Better Mortgage Rates Start With Better FICO Scores

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If you plan to use a mortgage for your next home purchase, you’ll want to keep your credit scores as high as possible. Credit scores play an out-sized role in determining for which mortgage product you’ll qualify, and to which rate you’ll be assigned by your lender.

The higher your credit score, the lower your mortgage rate will be.

What Is A Credit Score?
History has shown that the best way to predict a person’s behavior over the near-term future is to look at that person’s behavior in the recent past. It’s a concept similar to the First Rule of Physics — an object in motion tends to stay in motion.

We can apply this theory to consumer credit, too. A person who has recently paid his bills on-time should continue to pay his bills on-time in the near-future.

This is the basis of credit scoring; using your past to predict your future.

To mortgage lenders, your credit score represents your likelihood of making on-time mortgage payments for the next 90 days. “90 days” matters because, after 90 days without payments, a homeowner falls into default.

Higher credit scores correlate with lower default risk which explains why people with high credit scores tend to receive lower mortgage rates than people with low credit scores. This is true across all loan types, including conventional, jumbo, and FHA mortgages.

Like most else in finance, those with the lowest risks get to pay the lowest rates.

Lenders Use The FICO Scoring Model, Exclusively
There are three main credit bureaus in the United States. They are Equifax, Experian and TransUnion. Each offers a bevy of credit-scoring products, available for purchase on their respective websites. Prices range from “free” to several hundred dollars.

None, however, are particularly relevant in the home-buying process. This is because the nation’s mortgage lenders rely on a different credit model — the FICO model.

FICO is named for the Fair Isaac Corporation. It was “invented” in the 1950s and has become the mortgage industry standard for credit ratings. Today, FICO scores are omnipresent to the point that people generically refer to all credit scores as “FICO scores”.

This is akin to calling all adhesive bandages “Band-Aids”. FICO is the brand name — not the product.

FICO scores range from 300-850.

Credit Scores Change Mortgage Rates
Your FICO score has always influenced the mortgage rate for which you’re eligible. In 2008, though, it began to change your loan fees.

In response to major mortgage market losses, in April 2008, both Fannie Mae and Freddie Mac introduced something called Loan-Level Pricing Adjustments (LLPA). Loan-level pricing adjustments are “discount points” added to a mortgage rate, based on a specific borrower’s risk to the lender.

A discount point is a loan fee, paid at the time of closing. 1 discount point is equal to 1 percent of your loan size.

Example : A $300,000 mortgage that’s assessed 1 discount point will have $3,000 in extra fees due at closing.

Fannie Mae and Freddie Mac know that low credit scores correlate to high default rates so, like an insurance policy, they assigned the highest costs to the highest-risk borrowers.

Assuming a 20% downpayment, look at how discount points change based on credit score. Fees get massive for FICOs under 700.

• 740+ FICO  : There are no discount points required. This loan is “low risk”.
• 720-739 FICO :  0.250 discount points are charged to the borrower, or $250 per $100,000 borrowed
• 700-719 FICO :  0.750 discount points are charged to the borrower, or $750 per $100,000 borrowed
• 680-699 FICO :  1.500 discount points are charged to the borrower, or $1,500 per $100,000 borrowed
• 660-679 FICO :  2.500 discount points are charged to the borrower, or $2,500 per $100,000 borrowed

Now, not many new home buyers just have that kind of extra cash just laying around. Therefore, as an alternative to paying discount points with cash, many choose to “roll up” the fees into their respective mortgage rates. In general, 1.000 discount point can be “traded in” for a 0.250 increase to your mortgage rate.

Example : A consumer with a 680 FICO score is required to pay 1.500 discount points at closing, or can alternatively accept a mortgage rate increase of 0.375%.

This is why it’s important to keep your credit score high. There are real dollar costs for having scores under 740.

