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In today’s credit score driven world, it often seems as if there are rate add-ons for loans with anything under a 740 credit score. It has become increasingly important to monitor and maintain one’s credit rating to ensure qualifying at the best interest rates available. One of the most pesky things that can adversely affect one’s credit score are collection accounts. Here are some basic tips regarding collection accounts:

1. Review your credit report with a seasoned mortgage professional, and create a strategy for paying off collection accounts. For example, paying off collection accounts more than 2 years old may actually adversely affect your credit rating in some cases. You may be able to simply payoff a collection account at closing.
2. Document, Document, Document: If you do payoff an account, be sure to keep receipts from the creditor. Try to make sure the receipt corresponds with the account number reported on the credit bureaus.
3. Ask your lender what accounts will need to be paid off prior to closing. Some aged and/or smaller accounts may not be required to be paid off to complete your real estate transaction.
4. Contact your creditors. You can be your own advocate by taking the initiative to contact your creditors and make payment and/or payoff arrangements. You may also be able to document a filing made in error, and get documentation to remove an adverse credit item.

Best of luck!

I recently had a client who had a relatively low credit score despite making timely payments.  This was due to his credit cards and other revolving balances being at or near the credit limits.  With credit scores having a huge impact on mortgage rates and terms, I decided to share some of the information on www.myfico.com regarding credit scores and outstanding balances.

Credit balances make up 30% of your credit score.  This is next highest only to your payment history.  It is a good idea to keep your balances under 50% of your available credit on any given card.  If you can keep your balances even lower (30% or lower), try to do so.  If you are having trouble reducing your credit balance to limit ratio, you can always ask your creditor to increase your credit limit.  Ask in your request that they do so based on your payment history, rather than doing a new credit inquiry.  If you pay off a credit card, do not close it but rather keep a minimal balance to show activity with a low balance.

It is always a good idea to obtain a free copy of your credit report annually as well in order to check for errors.  A mortgage professional can walk you through yoyr credit report and offer tips that may improve your credit rating.  Good luck!

If you are one of many Americans who took out an ARM loan a few years ago, you would think from reading many reports that your rate will skyrocket come the first adjustment period. I suggest you do some research on your Adjustable Rate Mortgage terms before sounding the panic alarm.  The first things you will want to find out are:  your Index, your Margin, and your Caps.

Index: The index in which you have an adjustable rate mortgage plays a large part in how your rate can adjust, as the yield or interest rate is added to the margin to determine your new rate, subject to any Caps in place.  Many mortgages have an index based on the 1 Year Treasury Bill, LIBOR(London Interbank Daily Offered Rate), or the COFI(Cost of Funds Index).  The MTA is the Monthly Treasury Average over a given timeframe.

Here are the yields of many Market Indices as of 7/7/2009:
Prime:   3.250%
1 Yr Libor 1.511%
1 Yr T-Bill 0.490%
1 Mth COFI 4.244%
1 Mth MTA  4.788%
6 Mth LIBOR 1.023%
1 Mth LIBOR 0.302%

Margin: The margin is a percentage that is added to your Index to determine your fully indexed rate.  Many Prime ARM loans have margins ranging from 2.25% to 3.5%.  Unfortunately, there are Subprime ARM loans with margins ranging from 4.25% to 9.25% or more.  The ARM loans with high margins are the “toxic” ARM loans you read and hear about in the news all the time, because the loans adjust upward to the maximum of the caps each adjustment.

Caps: Caps refer to the maximum amount your new rate can adjust in a given period.  Usually there is a First Adjustment Cap, a Subsequent Adjustment Period Cap, and a Lifetime Rate Cap.  Caps of 2/2/6 would mean a rate could adjust as much as 2% in the first adjustment (regardless of the fully indexed rate), 2% any adjustment thereafter (regardless of the fully indexed rate), and 6% over the life of a loan (regardless of the fully indexed rate).  Some loans may have a “floor” for adjustments as well, meaning that your rate may not decrease a certain amount from the initial rate.

Calculating an adjustment: the possible good news.  If you have a 5/1 ARM based on the 1 year Treasury Bill(.49%) with a margin of 2.75% and 2/2/5 Caps, well, you are in good shape for now.  .49%(Index) + 2.75%(Margin) = 3.24% Fully Indexed.(You may have a floor in your adjustment).  Do yourself a favor and check out your mortgage note you signed, or contact your loan servicer for your ARM details. 

Keep in mind, if you have sufficient equity, that now is still a great time to refinance into a fxed rate or Prime ARM loan depending on your needs.

