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The mortgage industry is imploding. High risk mortgages to high risk borrowers are becoming extinct. Credit scores will be more important than ever. There are five major factors that calculate your credit score with each factor carrying a different percentage:

- 35% Payment History
- 30% Amounts Owed
- 15% Length of Credit History
- 10% New Credit
- 10% Types of credit

Notice the first 3, that’s 80%: How you pay, how much you owe, and how long you’ve been paying carries the most weight.

Having a good credit score is a commitment. The FICO score is a solid indicator of your debt/payment habit. Rarely have I seen a borrower who takes their debts seriously with poor scores. On the other hand if a borrower has poor credit, they’ve developed poor debt/payment habits. A few years ago I worked with a couple that had poor credit. They were in a bind and relied on me to help them improve their scores. It took a few months but I helped them clean up their credit with one caveat, that the next time I pulled their credit, I would hope to see their scores improve. A year later I pulled their credit, their scores never improved. They went back to their old habit of signing up for credit cards and maxing them out.

Has the mortgage meltdown brought an awareness to how people especially the subprime borrower handle money?

The answer is NO. Instead the media and just about anyone who has an opinion has decided to blame the mortgage and real estate professionals who put them in mortgages and homes they couldn’t afford.

If you really want to understand how the average American family handles money especially debt, read this article by the New York Times entitled Couple Learn the High Price of Easy Credit. (Login required)

Rather than summarize the article, here are some of the interesting snippets:

“The Sears one is 32.24 percent,” Ms. Moellering said, reading a credit card statement with a balance of $5,955, including $155 in monthly finance charges. The high interest rate took her by surprise. “That’s nice,” she said sarcastically.

Their debt escalated when they decided to get married. They paid for rings, a reception, a honeymoon and a new bathroom — about $50,000 in a seven-month stretch. “In such a short period of time, there’s no way to do it other than credit card debt,” Mr. Moellering said.

“It’s been almost two weeks since we’ve had time to sit down and go over the bills,” Ms. Moellering said. “You can’t do it every day because we both work full time. I’ve got two kids; they want all our attention; they haven’t seen us all day. We’re trying to cook dinner. We have to do the dishes, fold the laundry. We’re exhausted. And on the weekends the kids want our attention, and we want to spend time with them; we don’t want to spend time going through the bills.”

Is this how your family handles debt?

… according to the new scoring model. I have yet to see a credit report reflect the news scores.

Credit Agencies Aim to Simplify Scoring
Tuesday March 14, 11:55 am ET
By Eileen Alt Powell, AP Business Writer

Three Large Credit Agencies Adopt Uniform Credit Score Aimed at Simplifying Loan Process

NEW YORK (AP) — The three major consumer credit reporting agencies announced Tuesday that they have created a new credit scoring system aimed at simplifying the loan process for both lenders and borrowers.The announcement by Equifax, Experian and TransUnion said the new “VantageScore” was “a direct result of market demand for a more consistent and objective approach to credit scoring.”

The agencies in the past each used their own proprietary formulas to create their own scores, meaning that a lender dealing with a consumer’s application for a credit card or a mortgage might have to reconcile three widely different scores.

With the new system, a single methodology will be used to create the scores.

“Under the new scoring system, credit score variance between credit reporting companies will be attributed to data differences within each of the three consumer credit files and not to the structure of the scoring model or data interpretation,” the agencies said in a joint statement.

It added that VantageScore “will provide consumers and businesses with a highly predictive, consistent score that is easy to understand and apply.”

Kerry Williams, group president of Experian’s credit services division, told The Associated Press that his agency was making the new scores available immediately to financial institutions and expected wide adoption, but said he did not expect the scores to be rolled out for consumers until later this year.

Credit scores are important because they measure how much debt a consumer is carrying and how well the consumer keeps up with bills.

The higher the score, the more credit worthy the consumer is considered and the lower the interest rate the consumer is likely to be charged.

The three credit agencies termed the move to a unified score as “unprecedented.”

The scores will range from 501 to 990. The top end is slightly higher than scores currently in use.