Improving On Your Credit Score
If your credit score is not as high as you’d like, the good news is that you can take steps to raise it — sometimes without even changing your spending habits.

via trulia

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10 Major Mortgage Mistakes to Avoid

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Getting a mortgage is no simple task: It's a complex and time-consuming process, and perhaps one of the most significant events of our lives, at least in financial terms. Here are ten potential pitfalls to avoid:

1. Not checking your credit: Long before you begin searching for a mortgage, you should know where you stand in the credit score department. After all, a bad credit score can bump up your mortgage interest rate several percentage points or leave you with no approval at all. Be sure you check your credit early on (several months in advance) in case any changes need to be made to get it back up to snuff.

2. Applying for new credit alongside the mortgage: In this same vein, be sure to avoid applying for any other type of credit before and during the mortgage application process. Whenever you apply for new credit, you're seen as a greater credit risk, at least initially. If you happen to apply for a credit card or auto loan around the same time you apply for a mortgage, your credit score might get dinged enough to kill your eligibility or bump up your interest rate.

3. Failing to look at the total housing payment: A mortgage payment consists of principal, interest, taxes, and insurance (PITI). A common mistake made by prospective home buyers is not factoring in their property taxes and insurance premium into their overall mortgage budget. The debt-to-income ratio (DTI ratio), used to determine if a borrower will qualify for a certain mortgage payment, is calculated by dividing the proposed cost of PITI by gross monthly income. A $1,200 homeowner's insurance policy would add $100 per month to an escrowed mortgage payment.

4. Not seasoning your assets: The bank or lender will want to see that you can actually pay your mortgage each month. But without seasoned assets, those that have been in your own account for at least a couple months, you could be out of luck entirely. Some borrowers seem to think they can transfer funds from a relative's account days before applying, but this simply won't fly once the underwriter uncovers the paper trail.

5. Job hopping: Another key to mortgage approval is steady employment and income. An underwriter will want to know that the income you bring in every month is consistent and expected to continue into the foreseeable future. So don't jump from job to job too much before applying for a mortgage. If it's in the same field, it shouldn't be a deal killer, but a career change will lead to problems. If you're thinking about jumping ship, wait until you've closed your mortgage first.

6. Not getting pre-approved: Good preparation is the key to a good mortgage. Before shopping for a home, make sure you can actually qualify for financing by getting a pre-approval. A mortgage pre-approval is more robust than a simple pre-qualification because the bank pulls your credit and looks at your income, assets, and employment. Your DTI ratio will also come into play to ensure you know exactly how much you can afford. With this pre-approval, you will also get a written commitment from the lender that will show home sellers you're serious about the purchase.

7. Not shopping around: But just because you're pre-approved with one bank doesn't mean you need to obtain financing from them. Be sure to shop around with multiple banks and lenders and even consider a mortgage broker. A broker can shop your rate with a number of banks concurrently and find you the lowest rate with the best terms. Don't be one of the many consumers who obtains a single mortgage rate prior to applying. Comparison shop as you would for anything else you buy. And don't forget to factor in closing costs!

8. Chasing exotic loan programs: Shop around for the lowest rate and closing costs, but not at the expense of your mortgage. Anything that sounds too good to be true most likely is. If the payment seems too low, you might be paying interest-only or even negatively amortizing, meaning your mortgage balance is growing each month. It's best to keep it simple and go with a loan program you can get your head around, like a fixed-rate mortgage.

9. Forgetting to lock your rate: Keep in mind that a mortgage rate means very little if it's not locked-in. If you're happy with your rate, lock it. Mortgage rates change daily and sometimes several times daily. All those mortgage quotes you obtain are just quotes until you actually tell the bank, lender, or broker to "lock it in." Once locked, your rate is guaranteed for a certain period of time, be it 7 days, 15 days, or a month. But never assume your rate is locked until you get it in writing!

