Dennis' Mortgage Blog

Perhaps the primary component to lending today is a borrower's credit score, commonly referred to as the "FICO" score (FICO stands for Fair Isaac, COrporation-the company that created computerized credit scoring), and perhaps no component of the loan process is more misunderstood and filled with misinformation than the credit score.  As a result I spend time with most clients discussing their credit report, items that are of concern that they can make corrective action on--not just derogatory reporting items but also items to increase security and reduce chances of credit theft--and explaining the credit score.

For those reading not yet familiar with credit scoring, your credit score is a number calculated by several different factors based on how you pay your debts, how much debt your have, when you obtained the debt and if you are looking for debt.  Your credit score is like bowling not golf: the higher the score the better.  At the bottom of this post is a link to the myfico.com site and it has a pie chart showing what your score is based on.

"I don't want you to run a report because it will lower my credit score."

Perhaps the number one myth for credit scores and one that was somewhat true when credit scoring first came out but not so much anymore--especially if I am obtaining your credit report for the purpose of providing a mortgage, or mortgage information.  In the booklet linked below from myfico.com is an explanation of how inquiries from potential creditors affects your credit score.  Understanding that many consumers shop or research more than one lending source before obtaining a mortgage or auto loan they credit scoring program takes this into account and allows "score free" (my term) inquiries for the consumer.  As well, while you may provide me a score from another lender or directly from the credit bureau(s), until I have my own report I cannot issue a pre-approval letter.  Why? Primarily because our system is set up to interact with every major lender and both Fannie Mae and Freddie Mac allowing us to upload borrower information into their programs for credit approvals and conditions--they will not take the upload unless we have credit information. 

This does not mean however that you can go out and have a bunch of reports run from a bunch of different sources.  Inquiries from companies that provide revolving credit (Citi, Capital One, etc) count against your score and each additional inquiry takes increasingly more points off your score.  According to Fair Isaac consumers with more than six inquiries on their credit report are eight times more likely to file bankruptcy.

It is okay to shop for a mortgage (as much as I would appreciate if you just use me!) or an auto loan, it is not okay to shop for credit cards.

"How can I raise my score?"

Reduce your credit.  The number one factor in determining your credit score is your credit history, how you have paid your debts in the past.  As discussed in my previous blog post it takes time to remove derogatory reporting from your credit report.  Doing so will reduce your score but it will take time.  A quicker way to raise your score is to pay down outstanding credit, particularly on revolving or charge accounts (Visa, Mastercard, Department store).  One of the factors in a credit score is the amount you owed in comparison to the amount you have available.  If you have a Discover card with a limit of $5000 and owe $4875 on it this is creating a depression on your score.  If you are able to pay the balance down to below 50% of the limit you will see an increase in your credit score. IMPORTANT! Do not start paying all your credit balances down to half the limits just to lower your score if you are getting ready to purchase a home!  You may be spending money and actually hurting your ability to qualify! 

The other way to raise your score is to reduce available credit, this can be accomplished by closing accounts you no longer use or need.  Most consumers need one perhaps two credit cards at most.  My preference is to have a primary card that is tied to a mileage or points program.  Use this much like and ATM card monthly to take advantage of the "perks" you may accumulate such as free airfare for the family vacation.  Pay off the card every month to ensure you are spending what you can afford on your budget.  You may wish to carry a second card with a higher limit that you use only for the "big ticket" items that you know will take some time to payoff.  This card may also be tied to points, but should have the lowest rate you can obtain.  Close every other account.  For one it will increase your score and secondly reduce the possibility of someone taking the number and using it.

Closing Accounts

To close an account do not just call the credit company and say, "I want to close my account." This may or may not result in them actually closing your account, but it will result in them knowing you wish to close your account.  They will check your score (they have your authorization from your credit agreement to do so) and if sufficiently high will instead of closing your account send you communication that you are pre-approved for a higher balance. 

To properly close your account send a letter to the creditor with your name, address and account number.  State that you are instructing them to close your account.  Your account is being closed with no balance owing and no derogatory information reporting on the account.  State that you are also revoking any rights or authorizations you have given to them to obtain any credit information from any credit bureau and also revoking their rights to provide your name, address or any information to other entities, including subsidiaries.

Copy the letter four times.  Keep one copy for yourself and send one copy to each of the credit bureaus (addresses in prior blog post here).  If you are canceling more than one account you can send all the letters at once.  Be sure to include a cover letter with your name, address and social security number and detail the creditor and accounts you are closing.

Do You Need To Worry About Your Score?

