a great article about credit score myths, click here.

As you can see, your income does NOT affect your credit score at all.

And one thing not mentioned in the article is that the longer you have a card, the more it helps your score.

Let's say you have four credit cards. You got your first one 8 years ago, your second card 5 years ago, your third 3 years ago, and your fourth 2 years ago. So, you have four cards and total of 18 years. That's an average of 4.5 years of credit. If you never use the first card that you got 8 years ago and decide to cancel it, your length of current credit (or credit history) goes down to an average of 3.3 years... thus reducing your "credit history" or length of time you've had your accounts. The lower the number for your credit history, the lower your score. So? Keep that old card open even if you don't use it. And better yet. Use it. Once in a while make a charge on it. Every couple of months buy your groceries with it and pay it off right away... just to keep it active and to keep the line of credit where it's at. If you NEVER use a card, the card company can lower your line of credit without any notice. If that happens, it could take down your OVERALL available credit and raise your debt to credit ratio.