Many investors have a hard time dealing withfalling stock prices but for the wrong reasons. No matter how often you preach the virtues of the buy-and-hold method, the true test of courage comes when you watch your holdings nose dive twenty percent in one afternoon.

Anyone who has been through abear market knows that it takes tremendous discipline and dedication to stick to your guns while everyone elseliquidates their holdings. Plagued by images of depression,recession, and corporate layoffs, manic Wall Street becomes a breeding ground for chaos and faulty logic. Perfectly good companies begin selling for fractions of their true value, despite a lack of change in the long-term economics of the business.

Here are three fundamental truths that will help you deal with short-term market losses.

Truth One: You own a business, not a stock

What you are holding in yourportfolio is a piece of a business, not a stock. Investors who purchase shares of stock simply because they are going “up” or are going to be the “next big thing” are essentially gamblers. They buy a commodity with the belief (rational or not) that the next person in line will pay a higher price for it than they did. The problem is, this cycle can’t go on forever, and at some point, someone is going to look around, realize what happened, and bail ship.

In order to be a successful investor you must do two things. First, remove all emotions from each of your financial decisions. Romeo and Juliet were terrific lovers, but not very logical people (and look where that got them). Letting yourheart and emotions impact your actions is foolish in most circumstances, deadly ineconomic ones. Second, learn to separate the underlying business from the stock price; they are not the same thing (read that again). You’ve heard it said a million times;even a great company is a lousy investment if you pay too much for it.

Home buyers who are seeking a mortgage find out early-on that their credit score plays an important part in the home buying process and in determining the interest rate that a lender offers.

What is a credit score?

A credit score is a number that lenders use to estimate risk. Experience has shown them that borrowers with higher credit scores are less likely to default on a loan.

How are credit scores calculated?

Credit scores are generated by plugging the data from your credit report into software that analyzes it and cranks out a number. The three major credit reporting agencies don’t necessarily use the same scoring software, so don’t be surprised if you discover that the credit scores they generate for you are different.

Why are credit scores sometimes called FICO scores?

The software used to calculate a great number of credit scores was created by Fair Isaac Corporation–FICO.

Which parts of a credit history are most important?

The pie chart above right shows a breakdown of theapproximate value that each aspect of your credit report adds to a credit score calculation. Use these percentages as a guide:

35% – Your Payment History
30% – Amounts You Owe
15% – Length of Your Credit History
10% – Types of Credit Used
10% – New Credit

Your Payment History Includes:

• Number of accounts paid as agreed
• Negative public records or collections
• Delinquent accounts:
  1. total number of past due items
  2. how long you’ve been past due
  3. how long it’s been since you had a past due payment

What You Owe:

• How much you owe on accounts and the types of accounts with balances
• How much of your revolving credit lines you’ve used–looking for indications you are over-extended
• Amounts you owe on installment loan accounts vs. their original balances–to make sure you are you paying them down consistently
• Number of zero balance accounts

Length of Credit History:

• Total length of time tracked by your credit report
• Length of time since accounts were opened
• Time that’s passed since the last activity
• The longer your (good) history, the better your scores

Types of Credit:

• Total number of accounts and types of accounts (installment, revolving, mortgage, etc.)
• A mixture of account types usually generates better scores than reports with only numerous revolving accounts (credit cards)

Your New Credit:

• Number of accounts you’ve recently opened and the proportion of new accounts to total accounts
• Number of recent credit inquiries
• The time that’s passed since recent inquiries or newly-opened accounts
• If you’ve re-established a positive credit history after encountering payment problems
• In general, checking to make sure you aren’t attempting to open numerous new accounts

Credit scoring softwareonly considers items on your credit report. Lenders typically look at other factors that aren’t included in the report, such as income, employment history and the type of credit you are seeking.

What’s aGood Credit Score?

Credit scores (usually) range from 340 to 850. The higher your score, the less risk a lender believes you will be. As your score climbs, the interest rate you are offered will probably decline.

Borrowers with a credit score over 700 are typically offered more financing options and better interest rates, but don’t be discouraged if your scores are lower, because there’s a mortgage product for nearly everyone.

Here’s an look at credit scores among the US population in 2003:

Up to 499: 1%
500 – 549: 5%
550 – 599: 7%
600 – 649: 11%
650 – 699: 16%
700 – 749: 20%
750 – 799: 29%
Over 800: 11%

Bad Credit Report

Does your credit report tank? If yourFICO score is below 620, you’re not going to receive a good interest rate for a loan and, in fact, that kind of score could dump you into the hands of apredatory lender. Not a good sign.

• If you want tobuy with bad credit, you should work on fixing it before applying for a loan.
• Four late payments is enough to disqualify you from obtaining a loan.
• You can order yourcredit report free online.