Yes for most and no for many.  According to Fair Isaac the median score in the country is 723; meaning just as many scores are above this number as there are scores below this number.  For mortgages we have certain benchmark scores, and in the past few months these have moved up about 20 points.  These are not written in stone but are benchmarks for loan types or rates for which applicants may be eligible.  Do not just read these numbers and assume you fall into a category--get "checked out" by a professional (preferably me!) for your overall qualifications and financial standing and possible mortgage options:

Below 620: Sub-prime, perhaps FHA or other government programs

621-680: Some "Alt-A" products or conforming type loans, there will probably be some add-ons to rate or fees

680-720: Very good credit and eligible for most programs if otherwise qualified

720-760: Eligible for virtually all programs is otherwise qualified, depending on program might get a break in fee.

760-850 (highest score): all programs if qualified and break in fees for most programs.

If your score is in the solid mid- to high- 700s or over 800 you do not need to worry about much.  Do not try to increase your score, try to minimize your exposure to fraud and theft.  Do not worry about the impact on your score of inquiries, an additional card or other credit items other than derogatory information.  You have exhibited the ability to manage your credit and finances and chances are slim that unless and extraordinary event occurs you will always maintain a high score.

If you pay your bills on time and limit the amount of bills you have to pay chances are you will have a good solid credit score and you should not obsess over what that score is.  If you have had some issues in the past or are spread over many different creditors or have other factors dampening your score there are steps you may take to improve your score and your credit/debt management.  If you have questions how please contact me.

FICO website (click on "About Fico Scores" tab for pie-chart)

Free booklet in Adobe from FICO here

Dennis

 11:46:51 AM

In the past few weeks we have received notifications daily from the different lenders with whom we work about guideline and program changes that are resulting in tighter guidelines.  Also making changes to underwriting policy effective in August are the Federal National Mortgage Association (FNMA, or Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac) that will restrict qualifying on interest only, all ARM and high loan to value products. 

Not surprisingly the politicians are getting involved and in several states, most notably Minnesota, legislatures are passing bills to further restrict lending criteria.  In the case of the Minnesota, the new legislation has wiped out approximately half of the borrowing market.  In trying to "protect" borrowers what has happened instead is the legislation will prevent thousands of homeowners from refinancing their homes out of adjustable rate products and into fixed rate or longer term ARMs, prevent them from getting out from loans that they obtained to purchase their homes using sub-prime financing due to poor credit and now that they have improved their credit and scores would otherwise qualify for a conventional mortgage.

With the tightening of the credit standards we will face difficult challenges in Southern California assisting potential homebuyers in purchasing their new homes with low down payments.  The couple looking to purchase their first home with even 5% down will be facing tougher qualifying guidelines and higher rate loans in the near future.  With a median home price in my home area of Long Beach of approximately $550,000 that means a young couple now may need as much as $55,000 to purchase their first home. 

The media has been reporting surging percentages of foreclosures in 2007 compared to 2006 and 2005, of course the percentages are much higher as in 2005 and 2006 the foreclosure rates were minimal.  With the tremendous value increases starting post-9/11 any homeowners who had difficulty with their mortgages had plenty of equity and were able to sell their home, pay off their mortgages and collect some profit.  With the flattening of the local market those who purchased in late 2005 through this year have seen minimal equity growth and when faced with difficulty making their payments may not have the ability to sell and clear the mortgages.  If one looks at the actual number of mortgage defaults and foreclosures however as a percentage of the total housing market and housing stock it is a very small percentage and well within or below historical norms for foreclosures.

Looking forward those families considering purchasing a new home in the future, be it next month or next year, need to start working with a trusted mortgage advisor today to ensure they have the proper foundation for qualifying and will be able to close a mortgage to purchase their home.  Pay attention to your credit and start saving as much money as you can--you will probably need it.

If I can be of assistance and start you on the path to homeownership please contact me.

Dennis

Tuesday July 31, 2007

With the over-reaction to the problems several sub-prime lenders have been having since Wall Street pulled investment money from their pipelines we have seen a chain reaction through the industry with tightening qualifying guidelines for most mortgage products.  Most impacted have been mortgage products allowing buyers to purchase homes with little (less than 5%) to no down payment.  Many buyers who purchased homes last summer with no down payment would not get through the underwriting guidelines today.

For starters the industry has just about pulled the plug for "A Paper" 100% financing using stated income rather than fulling documenting borrower's income.  While we have lenders willing to fund the primary mortgage for such a transaction, the difficulty has been in finding a second trust deed, or piggy-back, to get us to 100% financing. 

Regarding income, most program guidelines require a lower debt-to-income ratio (total PITI housing payment plus your monthly credit obligations divided by your gross monthly income) than they did last summer.  A lower debt ratio allows for smaller monthly housing payment which translates to lower mortgage amount(s).