Colleen Tunney, spokeswoman for TransUnion, told a conference call with reporters and credit industry representatives that the new score was created by looking at millions of consumer files at the same time to ensure consistent readings across the three bureaus’ data.

She and spokesmen for Equifax and Experian said it was not immediately clear how quickly the new score would be adopted by lending institutions.

“Step one is we’re talking to our credit grantors as we speak,” said David Rubinger, spokesman for Experian. He said each agency was marketing the new score to its own customers.

He added: “For any score to have merit in the marketplace, all parties need to be at the table.”

Many lenders, especially those in the mortgage business, use FICO scores, which are named for the Minneapolis-based Fair, Isaac Corp. which developed them. Others use proprietary scores from the individual credit bureaus or use the bureau data to generate their own scores.

Spokesmen for Fair, Isaac could not immediately be reached for comment.

Rubinger said the new score was expected to reduce the variance in a consumer’s scores by about 30 percent compared with what it was under the old system. He gave no other details.

He said the score would reflect a consumer’s frequency of borrowing, delinquency in paying bills and other “file content,” but had no specific weights for the components.

In a separate statement, Experian said the new scores will be grouped on “the familiar academic scale.” Experian gave these groupings:

A — 901-990

B — 801-900

C — 701-800

D — 601-700

F — 501-600

Experian said it was hoped that “as consumers increase their awareness of the importance of credit scores and credit reporting, the consistency of VantageScore will provide the type of information they need to evaluate their credit standing and make sound financial decisions.”

VantageScore is being independently marketed and sold separately through each of the three national credit reporting companies via licensing agreements with VantageScore Solutions LLC, the joint announcement said. The spokesmen said that VantageScore was jointly owned by the three credit bureaus. They said it did not yet have a headquarters, although an informational Web site had been set up at http://www.vantagescore.com.

The credit reporting agencies are operated by Equifax Inc. of Atlanta, Experian Information Solutions Inc. of Costa Mesa, Calif., and TransUnion LLC of Chicago.

http://www.equifax.com

http://www.experian.com

http://www.transunion.com

Buying a home vs. renting is a big decision that takes careful consideration, as most mortgage consultants will agree. But the rewards of home ownership are great. For many years, purchasing real estate has been considered an extremely profitable investment. It is an achievement that offers a sense of pride, financial stability and potential tax advantages.

Yes, there are certain responsibilities associated with owning a home. Landlords will often argue the benefits of renting, and for obvious reason. If you are renting, you’re helping them make their mortgage payment.

The numbers are staggering if you look at it this way. If you are paying $1,000 per month for an apartment, and you know your rent will increase 5% every year, then over the next five years you will pay your landlord $66,309. If you are currently renting a house, you may be paying much more than that each month. Either way, you gain no equity by shelling out this monthly housing expense and you certainly won’t benefit when the property value goes up!

However, if you were to purchase your own home or condominium, you would be well on your way toward building equity within that same five-year period. By choosing a fixed-rate loan program, you can have the comfort of knowing that your monthly mortgage payment will never go up. In fact, you would have the option of refinancing to a lower interest rate at some point in the future should interest rates drop, and this would cause your monthly mortgage commitment to go down.

In addition to building equity, there are tax advantages that come into play with home ownership. Depending on your tax bracket, owning a home is often less expensive than renting after taxes. Interest payments on a mortgage below $1 million are tax-deductible, and your mortgage consultant should help you evaluate the tax advantages of various loan scenarios, and share this information with your tax consultant to glean feedback on your behalf.

To find the loan program that is right for you, your mortgage consultant will need to evaluate your monthly household income, current assets and savings, as well as any monthly obligations you may have for credit card payments, car payments, child support, etc. These prequalification factors, along with the report of your credit score, will determine how much house you can afford and what interest rate you will pay for financing. It is also important to let your mortgage consultant know what your future goals are, because this will help narrow down which loan option is the best fit for your long-term needs.

