At the end of the day, the only color that matters is….
Do The Math : Exactly How Much Money Will Your Credit Score Cost You On Your Next Mortgage is a brilliant article.
Mortgage Primer: Your credit score
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.
Why are there 28 days in February?
Occasionally my mind entertains the oddest questions, some relevant to mortgages, some not so relevant such as:
- Why can’t the feds just make mortgage rates a flat rate based on the program you want and the credit score you have?
- Why do some people shop for a mortgage to get the lowest rate yet pay a 20% interest rate on their credit cards?
- Why do people think they deserve to own a home when they’ve never paid any bill on time?
- Is living in the suburbs really a better environment for children?
- Why does the World Series of Poker still have Milwaukee’s Best as a sponsor?
- Why didn’t they have all the Marvel movies like Spiderman, the Hulk, Fantastic Four when I was a kid?
- Why are college coaches the highest paid state employees when they’re the biggest liars (think Nick Saban) on campus?
- Why are there only 28 days in February?
Little did I know Slate actually has answered one of questions in 28 Days? Why February Gets the Shaft.
100% Financing
Recently a visitor used google to find my site:
what credit score can i get 100% finanacing on a home
The quick answer to this visitor’s question is 620 provided you have an established credit history, a mortgage history or verification of rent and 12 months of canceled checks.
FAQ: How do I get the best rate?
From time to time I’ll be addressing client questions that are frequently asked and some questions that are quite obscure. Some questions are mortgage related, some are real estate related, and some are Denver related. My answers won’t be the canned answers you see on most mortgage sites.
Q: “How do I get the best rate?”
A: Let’s assume the following:
- you’re asking about a mortgage on a single family house that’s considered your primary residence
- you’re asking about a first mortgage without a second mortgage
- you have either 20% equity (refinance) or you’re putting a 20% down payment (purchase)
- you have credit scores over 720
- you don’t have any late payments of any kind
- you have assets i.e. money in a checking account, savings account, 401k, mutual funds and/or stocks at established financial institution(s)
- you have statements from the aforementioned financial institution(s)
- you’ve been in the same line of work for quite some time for the same company
- you have a limited amount of debt
- your debt to income ratio is far below the 40% threshold
If you fit this profile you’ll get the best rates because mortgage institutions view this profile as little to no risk. These loans are typically run through an automated underwriting program i.e. computer software that runs an algorerithm (software geek joke) and gives you a loan approval in seconds. Even if you don’t fit this profile 100%, the automated underwriting program may still grant you an approval in seconds. Your history of paying debt (credit score), capacity to pay the loan (income/assets), and the collateral backing the debt (property) all plays a role in getting the best rate.
Lending to the credit averse
DU recently completed a study that looks to State Legislators to improve lending practices to those that have less than perfect credit according to a Denver Post article entitled States urged to aid loan fitness.
Banks should provide small loans to those with no credit or subprime credit - defined as FICO scores below 660, according to the study’s lead author, Rickie Keys, a senior research fellow for the University of Denver Center for African-American Policy.
The repayment of those loans would then be reported by the bank to the three major credit bureaus. That would provide people an “opportunity to get small loans and use those as a springboard to improve their scores,” said Keys, who is based in Shreveport, La.
Ironically, despite emanating from DU (Denver University) the study didn’t include Denver or any Colorado cities:
The University of Denver study, “Financial Empowerment for the Unbanked and Underbanked Consumer: Crossing the Red Line,” analyzed banking and lending services in 14 markets nationwide, including Atlanta, Charlotte, N.C., and Memphis, Tenn.
Denver was not one of the markets studied, although Keys said the Mile High City will be among the next 14 cities analyzed.
Credit scores range from 350 to 850. Credit scores above 720 is considered superior. Credit scores below 660 is considered sub prime. Most consumers fall below 680. Why? Credit is a topic that most consumers truly don’t understand. To learn more about your credit, simply enter your info in the form below and I will send you a credit guide.
When banks won’t compete, where do you go?
Everyone has heard the line, ‘When banks compete, you win!” Well, not really when it comes to a second mortgage or home equity loan. These loans rely on credit score and equity. If you have bad credit, you better have equity. If you have no equity, you better have good credit to get a 115% or 125% loan. If you have bad credit and no equity, sayonara.
So where do you go when banks won’t compete. Enter person to person lending at www.prosper.com. Featured in Inc, Newsweek, Business Week, Entrepreneur, et. al. prosper has grown exponentially.
The premise is simple: People who need money request it, and other people bid for the privilege of lending it to them. Prosper makes sure everything is safe, fair and easy. You can borrow anywhere from $50 to $25,000. Seems like an interesting lending alternative when no else is willing.
780 Credit Is Mediocre….
… 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.
Adjustable Rate Mortgage Holders Prepare for Increase in Interest Rates
Interest rates are on the rise and many home owners who have adjustable rate mortgages may see increases in their forthcoming annual adjustments.
Federal Reserve Chairman Alan Greenspan made it clear in 2004 that the Federal Reserve would be increasing short-term interest rates at a measured pace. With the US Dollar at its weakest point in seven years, oil prices unstable and the evaluation of other economic indicators, the Fed Funds Rate was hiked seven times from 1.0% to 2.75% since June 2004 in an effort to curb inflation. Some economists believe it won’t stop until the Fed Fund Rate hits 4.0%.
Consumers with revolving debt accounts tied to the prime rate have seen the effect through rising interest rate charges, as the prime rate always rides 3% above the current Fed Funds Rate.
Mortgage interest rates are affected indirectly by these changes. An increase in the Fed Funds Rate has an impact on financial markets as a whole, but mortgage rates may go up or down based on the perception investors have of current economic statistics and their reaction to the Federal Reserve’s after-meeting statements.
In general, when economic data indicates we have a slow-down occurring in our economy, investors tend to sell off stocks and reallocate that money to the safe haven of bonds and mortgage-backed securities. The purchase of mortgage-backed securities drives interest rates down. When economic data says there is growth in the economy, the stock market typically rallies and mortgage-backed securities sell off to fuel that stock market rally. This drives mortgage interest rates up.
Our current market reflects the reaction of investors reading between the lines on comments made by the Fed, and mortgage interest rates are going up. This will have an affect on home owners with adjustable rate mortgages (ARMs) tied to indexes that are based on short-term interest rates. This includes the 11th District Cost of Funds, 12-Month Treasury Average (MTA), London Inter Bank Offering Rates (LIBOR) and others.
This doesn’t mean that everyone with an adjustable mortgage is in trouble right away. Some indexes are more volatile than others. COFI moves much slower than other adjustable rate indexes, while the LIBOR fluctuates with more volatility. But remember, when an ARM adjusts, the new interest rate is a sum of the borrower’s fixed margin plus the current rate of the index the mortgage is tied to.
Consumers who foresee paying an interest rate that is significantly higher may want to consider refinancing to take advantage of the stability of a fixed rate mortgage.
This is also a good time for borrowers who started out in an adjustable rate loan due to a poor credit score to transition into a fixed rate loan if they can. Once a track record of making mortgage payments on time and in full has been established, this should have a positive effect on the credit score and there is a good chance the borrower may now qualify for a loan with a lower interest rate.
As with any decision to refinance, it is important to take the terms of the existing loan, the cost of the new loan, and the borrower’s long-term needs into consideration. A qualified mortgage professional should help weigh out the options by providing a clear assessment of available loan programs for the consumer.
Renters Have Much to Gain by Pursuing Home Ownership
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.