Credit Scores/Bad Credit category archives

If you’re applying for a new mortgage, refinancing an existing mortgage or applying for a loan modification, your FICO® credit score plays a key role in helping you qualify and get better terms.

Happily, there are things you can do to raise that FICO® score!

Last week, I posted tips on managing debt and credit cards. This week, I’ll cover how to rate shop for a loan without hurting your score and more overall credit scoring tips.  Remember, there are no quick fixes to improve your credit score, but it can be done.

1. Do your mortgage rate shopping in a timely manner. FICO scores make a distinction between a search for a single loan and pursuing many new credit lines. Making several rate inquiries in a short period of time for the same kind of loan, such as a car loan, is usually treated as a search for a single new loan. Stretch those inquiries out over several months, though, and it could look like you’re applying for several new credit lines. That would hurt your score. Learn more about what to know about rate shopping.  
2. If you’ve had problems, take immediate steps to re-establish your credit history.
   Open new accounts in a responsible manner, pay them on time, and keep any credit card balances low. Your credit score will slowly rise.
3. Don’t be afraid to check your own credit report. Contrary to popular belief, requesting your credit report doesn’t lower your score, as long as you order it directly from the credit reporting agency or through an organization authorized to provide consumers with reports. It is important to review your credit report to make sure it’s accurate and make corrections if you find discrepancies. 
4. Open new credit accounts only as needed. Applying for and opening new accounts or credit cards probably won’t raise your score and could lower it.
5. Have credit cards, but use them responsibly. Generally, having credit cards and installment loans will raise your credit score — if you pay them on time and keep balances low. Someone without credit cards may be seen as a higher risk than someone with credit cards who has handled them responsibly.
6. Remember that closing an account won’t make it go away. It will still appear on your credit report and may be taken into consideration by the score.

These actions won’t instantly improve your score, but as you start to manage your credit and pay on time, your score will eventually go up. If you need extra help, don’t hesitate to consult with a credit counselor.

According to the BAI survey, the perception is:

• 31% of the consumers thought it was harder to get a mortgage.
• 5% thought it was easier.
• By default that means that 64% thought it was about the same as 6 months ago.

What do I think?

If you have good credit, can document your income and assets, have enough assets for a downpayment, and are working with a MORE THAN competent mortgage lender who knows how to navigate the complexities of today’s market, then it’s no harder now than it was 6 months ago.

If your credit is struggling, you can’t document your income (sorry – self employed people who write everything off are out of luck) and don’t have either equity or a downpayment or you’re working with a lender who isn’t on top of things, then it is harder.

So, tell me – what’s the perception that you’re seeing?

31% of BAI Survey Respondents Find Mortgage Access Worsening : HousingWire || financial news for the mortgage market

Financial services information and intelligence provider Bank Administration Institute (BAI) launched the BAI & Finacle Banking Confidence Index, which tracks the effect of upheaval in the financial services industry on consumers’ views.

The index measures consumer views across five areas: financial stress and the economy, access to credit, fees and disclosure, managing personal finances and consumer trust.

The index’s findings, released Tuesday, indicate one-third of consumers feel their financial situation has deteriorated in recent months, but few expect conditions to grow even worse.

Of those surveyed, nearly one-third — or 31% — indicated access to mortgages is worse now than six months ago, while only 5% said it improved. The projections indicate 12% of respondents expected access to improve in another six months, while 15% expect access to worsen.

“In today’s fast-changing scenario, consumer opinion counts more than ever before and technology has made the consumer highly empowered,” said Haragopal Mangipudi, global head at Finacle, a solution from Infosys (INFY: 46.39 -1.70%). “Presented with diverse and ever-dynamic consumer segments, banks need to anticipate changing requirements and fine-tune business strategy.”

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!

With foreclosures taking up so much space in the headlines these days, we’ve been conditioned to think of it as the first and final step in a mortgage loan gone bad scenario.  However, there are two steps that come before the foreclosure process begins - namely: mortgage delinquency and mortgage default.

A Quick Mortgage Terms Primer

Delinquency

A mortgage borrower becomes delinquent on payment of their loan when they fail to pay their mortgage payment on the due date.  Even if we’re talking one day late, your mortgage becomes delinquent as soon as your actual payable due date is passed.  Now, your lender likely allows you a set period, which can be between as many as 15 to 30 days out, before they assess any sort of late payment fee.    But… Go up to or beyond the 30 day late mark, and your lender will send a friendly little note to at least one of the 3 major credit bureaus - letting them know you’ve been very, very naughty.

Should this happen to you, don’t worry too much.  As long as you get back on track and make nice nice with your lender, you should be in good shape.  Sure, you’ll have that 30 day late ding on your credit report, but steady payments over time from this point forward will get you back in good standing.

Should, for some reason, you fall behind in your mortgage payment beyond the 30 day period, and then on into an extended period, your mortgage will then move into default territory.

Default

Normally, when you fail to make as many as three or more of your home loan payments, your mortgage will normally move into default status.

Folks, this isn’t pretty.  Once your home loan moves into default, the Legal Team of Dewey, Cheat’em, and Howe get the nod.