While it seems paradoxical, reserve requirements are higher for no down payment transactions.  When determining reserves it is important to have every dollar you have in all your asset accounts listed: checking, savings, investment and retirement accounts.  Note as well that unless you have found a seller that is willing to pay your closing costs that you will need funds for loan fees, appraisal, escrow, title and insurance for starters. 

Finally if you have a low or poor FICO score you have severely limited any options for 100% financing--particularly the total dollar amount you may borrow.  Traditionally FHA and some Fannie Mae products will fund low down mortgages with FICO scores less than "good", but their maximum loan amounts are a limiting factor in Southern California and many other markets.

Just as you would not attempt to self-diagnose yourself for diabetes or asthma, you should not try to self-qualify yourself for any mortgage product--much less 100% financing. There are a myriad of variables that mortgage professionals go through in determining qualifying ability and loan options.  It is good to have knowledge and education about the mortgage industry and process, but when you are ready to purchase your new home contact a mortgage professional, such as myself!, to assist you and provide options.  I recommend a recommendation--ask family, friends and real estate professionals whom you trust to recommend a mortgage professional to assist you with reviewing your credit and financial situation and working through mortgage options.  Even if you are not ready to purchase the"perfect" home today, the mortgage professional should be able to provide you the steps needed so that some day soon you will be able to afford your American Dream.

(P.S. Ben Stein has some quick and interesting numbers on the over-reaction and lack of real impact the sub-prime foreclosures have on the house market in this article on Yahoo!)

Dennis 

 Monday, July 16, 2007

I hope you are in the stock market either with individual stocks or mutual funds. Yesterday's record finish sucked a bunch of money out of bonds pushing rates down some (a slight rebound today) but creating a lot of additional wealth for tens of millions of Americans invested with their pensions, 401(k)s, IRAs, insurance products and other investments. Too bad the Social Security Administration cannot provide such a return...Since October 2002 when the Dow hit post-9/11 low the index has doubled in value. If you invested $5000 in a mutual fund invested in every Dow stock today you would sitting on $10,000, that is an annual return of about 20%. This performance in the equity markets indicates investors are bullish (positive) on the ability of our nation's companies and corporations to sustain profits in the near term.

Investors are not the only positive ones, consumers are as well. Although retail sales fell last month, this month consumer confidence soared above expected number and Americans are much more positive about their financial futures than predicted. This is not great news for mortgage rates as the tendency is for this positive confidence to show itself in big ticket and durable good purchases and can be inflationary--we know what the "I" word does for rates.

No change from last week:

30 Yr. Fixed Conforming with 10% or more down: 6.5% at 1.00 point

30 Yr. Fixed Jumbo with 10% or more down: 6.625% at 1.00 point

Note these are for 30 day locks, purchase transactions with 10% or more down and strong FICO's.

I received a call from an agent this morning with a client working with a friend who is a mortgage broker and there may be cause for some concern. One issue that was brought up is of great concern to me and is an issue I hear about frequently from agents: lack of a good faith estimate from the lender or broker. A few things about good faith estimates, first anyone should be able to provide one almost instantaneously with the technology and industry specific programs we use. When pre-qualifying a borrower following the conversation a good faith should be offered and provided. Many lenders do not like to provide a good faith because if gives them something to be shopped with and rates and fees can be compared. It would be easy for me upon seeing another lender's good faith to lump charges together to make it look like I have less fees, or take fees off the good faith and change the points, essentially tailor a good faith that looks better than what the client has in hand to try to take the deal. Being confident in my ability to provide what I quote and knowing that while other brokers can quote lower not all close at what they quote I have no problem providing a good faith. This has cost me business as clients have taken them to other lenders who have chopped up fees, etc to get the deal, but in the long run this policy has served me and my clients well.

Finally, at application a mortgage broker in the state of California must provide a Mortgage Loan Disclosure Statement which is a two page form, the first page looks like a Good Faith and breaks down fees, as well as separates payments to the broker, plus and rebates. Page two has some description of the loan program. Many brokers only show page two of this form as they do not wish to disclose their fees upfront. If your client has not received a good faith estimate and/or Mortgage Loan Disclosure statement at time of application they need to contact their lender and demand a copy.

Let me know how I can assist you and your clients. Be sure to send them to www.DennisCSmith.com for rates, to apply for mortgages, and a lot of great information on loans and mortgages.

Dennis

Are you familiar with the Napoleonic Code?  It has come to mean "guilty until proven innocent", essentially the opposite of our legal system that presumes innocence.  Credit bureaus operate under the guilty until proven innocent application of justice.  If a credit company reports to the credit bureau(s) that you were 30 days late with your payment in June 2006, the credit bureau accepts the report as fact and it shows on your credit record that you were 30 days late in June 2006.  It is up to you to prove to the credit company and/or the bureau(s) that you made your June 2006 payment on time and to have the late payment removed from your report.