There are many different types of loan programs available, including “low” and “no” down payment mortgage programs. These types of programs require the borrower to provide less than 3 percent of the loan amount as down payment. FHA lenders rule that the mortgage payment, including principal, interest, taxes and insurance (PITI) should not exceed 31 percent of your gross income, and the PITI plus other long-term debt (car payments, etc.) should not exceed 43 percent of your gross income.

Housing is an expense that takes a big bite out of the monthly budget. If you are a renter and feel that “home” is more than just someplace to hang your hat, think about the advantages of purchasing real estate. It may be time to take the step into building your personal net worth as a home owner.

Consumers interested in purchasing or refinancing a home will pay an interest rate based on current market conditions and their ability to pay back the loan. The borrower’s income and debt ratios are taken into consideration by the lender, as well as the predictability factor provided by credit scoring. It’s important to have a mortgage professional in your corner that has a keen eye for solutions to improving credit scores in an effort to get the best interest rate possible.

Interest rates associated with various loan programs are broken down into schedules based on credit score ratings. While each lender has its own guidelines, it’s safe to assume that as the consumer’s credit score goes down, interest rates will go up.

A borrower with an outstanding credit rating will get what is called an A-paper loan. This type of borrower is rewarded with a lower interest rate because they have a proven track record of using credit sensibly and paying their bills on time.

Loans designed for consumers with less-than-perfect credit – sometimes referred to as “sub-prime” – can range anywhere from A-minus, B-paper, C-paper or D-paper loans.

If you have already taken out a mortgage loan with a higher interest rate because your credit score was a little under par, you will really appreciate the value in doing a little work to improve your credit score. Refinancing from a D-paper loan to a B-paper classification can save literally thousands of dollars in financing fees over time, even though the B-paper loan is still considered sub-prime.

A qualified mortgage consultant will guide you through the nuances of the process of improving your credit score to refinance and save money. First and foremost, he or she will want to review the terms of the existing mortgage loan to determine if you have a pre-payment penalty clause written into your contract. In general terms, that means that if you sell the home or try to refinance before the pre-payment penalty expires and you have not already paid off 20 percent of the original loan amount, you will most likely have to pay a 3 percent fee back to the lender to compensate for the high risk and high costs incurred to provide that financing.

Next, you should obtain free copies of your credit reports from www.annualcreditreport.com and start working on improving the credit score six months prior to the expiration date on your existing pre-payment penalty.

There are five factors that make up the credit score and your mortgage consultant can coach you through some basic strategies to improve your credit score. This means very conservative use of credit cards, paying off debt as much as possible and not applying for additional credit cards unless you will benefit from such action. You will want to verify that negative items you have paid off are being removed from your credit report, and that good credit history is being reported to all three bureaus. You’ll also want to dispute any errors that appear on your credit reports and seek to have those removed entirely.

Once your credit score improves, it’s time to refinance at a better interest rate. Your mortgage professional should look for a program that carries no more than a two-year prepayment penalty so you can continue to refinance as your credit score increases. You can repeat this process until you reach A-paper status and secure the best interest rate available.

This is a strategy that also works well for first time home buyers who do not have enough credit history under their belt to get an A-paper loan at the time of purchase. The important thing is to work with a mortgage consultant who can give you a road map to follow and a strategy for success in building personal wealth.

A mortgage refinance is done by applying and qualifying for a new mortgage loan and then using the proceeds from the new home loan to pay off the old home mortgage loan. You can refinance for many reasons: to take cash out of the equity in your home, to lower your interest rate, to lower your mortgage payment, to simply switch mortgage companies because you are not pleased with your current mortgage company, to consolidate debt, to pay off high rate credit cards, to lower the term of your mortgage, to increase the term of your mortgage, to combine a first and a second mortgage, to switch from a fixed rate to an adjustable rate, or to switch from an adjustable rate to a fixed rate, and for many, many other reasons

When refinancing in order to payoff credit card debt, keep in mind that credit cards are unsecured debts. When you refinance, you are transferring unsecured debt into debt secured by your home. Make sure you are financially savvy enough not to continue the patterns that resulted in the credit card debt or your could be putting your home at risk.