To use one of my favorite Dirty Harry quotes, “A Man’s gotta know his limitations.” With all of the talk recently of Fannie Mae Jumbo loans, Fannie Mae High Balance Loan Programs, FHA Jumbo’s, VA Jumbo’s, and the like; I thought it would be a good idea to show you how and where  to find out exactly with the loan limits are in your specific State and County.

The first step is to go to this site: HUD/Fannie Mae Loan Limits .  A couple of important things to remember when navigating this site: you initially just need to input the State(all Counties will be listed), the Limit Type(Fannie Mae, FHA, or HECM-reverse mortgage), and the Limit Year (It’s 2009, folks). Once you find your County, the loan limits are pretty self-explanatory.  If you own a multi-unit property, your loan limits will be higher than a single family home.

For VA Loans, the loan limit is $417,000 unless otherwise noted here: VA Loan Limits  .  Financing may be available above the loan limit for a VA limit with a down payment.  A calculator and examples are listed here: VA Calculations .

Keep in mind pricing and qualifiaction terms may vary with “high balance” loans above the traditional loan limits of $417,000.  I hope this helps!

Despite the contraction of the secondary market, the USDA Rural Development  Loan still has 100% financing available for qualified applicants with moderate income in qualified areas.  The USDA RD Loan is a great program for rural and even some not-so-rural areas that qualify for the USDA program.  Even New Jersey still has many areas that qualify for the RD Loan.

There are property location restrictions for the USDA 100% financing program.   The first step is to determine if the area you are looking to purchase qualifies for an RD Loan. Check the USDA website’s eligibility map listed here:property eligibility .   Keep in mind, both the property (based on location) and the borrower(based on income) need to qualify to be eligible for consideration for this loan program.

The other qualification restriction is income based.  The income limits for the 100% Section 502 Guaranteed Rural Housing Program are here:  Property Eligibility According to the chart, a family of 2′s maximum possible annual income in Somerset County, NJ would be $71,900 for the Section 502 Guaranteed Rural Housing Program.  Income restrictions in other areas may vary, check the site for your particular location.

There is a one time financed fee similar to the VA funding fee for this program, and there are credit qualifications-620 minimum fico- and property qualifications as well.  Once you have determined your income and area qualify, consult with a loan officer well versed in USDA loans. 

All in all, this is a great program for 100% financing for those with moderate income in qualified areas.
 
Michael Byrne

If you are looking to purchase or refinance a home in the near future, there are some basics things to do and to avoid doing in order to keep your credit rating intact.  With credit scoring often determining the interest rate at which you can borrow money, keeping your credit rating as high as possible can save you thousands of dollars annually.  This is particularly important these days as most lenders require a minimum fico of 620 for FHA, VA, and USDA loans.  Fannie Mae imposes various credit score hits for FICO scores that fall below a 740-620 credit score.

Here are a few quick basic tips and some information derived from www.myfico.com :

• Do stay current on your existing accounts.  Your payment history is the most important part of your credit rating, comprising 35% of your credit score.
• Don’t max out on any existing credit cards.  Other than being late, having credit over your credit limit is the quickest way to reduce your credit score. Credit balances comprise 30% of your total credit score.
• Don’t consolidate credit cards into 1 account at a teaser rate.  Consolidating cards to one account will show a higher balance to limit ratio and you could be penalized.  Typically, you do not want your credit balances to exceed 70% of your available limit.  Being below 50% of your available limit is even better.
• Don’t pay off any old collection accounts.  Collection accounts over 2 years old have little impact on your credit rating.  Paying off an old collection account will change the last activity date of your credit and potentially lower your score.  Of course, you may be required to payoff any collection accounts at closing anyway.
• Don’t open any new accounts, particularly “1 year same of cash” type store accounts.  Wait until after closing for household purchases such as furniture.  New accounts comprise 10% of your total credit score, and your “credit mix” comprises another 10%.

FICO Credit Score Components
• 35% Payment History
• 30% Amounts Owed
• 15% Length of Credit
• 10% New Credit
• 10% Type of Credit 

Do be sure to meet with a mortgage professional to get pre-approved as well as review your credit report with him/her.  Regardless of what stage in house hunting or refinancing you are in, it is a good idea to be sure you are looking in the proper price range for your budget.

For many, the most difficult obstacle to achieving the dream of home ownership is securing a sufficient down payment.  With the days of easy credit a thing of the past, many loan programs require a 10% down payment currently.  There are still 2 loan programs which offer 100% financing: The Veterans Administration(VA) Loan and The USDA RD loan.  Today we will take a look at the VA home loan.