10. Not reading your loan documents: Finally, it's your responsibility to read and accept the terms of your new mortgage. Sure, it might be a pain to go through all the loan documents at signing, but it's a bigger pain to sign up for something you don't want or agree with. Take the time at closing to ensure you understand everything you're signing, and thereby agreeing to. And don't be afraid to ask questions! Otherwise, you could wind up with a mortgage with predatory terms and no place to turn.

by Colin Robertson | U.S.News & World Report LP 

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6 Must-Do's Before Buying a Home

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You might be ready to buy a home, but are you armed with the knowledge you need? Do you know about credit score requirements? Are you familiar with flexible standards on Federal Housing Administration loans?

Whether you are a first-time homebuyer or an experienced owner, buying a house requires a "preflight check," in the words of Barry Zigas, director of housing policy for the Consumer Federation of America.

Here is a six-item checklist, including tips on two types of savings you need, plus advice about what's more important than buying a house for its resale value.

Strengthen your credit score
"It's a brave, new world with respect to credit requirements for mortgages," says John Ulzheimer, president of consumer education at smartcredit.com and formerly of FICO, which pioneered credit scoring.

One old rule still applies: The higher your credit score, the lower your down payment and monthly payments.

"Below 660 or 680, you're either going to have to pay sizable fees or a higher down payment," Zigas says. And that's pretty much the cutoff score for getting a mortgage, he says.

Vicki Bott, deputy assistant secretary for single-family housing at the Department of Housing and Urban Development, says that her office has noticed much the same thing. "While there are many qualified borrowers in the 580 range, the market today is probably (looking for) 640 to 660, at a minimum," Bott says.

On the other end, a score of 700 to 720 will get you a good deal and 750 and above will garner the best rates on the market, Ulzheimer says.

Improve your chances by: pulling your credit reports and ensuring you're not being unfairly penalized for old, paid or settled debts, Zigas says.

Stop applying for new credit a year before you apply for financing. And keep the moratorium in place until after you close on your home, Ulzheimer says.

Figure out how much house you can afford
The buyer's mantra: Get a home that's financially comfortable.

There are various rules of thumb that will help you get an idea of how much home you can afford. If you're using FHA financing, as almost one-fifth of buyers get FHA-insured loans, your home payment can't exceed 31 percent of your monthly income. But, with some mitigating factors, FHA will let you go higher.

For conventional loans, a safe formula is that home expenses should not exceed 28 percent of your gross monthly income, says Susan Tiffany, director of consumer periodicals for the Credit Union National Association.

Improve your chances by: trying on that financial obligation long before you sign the mortgage papers, says Tiffany. Before you home shop, calculate the mortgage payment for the home in your intended price range, along with the increased expenses (such as taxes, insurance and utilities). Then bank the difference between that and what you're paying now.

Not only does it allow you to build a nice nest egg, but "you can back away from it," or scale back, if the payments start to pinch, she says.

Save for down payment and closing costs
Depending on your credit and financing, you'll typically need to save enough money to put anywhere from 3.5 percent to 20 percent down.

If you're using FHA financing, then you need a score of 500 or higher. And in the 500 to 579 range, if you can find a lender, you'll have to put 10 percent down instead of 3.5 percent.

One exception: Veterans Affairs loans, which require no down payment.

Another cash expense: closing costs. Whatever your loan source, you'll also need money to pay closing costs, which run (depending on where you live), from $2,300 to $4,000. Get the average closing costs in your state at Bankrate's closing costs map.

Improve your chances by: Along with banking your own money, search out down payment assistance, Tiffany says. Often it's location-based or tagged to a certain type of buyer, like first-timers, she says. So do an Internet search with the city name, then the county name, along with word combinations such as "down payment assistance," "first-time homebuyers" and "homebuyer's assistance."

In a buyer's market, you can also negotiate to have the seller pay a portion of the closing costs.