They’ll likely begin foreclosure proceedings, and you’ll be required to get caught up completely on your mortgage loan if you want to avoid moving into the full foreclosure process.  Oh, and there’s also a chance that you’ll be charged fees to pay back your lender for whatever they paid their legal firm.  Yeah, I know.  You can almost hear that cash register bell ringing.

Bottom line is this…

You’re not alone if you go past the 15-day to the 30-day late payment limit.  However, be very, very diligent about getting square with your lender if this happens.  This is not a situation where you want to stuff the notice of payment due in the drawer and get back to watching that night’s UFC battle.

“Is it possible to jump from a 520 to a 620 in 3-5 months? I want to buy a house…”

This is a question I’m seeing more and more of lately and they are starting to give me a flash back to 2006. Rolling Stone has a top songs of the year list and in 2006 it was “Crazy” by Gnarls Barkley. Very appropriate as this is when the sub-prime market started to unravel.

In July 2009, people are scrambling to take advantage of low house prices - down 20-30% - in some areas, and low interest rates. This means people are starting to say, “the hell with my low credit score, I want to buy a house now”. People with 600 type scores are looking to buy! A few months ago, the lenders would have scoffed, but what happens if the lending starts to flow more freely?

Here’s the math a potential buyer needs to consider: if you buy a house today with a 620 credit score, on average, you are probably going to get a rate of 6.55% for a $300K mortgage 30 year fixed. If you had a 760+ you might be able to get a 4.980% rate.

So what if you wait? Let’s say interest rates rise a full percentage point. Now that 760+ credit score would get you a 5.980% rate. So, if you could raise your credit score to the top tier, you’d still be better off - if prices don’t change.

Will home prices change? Many economists don’t think so. I saw a market study that shows that prices are going to be stable in most markets for the next five years.

To the folks with low credit scores, I have three pieces of advice

1. Get your credit score higher. How? Pay on time, and lower your amounts owed. Wait until your credit score improves to consider home ownership.
2. Use a true home cost calculator to show yourself you can afford it.
3. Prove you can afford it, by paying into savings that money for several months. If you don’t have to go into credit card debt to afford the house, maintenance, taxes, etc., then you can feel you can proceed. Use a service like SmartyPig to set up a savings goal to prove you can save the difference.

For people with great credit AND a big savings account for 20% down, this is a great time to buy a house. If you start to hear things like “we can work around this item in your credit report”, you should feel like you are back in 2006. That’s where you should catch yourself and be honest with yourself. Don’t chase a train just because your neighbors are doing it. Figure out what’s right for you and be smart.  Home ownership is great, but it’s not for everyone at every moment in time.

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.

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.

Well, it had to happen, Fair Isaac, scratch that, FICO [the new name for the company] worked with Equifax to develop a better FICO score for lenders.

Basically, they took the BEACON® Score and tweaked it and called it the BEACON® Mortgage Score. Low and behold, it performs better for mortgages. Why? Financial institutions have known that tweaking a score model for its direct application tends to predict risk better. This is why there are bankcard FICO scores for credit cards. Credit card companies care more about credit card default risk so they weight their models accordingly. Now, it’s happening in the mortgage business and the result is better prediction of mortgage defaults.

Is this huge news? Will it affect me?

This still means that users will have to manage all their credit wisely. For those asking the tough question of which do I pay off first. That depends. If you are thinking about renting for the next 10 years, than worry less about your mortgage track record and pay off your credit cards. If you know you need to be in a new mortgage in the next 5 years, you probably want to prioritize these payments over credit card bills.

In the end, the consumer still needs to structure their lifestyle so ALL their bills are paid on time. Don’t worry about all the flavors of FICO scores, there are too many to keep track of them all. Just keep paying your bills on time and try to keep your balances low.

In light of Justin’s post, I thought I’d provide an explanation on the cost of your credit standing. Let’s take an example of buying a $300,000 house and having two different mid FICO credit scores.  To provide this example, we will take imaginary characters Brad and George

• Brad has a FICO credit score of 702, not bad, but according to the rate table on myFICO.com, this means he will get an APR of 4.985% on a 30 year fixed mortgage.  Not bad right?
• George has a better FICO credit score of 792, not bad, but according to the rate table on myFICO.com, this means he will get an APR of 4.763% on a 30 year fixed mortgage. 

Now, let’s look at the payment differences?

• One pays $1,567/mth and the other will pay $1,608/mth for a difference of $41/month

Big deal right?  for the cost of a basic cable subscription, one is getting a slightly better deal.  But what’s the long term cost?

• $41/month = $492/year = $14,760 over 30 years. 

Now let’s assume we took that $41/mth and put it into a savings plan or invested it?  What would we have in 30 years?

• $21,950 at a 2.50% savings account interest rate
• $28,456 at a 4% compounded growth rate
• $41,185 at a 6% compounded growth rate

In a growing market, you might not want to miss out on the appreciation to save this kind of money, but in today’s housing market, you might want to consider getting your credit score in tip top shape before you close the deal.  It could mean mucho savings over the 30 year life of your loan.