High Debt Ratios

Lenders consider two ratios: front-end and back-end. The front-end is your mortgage payment, plus taxes and insurance divided by your monthly salary. The back-end adds your monthly debt payments to your PITI payment before dividing that total figure by your salary. A 50% debt ratio is a high ratio. A highdebt ratio means you may not qualify for the loan. If you should find an unscrupulous lender that is willing tofund such a loan, you may not be able to afford to feed yourself, even if you eat dirt.

Job Instability or Relocation

How secure is your job? A high-rolling Sacramento buyer purchased a home in Midtown. His mortgage payments were $3,500 a month, which was a lot for a 25-year-old. However, that payment was affordable while this guy was earning an annual $120,000 salary. But when he lost his job, he also lost his home toforeclosure.

• Is Your Job in Jeopardy?
  Is your company laying off? Could you be fired and, if so, how hard would it be to get another job right away? Unemployment compensation is rarely enough to cover mortgage payments.
• Relocation.
  Are you likely to be transferred to another city within the next two to three years? If you had to sell due to a job transfer, your property would need to appreciate at least 10% to cover the cost of selling; otherwise, you would lose money on the sale. When you buy a home, you should plan to stay put for a while.

Maintenance Issues

All homes require upkeep and maintenance. Not everybody has the where-with-all, much less the desire, to tackle home repair projects. In addition, many first-time home buyers can not afford to hire a professional to fix things that break. Experts suggest you set aside 5% of the purchase price to cover maintenance and repairs when you buy a home.

When Renting Costs Considerably Less

If your mortgage payment would be triple the amount (or more) you would pay for rent, it might not make financial sense for you to buy. For example, if it would cost you $2,000 a month to rent what would cost you $6,000 per month to own, does it make sense to pay $48,000 a year more to own a home?

If you are in a 30% tax bracket, you might not come close to recouping the difference you paid. Say your deductible expenses are $5,000 a month; 30% of that is only $1,500, which would be your true tax savings per month. Would you spend $6,000 to save $1,500? For more information, please consult a tax accountant or CPA.

After you have determined how much home you can afford, it is time to shop for the right mortgage. Since you are likely to be financing a loan for hundreds of thousands of dollars, it is crucial that you make a smart decision. A bad mortgage can significantly affect your finances over time.

The good news is that there is a type of mortgage available for almost every situation. The bad news is that choosing the wrong one can cost you tens of thousands of dollars in interest over the term of the loan. The most common loans come in two styles: fixed and adjustable interest rate loans.

A fixed interest loan will provide stability for you. The interest rate wont change for the life of the loan, so your payments remain stable. One benefit with a fixed rate loan is that if interest rates go up, you continue to pay your same lower rate. On the other hand, if rates go down, you may be paying more than the current rate, although it may be possible to refinance for a lower rate.

With an adjustable rate loan, you sacrifice some of the stability in payments for the ability of the mortgage to adjust with prevailing interest rates. When interest rates are going down, this is can be to your benefit. But when rates are increasing, you can find yourself with a higher monthly payment.

The Down Payment

In addition to understanding what type of loan to look for,you should consider the down payment. In a traditional mortgage, you would provide a down payment of twenty percent or more of the price of the home. Twenty percent is the magic number because for most lenders, this is the amount of equity they require so that you can avoid paying PMI, or Private Mortgage Insurance.

When you are unable to put twenty percent down, the lender generally requires that you also pay the PMI premium, which can be anywhere from twenty dollars to a few hundred dollars each month. When shopping for a mortgage, take this into consideration and ask if there are alternatives to paying PMI if you will be unable to come up with the full down payment.

Another thing to consider is the potential to actually lose money on the house. While over time real estate has generally gone up in value, there are times when the real estate market stays relatively flat or actually declines. Depending on thecosts associated with the sale and the actual amount you sell the house for, you could lose money.

Finally, buying a home is a long-term proposition. When you rent, you may only be bound to a month-to-month or annual lease, so picking up and moving can be done on relatively short notice. Once you buy a home, it isnt as easy to just pick up and move. You have a significant financial obligation, and the process of selling a home may take several months to complete.

So, when you are buying a home, take the time to understand the benefits and drawbacks, and make sure you are doing it for the right reasons.

Determine How Much Home You Can Afford

If you have decided that buying a home is right for you, the first step is todetermine what you can afford. One of the common guidelines to use is the debt-to-income ratio. Most lenders suggest that your total debt-to-income ratio should not exceed 36%, and your mortgage debt alone should be less than 28% of your monthly income.

To calculate your personal debt-to-income ratio, first add up your total monthly gross income. Once you have that figure, multiply it by 36%, or 0.36. This number is the maximum amount of monthly debt payments you should have, including your mortgage.

Next, add up all of your current monthly non-mortgage debt payments and subtract it from the previous total you just calculated. This number will give you an approximate maximum mortgage payment you can afford. Ideally, this amount should be 28% or less of your monthly income.

Even with these guidelines, it is important to remember that your personal situation will ultimately dictate what you can truly afford, so take all aspects of your situation into consideration.