Build a healthy savings account
This is over and above your money for the down payment and closing. Your lender wants to see that you're not living paycheck to paycheck. If you have three to five months' worth of mortgage payments set aside, that makes you a much better loan candidate. And some lenders and backers, like the FHA, will give you a little more latitude on other factors if they see that you save a cash cushion.

That money will also help you with maintenance and repair issues that come up when you own a home. While repairs are sporadic, items such as a new roof, water heater or other big-ticket items can hit suddenly and hard.

Improve your chances by: setting aside money every month. A good rule of thumb: on average you'll spend 2.5 percent to 3 percent of your home's value annually on upkeep, repairs and maintenance, says Joseph Gyourko, chairman of the real estate department at the Wharton School of the University of Pennsylvania. If you're buying a $250,000 home, aim to bank $520 to $625 per month.

Get preapproved for a mortgage
For serious home shoppers, "the No. 1 thing is they better have everything in order," says Dick Gaylord, past president of the National Association of Realtors. That means that, before the real home shopping begins, you want to get financing in place, he says.

And the preapproval process is "much more extensive" than it was a few years ago, he says.

Bott agrees. "That documentation around income and assets is very essential, more so than in the last five years," she says.

Improve your chances by: getting financing in place "before you walk through the first house," Gaylord says. Otherwise, he says, "How do you know how much you can afford?"

Buy a house you like
If you're buying today for yourself and your family, you want a home that will make you happy for the next few years.

Gone are the days when you could count on a quick sale, Tiffany says. And depending on how much you put down, and how much you have to shell out to sell and relocate, short-term ownership can be a pretty expensive proposition.

Improve your chances by: stepping back, Gyourko says, and making certain "you like the house."

via bankrate

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The Right Mortgage

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If you're considering buying a home, securing a mortgage loan is a key part of the process.  However, you’re probably wondering: how do I find the best mortgage loan for my financial needs? Generally speaking, there are two types of mortgage loans:

• A fixed-rate mortgage offers a rate that stays the same over the life of the loan. This type of loan generally has a longer term and may be good if you plan to own your home for a long time.
• An adjustable-rate mortgage offers an interest rate that adjusts based on market conditions (it goes higher or lower) after a specified time period. This type of loan may be good for people who need an initial lower monthly payment.

Consider the following factors to help you gain insight into the kind of home you can afford, and the type of mortgage that will best fit your financial situation:

How long do you plan to own the home?

• Some loans have longer terms (from 15 to 40 years) that typically work well when you plan to stay in the home for a long time. Other loans have lower interest rates for a shorter term, and may be attractive if you plan to move in five to seven years.
• CONSIDER: How many years do you plan to stay in the home? Will you move within seven years, or is this the place to "settle down?"

How much can you afford as a down payment?

• 20% of the cost of the home is standard for the down payment on a conventional loan, but there are loans that allow you to put down as little as 5 or 10%.
• The higher your down payment, the lower your monthly mortgage payment will be.
• CONSIDER: How much can you realistically afford as the down payment?

What is the general price range for other homes in your neighborhood?

• How many homes are for sale in the area? How are they priced? Do you have a list of comparable properties?
• Are there other neighborhoods that catch your eye? How are the homes in these other areas priced?
• CONSIDER: Which area/home features the best combination of location, quality, and cost for you.

Which of the following is more important to you?

• To have low monthly payments?
• To pay less over the life of the loan, even if monthly payments are high?
• Some loans offer lower monthly mortgage payments over a long period of time. Other loans are designed to be paid in a shorter time frame, but have higher monthly payments.
• CONSIDER: Which situation would work best for you? It helps to be clear about your financial goals and resources.

Your credit history

• Mortgage lenders will look at your credit history and credit score to determine your track record for paying off debt.
• CONSIDER: Do you have a good credit score? Review your credit report to find out.

via bhgrealestate.com

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Are You Upside Down?