The two basic requirements for being eligible for a VA Loan Guaranty are a obtaining a Certificate of Eligibility and your proof of service , usually called your DD Form 214.  Reservists and National Guardsmen/women need to show 6 years of service to be eligible for a Certifcate of Eligibility. 

The current VA Loan Limit for 100% VA Financing in most areas is $417,000.  In high-cost counties, the loan limit may be higher.  There is a calculation for determining the down payment required to obtain financing for loans over $417,000, and is subject to secondary market restrictions.  All VA loans must be on owner-occupied properties.

The basics for qualifying for VA home loan at this time are a minimum credit score of 620, a 41% total debt ratio to income, and there are guidelines for bankruptcy and foreclosures as well.  A VA Appraiser will perform an appraisal on the property to insure the home adheres to VA guidelines.  Other guidelines apply as well.

A seller’s concession  towards closing costs of up to 4% is allowable for a VA Loan to limit the out of pocket expense for the purchaser.  As Brian Brady pointed out in a previous blog, VA loans may be assumable as well.

VA Loans do not have monthly mortgage insurance, however there is a VA Funding Fee financed on top of your mortgage amount. This financed fee ranges from 0% for Veterans with a 15% or higher service related disability to 3.30% for a 2nd time use for 100% financing.   A complete funding fee chart is listed here.

All in all, Veterans of the military service should check with a lender to determine if they are eligible to benefit for this great program for purchasing a home, as well as for refinancing in some cases.  As always, guidelines are constantly changing for this program.

In our current economic environment, jumbo financing remains available to qualified borrowers to purchase a house and to do rate, term and cash-out refinancing. The catch is that the definition of a “qualified borrower” has changed over time. Here are some tips (as well as questions to ask a prospective lender regarding their loan parameters) to help you qualify for a loan as well as documentation required to close on a jumbo mortgage loan in a timely fashion:

Review your credit rating. Jumbo loans now often want a minimum 680, 700, or even a 720, or higher credit score. You can ask your mortgage loan officer to review your credit report with you or go to a free credit report service to review a copy of your credit report. You will want to check your credit for errors and any late payments, high balances, or loans for which you have co-signed (like student loans). See more information on how credit reporting works, or consult with your loan officer. Ask your lender what their credit score policy is for your particular loan.
Check your home’s value. Nothing is more disappointing than someone’s home not appraising for enough to qualify for a refinance or purchase. Zillow is a great tool to start, and you also may want to consult a real estate professional if you are refinancing to gauge the market trends in your area. Local papers often list recent sales prices and addresses as well. I strongly urge anyone buying a home to use a buyer’s agent to represent them for their purchase. Review with your lender what the maximum loan to value is for your particular loan program. All lenders will scrutinize an appraisal, and many lenders require a review appraisal or a second full appraisal for large loans.

Check your income. Many lenders may not include bonus income at all, or may require a low loan-to value (usually under 75%) to include bonus income. If you are self employed or have a small side business, review your actual claimed income or loss. Lenders now check with the IRS for what your total claimed income is prior to closing a loan, via a form 4506.
If you have W-2 income but substantial business losses, this could present an issue. Check with your lender beforehand and present 2 years worth of SIGNED tax returns. Presenting a signed return verifies that it is indeed what you filed with the IRS.

Review your asset “reserves.” While some lenders do not even verify asset reserves for jumbo loans, most want to see some money left over in savings after closing. Usually, a lender wants to see PITI reserves, or a certain number of months total mortgage payments in savings. These reserves can be in the form of an IRA, 401k, stocks, checking, savings, etc.

Lenders want to see 2 months of ALL PAGES of asset accounts. Accounts such as an IRA or 401k are usually counted as 60-70% of their face value towards reserves due to withdrawal and tax penalties/liabilities, if applicable. Many lenders require 6-24 months or more PITI reserves, depending on the loan’s size.

Decide what type of loan you want. 40, 30, 20, and 15-year fixed loans have different rates and payments. If you plan on staying in your home less than 10 years, you may want to entertain an adjustable rate mortgage for a lower interest rate. An interest-only loan may be attractive if you plan on making lump sum payments, or simply want to make minimal payments.

Interest-Only and Adjustable Rate Mortgages are not for everyone, as we have learned over the last few years. Be sure to check the margin, index, and caps on an adjustable rate loan. Get ARM details in writing from your lender.

Have your documentation ready. Your lender isn’t singling you out if they ask (in addition to income/asset information) for a recent phone bill with your address and phone number, a copy of a legible drivers license, homeowners insurance declaration page, credit inquiry letter, and even a credit explanation letter. This is standard now for documenting a loan file.