One of the most popular reasons for doing a mortgage refinance would be to obtain funds for improvements on the home. Since the money spend on such improvements often directly increases the value of the home, it is a very sensible way to obtain such funds. Some of the most popular improvements include new kitchens and bathrooms, new windows, landscaping and swimming pools.

Many homeowners are using the appreciation in there homes to get rid of high rate credit cards by consolidating. When you consolidate your loans you often reduce the amount of money your spending each month.

One of the main benefits to refinancing is to consolidate consumer debt. Consumer debt (i.e. Credit Cards ampersand Auto Payment) is typically at a higher interest rate and is never tax deductible. Interest paid on debt tied to your home is deducted from your income at the end of the year often substantially reducing your tax liability. This tax favorable status is one of the many benefits of refinancing.

Refinancing your home can save you hundreds per month when you consolidate debt.

What if you want to add on, remodel or update the kitchen? You may not have the cash to do so, but the cost of improvements may be more than covered by the increase in value of the home. This is a great use for a home equity line of credit or a cash-out refinance.

Many people refinance to change from a variable rate to a fixed one or vice versa. Refinancing a high interest rate after a 24 month good payment history could save you a lot of money on your monthly payment.

If planning to purchase investment property, refinancing your primary residence is a great way to raise the cash for the down payment required.

Always consider your long term benefits of doing a refinance. The interest rate is not the most important aspect of the transaction. Even if your current rate is lower, you will probably save more money over time with a debt consolidation refinance then you would be with maintaining the situation you are currently in. Ask yourself a few questions: How long have I had this balance on my cards? At the rate I am paying my credit card debt down, how long will it actually take to pay them completely off? What will be my total cost once I have paid off all my credit card debt?

You can refinance to switch to an interest only loan to maximize cash flow or to switch to a Pay Option ARM to provide yourself with a lot of flexibility in your monthly mortgage payment. Some people also refinance simply to get a way from their current mortgage lender because they are not pleased with them.

Another main benefit of refinancing is to get out of PMI (Private Mortgage Insurance). In most cases if your Loan-To-Value was above 80% when you moved into the home then you most likely got stuck paying PMI. Your home may have appreciated quite substantially over the past year or two and with a new lender they will take new appraised value thus eliminating PMI.

Most people refinance to because of changes in their financial situations. Some, after determining that they can afford a bigger mortgage payment, refinance to a shorter loan term to save on the total amount of interest charges. Others, after experiencing a decrease in income, may refinance to a longer term loan to take advantage of the lower monthly payments. Yet others refinance to withdraw from the equity built in their homes for other financial purposes.

Using equity in your home to pay off high rate loans (credit cards, auto loans, etc.) may have certain tax benefits also. Consult your CPA for more information.

Many homeowners refinance to pull out cash to purchase another property.

To reduce the term or length of your loan, doing so can save you thousands of dollars in interest.

Editors Note: Due to the mortgage and credit crunch, interest only mortgages are more difficult to obtain. If you’re in need of a Denver home loan contact us to discuss your mortgage options.

Paying interest only is a great way to minimize housing expenses per month. The concept of this type of payment structure is to allow you a set amount of time in which your payments will be based off of interest only. Every borrower should keep in mind that this loan will not pay down any of the principal balance during the interest only portion of the loan.

Why pay interest only - do you think you will ever really pay off your mortgage? How do you gain equity in your home? Is it from paying down your principal or more so from the market appreciation of your home? When you consider these things paying interest only and having the extra cash flow often makes good sense.

Examine every loan option with your mortgage broker before you decide on a interest only loan program. Your mortgage broker will be able to determine if the interest only option is a good fit for you. This will ensure that you are not frustrated by an uninformed decision years down the road.

Many lenders charge a small premium in order to have interest only premiums, usually 1/8th or 1/4p point. Make sure you discuss this with your mortgage broker as well.