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Do you owe more on the home then what its worth?
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HARP 2.0 can help.
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7 Things You Didn't Know Affect Your Credit Score

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We all know to pay our bills on time and carry as little debt as possible, and most of the time, that is all that matters in your credit score. Yet, there are other, smaller factors that many people aren't aware of that can cause your score to suffer.

Small Unpaid Private Debts

Many people pay their mortgage, credit card and utility bills with unflappable consistency, yet neglect smaller debts. They may feel that these debts are illegitimate or that they will just go away if ignored. For example, municipalities have been known to report unpaid parking tickets and even library fines to credit bureaus. Unfortunately, any unpaid debt can weigh down your credit score.

Tax Liens 

You might not think of the IRS as an agency that reports to credit bureaus, but Uncle Sam figured out long ago how to use your credit history as leverage. In fact, these records remain in your credit history for 15 years; even longer than a bankruptcy. If you have an unpaid tax lien, paying it off will certainly help your credit score, but it can't undo all the damage done by having there in the first place.

Utility Bills

Your electricity bill or gas bill is not a loan, but failing to pay it will hurt your credit score. While these companies won't normally report their customer's payment history, they will report delinquent accounts much more quickly than other institutions, so be careful.

Too Many Recent Credit Applications 

It can be tempting to sign up for various credit cards that offer some bonus for your business. Banks can offer tens of thousands of points or miles, while retailers grant in-store discounts when you apply for their credit card. By themselves, these applications have an insignificant effect, but too many credit checks in too short of a time period can lower your credit score. To avoid this problem, limit the number of applications for credit, especially when you are shopping for a home, car or student loan.

Long-Term Loan Shopping 

Consumers may know that too many credit inquiries will lower their credit score. Nevertheless, to allow consumers to shop around for the best rates on automobile, student and home loans, the FICO will not penalize borrowers who have multiple credit checks in a short period of time. Various FICO formulas negate multiple inquiries with either 14 or 45 days. Therefore, continuing to shop around for a loan over several months will fall outside of this safe harbor and will lower your score.

Business Credit Cards 

Do you have a credit card in the name of your business? Nevertheless, almost all banks will still hold you personally responsible for your debts. Furthermore, your payment history is reported to the credit bureaus. Therefore, any late payments or unpaid debts in the name of your business will affect your personal credit, so long as you are the primary account holder on a business card.

Mistakes 

Any incorrect information in your credit history can hurt your score. For example, people with common names frequently find other people's information in their file. In other cases, typos and clerical errors result in adverse information affecting your score. This is one of the reasons why consumers are encouraged to complete soft inquires at least once a year and dispute any mistakes they find.

The Bottom Line

By paying close attention to the decisions they make, consumers can avoid taking actions that seem harmless, but can really hurt their credit.

via yahoo finance

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Your Credit Report Will Be Re-Pulled Just Prior To Closing (And It Could Change Your Loan Terms)

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When does "cleared to close" not mean "cleared to close"? When Fannie Mae's involved, that's when.

Fannie Mae's "Loan Quality Initiative"

Fannie Mae doesn't make loans. Rather, it buys loans from banks and securitizes them into mortgage-backed securities. As such, Fannie Mae wants to make sure that every loan it buys to meet its basic underwriting standards. That way, it can stand behind the quality of its securities.

And, when we talk about loan approvals, this is actually what's happening; your loan is being underwritten based on Fannie Mae's guidelines. Loans approved for closing are -- presumably --  in line with Fannie Mae's minimum standards.

We say "presumably" because when foreclosures began to increase last decade, Fannie Mae started an audit of its loans and found large numbers of mortgage that had failed to meet its standards. Some loans, it found, were grossly underwritten, comprising its securities and its bottom-line.

To limit "bad loans", Fannie Mae created its Loan Quality Initiative.

The Loan Quality Initiative is broad in scope, comprising 9 pages. For banks, it creates "extra steps" in underwriting. It's validation of things like social security numbers and borrower occupancy. They're small tasks, but time-consuming, and there's a lot of them.