Real pain in the assets isn't it?  You make your payment on time, some how it gets keyed in late and now you have to take the time and energy to correct the problem.  And believe me it takes time and energy.  Ideally you contact the credit company, explain the situation, the person on the phone with you agrees and the matter is taken care of within a short time frame.  Key word? "Ideally"

Do not trust that someone working in the customer service department of a credit company will take the steps necessary to inform all of the credit bureaus that his/her company had made a mistake.  At best get the representative to commit to sending you a letter or email acknowledging the misreporting.  Before terminating your call try to get the representatives name and/or identification number and extension to put in any correspondence you will send to credit bureaus disputing the late payment on your credit report.

If you have an account, or accounts, that are misreported on your credit bureau reports it is not difficult for you to get them removed--although it may take a couple of attempts and some patience.  First, write a letter that includes your name, address and social security number (if a joint account with you and your spouse include both names and social security numbers), the name of the creditor, account number and the date of the late payment as stated on the credit report (i.e. Sears, acct. #12345678 reporting 30 days late June 2006), then state that the account was not late and should be reporting current and attach any documentation or information of calls you made in this regard.  Include a line/paragraph for each account you are disputing.  Make a copy of the letter for each bureau and send it to addresses below.

Finally regarding the blemish(es) on your record.  If you have otherwise good credit and all your accounts but maybe one or two report you always on time I would not worry about one or two accounts misreporting a 30 day late.  I understand the pride of having a "clean" or "spotless" report; I also understand the time and frustration of trying to get an item removed.  Unless you need something removed to improve your score to get a loan, know you are right, they are wrong and move on.  As time goes by late reports diminish in impact on your credit score and the one or two blemishes eventually will fade.  This is hard, impossible for some, for many of us to ignore, but trust me between dealing with the customer service departments, the letters, follow up, etc. if you can ignore the mistake.

Each bureau is obligated to provide you with one free credit report per year, take advantage of that to see what is on your report and monitor the activity.  Rather than getting all the reports at one time, space them out, say Experian in January, Equifax in May and Transunion in September.  If one of the reports show something in error, assume all the bureaus are showing the same error and send off your letter.

There are several companies out there charging fees for credit reports and alerts and other features.  With one free report every four months from a different bureau you can save the fees and monitor your own reports.

In my next post I will address FICO scores and some of the common myths associated with credit scores and what the scores mean and how they are used.

Experian

P.O. Box 2002

Allen, TX 75013

www.experian.com/reportaccess

Transunion

P.O. Box 1000

Chester, PA  19022

www.transunion.com

Equifax

P.O. Box 740241

Atlanta, GA  30374

www.equifax.com

Dennis

 Monday, July 09, 2007 

You will see in browsing my site that I do not include rate quotes, why?  On the right margin of the home page the National Averages for mortgages are provided, following these can give you a sense of trends, (and note that our rates are below the National Average), but for a specific rate quote that is a bit more challenging.

If you look here you will see a list of 24 criteria needed to make an accurate rate quote.  Most importantly is ensuring borrowers are being quoted a rate on a mortgage that is a) compatible with their goals b) compatible with their abilities and c) compatible with their comfort.  It is not unusual for me to have a potential client call and say, "I want a quote on a 30 year loan." 

Okay, most loans are 30 years, but some are fixed for the entire time and some are not.  Some are interest only for a period of time and some are not.  Some require excellent credit and full documentation of income and assets and some do not.  The caller is probably asking for a rate on a 30 year fixed rate, but again is it for a purchase? Refinance? How much equity? The list goes on and on.

Beware quotes provided without information being obtained.  You will note in small print below most mortgage sites and rate quotes (*rates subject to change). Because they are subject to change they will change, and guess which way?  Most rate quotes on-line and in advertising are deceptively low in order to get the phones ringing.

I am happy to quote rates.  I quote accurate rates for mortgages we have available.  If you call for a rate quote I will ask you several questions to understand your situation and then tell you what the rate is that day on a particular loan, or loans, and what time period the lock would be for if we were locking in the rate and terms that day.

Anyone can quote interest rates, quoting honest rates that are what a borrower can obtain that fits their criteria however takes some experience, skill and information.

Dennis

 Friday, July 06, 2007

Thanks for checking into my Mortgage Blog, my intention will be to post some updates every couple of days.  I will cover items such as different types of mortgages, credit and debt management, my take on the industry and economic conditions.  As well if you wish to fire away with some questions or topics you want me to comment on I will do so.

You can see my biography here which I hope indicates my experience and bona fides to provide you with opinions and views on the mortgage markets and industry. 

Thanks for checking in, be sure to do so regularly!

Dennis

 Friday, July 06, 2007