With an interest only loan you will still build equity in your home even if you only make the interest only payments and never apply any extra payment towards the principal. This is achieved because your house is always going to appreciate and gain value (unless you live in a community with declining home values, which is not very common). Therefore, You can still gain equity in your home while freeing up cash to pay down other bills, invest, and/or just to simply put save for a rainy day.

Many people choose interest only loans to increase their cash flow and not be encumbered by such a huge mortgage payment.

With any type of interest only loan you can choose to make additional payments to reduce your principal balance. These type of loans work very well with borrowers whose income may fluctuate on a monthly basis or borrowers who know they will be receiving a pay increase in the future and want to minimize the monthly payment until they have a larger income.

Interest Only loans allow you to purchase a larger house without increasing your monthly mortgage expense and it gives you mortgage payment flexibility to better manage your monthly cash flow without deferring interest.

Paying interest only may free up needed cash flow to help make payments on an investment property you may want to purchase.

Often times a real estate investor will want an interest only loan. The low minimum payments help to increase cash flow for other purchases.

The use of interest-only loans was unheard of just a few years ago, but in the last year these loans have exploded, giving many home buyers leverage against escalating home prices and enabling them to buy homes. A recent Wells Fargo survey of American homeowners showed that the majority of homeowners do pay principal on interest-only loans when they are flush with cash. 73% pay both the principal and interest at least some of the time. Only 25% pay only interest all of the time. Interest-only options on home loans give the home buyer the flexibility to choose how much to pay on their mortgage each month - just the interest-only payment or a little extra to pay down that principal.

Interest Only mortgages require monthly payment of “interest only” for a specified period, usually the initial 10 years of a 30 year loan term. At the end of the interest only period, the loan is re-amortized to pay off the mortgage in the remaining 20 years. The monthly payments will naturally be much higher compared to that of the interest only period. In practice, most homeowner refinance before the end of the interest only period. The disadvantage of Interest Only loans is in that the homeowner will not build equity during the interest only period. There is also the risk that the home has since lost value when it comes time to refinance.

Paying interest only may allow you to contribute to your 401k, or IRA retirement account, because of your new lower monthly payment.

Interest only loans can also be of value for borrower’s seeking to consolidate other debt carrying high interest rates like credit cards. By minimizing your mortgage payment, you can afford to pay down these other debts more quickly.

Your credit maybe considered bad and causing a low score for a number of reasons. While the are numerous reasons for bad credit some of the more common ones are as follows. You have numerous credit cards that are maxed out or close to the credit limit, you have unpaid judgments or collection accounts, you have 30 day lates showing on your payment history. All of these examples can cause severe drops in your credit score.

One area people overlook that can negatively impact their credit report is failing to honor mobile phone contracts. Cell phone companies give away free phones to customers who sign on with their services for a specified period of time, usually one to two years. Terminating subscription to the phone service before the expiration and failing to reimburse the phone carrier for the cost of the free phone is considered breaking the contract. Cell phone companies would then report to the credit bureaus and cause a blemish on the credit history. Such blemishes are not serious, but they nonetheless lower credit scores.

Credit scores generally range from about 350 to 850.

• 800+ = great credit
• 700-799 = good credit
• 600-699 = average credit
• 500-599 = bad credit
• under 500 = hard to get a loan at all

Your credit can be bad for a variety of reasons: Late payments High Account Balances Bankruptcy Collections Charge offs To minimize negative on your factors you will need to pay down balances, make payments on time, dispute incorrect information, and let the passing of time lessen the impact of past bad credit.

To many inquires at one time can affect your credit score.

If you credit score is low because of a high balance on a credit card transfer some of the balance to another card. Try not to open a new card because to do this can also reduce your score.

One reason why your credit may be bad is because of erroneous information reported on your credit report. This can happen to anyone and is actually quite common. This is one reason why you need to check your credit report out at least once per every 12 months. By checking you credit report for free you can keep an eye on your credit and make sure that you take care of any erroneous information when it happens, not when you are trying to apply for a loan and it comes as a surprise to everyone. Utilize your one free annual credit report each year to take a look over your credit to make sure everything looks well. There are many reasons as to why credit report errors can happen so make sure that if errors do happen to you that you rectify the situation immediately.

Maintaining high balances on your credit cards and other revolving debt negatively impacts your credit score. Paying down credit cards balances below the 70%, 50%, and 30% thresholds is a quick way to boost your credit score.

Paying down your credit card balances to around 30% will help your score. If you can, try to keep the balance at that level at all times. If you need to raise your score quickly, and don’t have the money to pay down your balances, you may request that your creditors increase your credit limit. This will in turn lower your balance in comparison to the limit. Only use this technique if you are responsible with your credit. Once your limit is increased, it may be tempting to go on a shopping spree. Know that if you do this, you will be in a much worse situation than when you started. Not only will you have more debt, but you will increase your ratio of balance to limit.

There are several ways to increase your credit. However the fundamental principle is the bills must be paid on time. This doesn’t mean by the due date. For the sake of your credit a payment must NEVER be more then 30 days late. If you are acquiring 30 day lates on your credit then your credit standing will deteriorate quickly. Judgments also hurt your credit even if you pay them.

It is also important to note that a credit score is a snapshot. Although it shows your payment history, length of credit, etc. having inaccurate (negative) information removed from your credit bureau report will immediately reflect an increase in your score.

If you do decide to pay off some of your credit cards, be sure to leave the cards open. The credit bureaus look favorably upon accounts that have been open for a substantial period of time, especially if they are showing a zero balance.

Remember that a credit score amounts to a prediction of how likely it will be that you go 60 days late or more on your mortgage in the next two years. One thing that will really lower this score is if you carry high balances on revolving debt and then start making a few of the payments late. This is the pattern of a consumer who is close to getting in trouble with debt.

Things that may go into a collection or judgment that will hurt you credit are; unpaid medical payments, unpaid utility payments, and unpaid cell phones or cable payments.

Before lenders lend money, they need to be assured that the funds will be repaid. In other words, is the prospective borrower creditworthy? To find out, they ask for various types of information.

Sub-prime lenders understand you may have come upon some hard times in the past and will look at your more recent credit history.

Lenders look at the risk that you will default on the loan, based on several factors. Those include credit score, history of paying your mortgage or rent on time, debt-to-income ratio, occupancy type (primary residence, second home or investment property), property type (single-family, 2-unit, condo), percentage of the property’s value you want to borrow (60%, 70% 80% 100%), and work history, among others.

Lenders will look at an applicants past credit history, income and the value of collateral being used to secure the mortgage. The lenders will compare this information to their guidelines to determine if the applicant is a good credit risk.

With regards to repayment capability, most banks prefer that a borrower has total debt obligations of less than 45% of gross income. Total debt include any monthly obligations the borrower has, including the proposed mortgage payment, property tax, homeowner insurance, automobile financing, credit card installments, alimony, etc. Utility and food costs are not considered debts and are not included in the Debt-to-Income ratio. Some non-prime mortgage lenders allow a Debt-to-Income ratio of up to 55%.

Lenders will look for job stability, credit worthiness, disposable income, liquid assets, debt to income ratios and loan to value ratios among many other things. Sometimes a borrower can be deficient or weak in one of the above mentioned areas but make up for it in others to still be considered for the financing desired. Lenders don’t typically want to see a lot of job changing or career changing happening. Also, obviously the better the credit the better the chance the lender will be repaid on the debt. Disposable income is how much income is left over after you have paid all of your monthly obligations. Debt to income is a ratio that is calculated based off of how much you make divided by how much your obligations are and LTV (loan to value is simply how much of a mortgage you are borrowing compared to how much your home is valued at. These are all very important items that a lender looks at as a part of your whole package.

Reserves is another factor that lenders want to see. Reserves are simply how much liquid cash you have in the bank to make payments with. If you are a first time home buyer the reserves can be anywhere from 2 -6 months worth of PITI (Principle, Interest, Taxes and Insurance). Various lenders will have different guidelines so be sure to ask your Mortgage Professional how much cash you will need to have in reserves.

Your credit worthiness will affect the interest rate and the number of programs that are available to you.

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