As a mortgage applicant, you don't have to worry about what the bank is doing. You have one task only -- don't mess up your credit.

Just Before Funding, Your Credit Will Be Repulled

The Loan Quality Initiative requires lenders to re-verify credit credit profiles just prior to closing and to look for changes. In other words, although your credit was pulled at the start of underwriting, Fannie Mae wants your bank to pull it again -- just in case something changed.

This ensures that loans are priced properly, and are funded on the borrower's risk at closing as opposed to at application; because a lot can change while a loan is in-process. Especially when the loan is for a purchase closing in 60 days or more.

Banks will repull your credit prior to closing. Some of the things they're looking for include :

• Did you apply for new credit cards while your loan was in-process?
• Did you run up existing cards while your loan was in-process?
• Did you finance an automobile while your loan was in-process?
• Did you make some other major purchase while your loan was in-process?
• Did you add non-disclosed debts while your loan was in-process?

Each of the above is a red flag to underwriting. If your "final" credit report doesn't match your original credit report, your mortgage may be subject to a complete re-underwrite and, in a worst case scenario, a loan application denial.

The 3 Credit Hotspots For Loans In-Process

The Loan Quality Initiative is pretty straight-forward and common sense-like. As a mortgage applicant, it's easy to avoid its claws. There are 3 things for which an underwriter is looking in your credit file.

Here are those 3 items how the bank will react.

What the bank will do: Recalculate debt-to-income ratios using your "new" minimum payment due figures. If the DTI exceeds Fannie Mae's maximum threshold, the loan will be denied.

What you should do about it: Don't run up credit cards prior to closing -- even for layaway items. Consider paying more than the minimum due, just in case.

What the bank will do: Use your new credit score to assess loan-level pricing adjustments or outright denials for when scores fall below Fannie Mae's minimum credit score requirement.

What you should do about it: Follow the basic rules of keeping your credit score high -- pay your bills, don't let things go into collection, and don't look for new credit unless necessary. myFICO.com has a terrific series on credit scoring you can review.

What the bank will do: Look at the Credit Inquiry section of your credit report to look for "non-disclosed liabilities". If items are found, the bank will ask for supporting documentation on the inquiry, and will use the information to re-underwrite your mortgage.

What you should do about it: Don't go looking for new credit until after your loan is funded.  Period.  Now re-read that first sentence, please, to help it sink it.

And remember -- this is all happening after your loan has reached "final approval" status. You should protect your credit all the way through funding. Don't buy new furniture on credit the day before you move in; or buy a car for that new garage.

Loan Approvals Tough, But Not Impossible

Fannie Mae began its Loan Quality Initiative to improve its loan pool's overall performance.  Better loan quality helps to keep conforming mortgage rates down and reduces the taxpayer burden of bad loans.  That's two big wins.

Unfortunately, the Loan Quality Initiative can also result in additional mortgage turndowns and broken closings.

Therefore, be extra careful with your credit between your application date and closing.  If you must buy something big, consider paying cash or waiting it out.  major purchases on your credit card can be grounds to revoke an approval.

Even if your loan is cleared-to-close.

Apply For A Mortgage With Great, Low Rates

Fannie Mae's Loan Quality Initiative applies to Fannie Mae loans only. It does not apply to FHA mortgages, USDA loans, VA loans or jumbo loans. However, it's still good smarts to keep your credit clean while your loan is in-process.

via themortgagereport.com

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Refinancing Gets Even More Attractive

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Homeowners who have resisted the urge to refinance their mortgages until now could be rewarded for their willpower. Mortgage rates have fallen to new lows—and banks are rolling out incentives to win business.

Economic uncertainty in Europe and slow growth in the U.S. are prompting investors to pile into ultrasafe U.S. Treasurys. That, in turn, is pushing down mortgage rates, which are tied to Treasurys.

The average interest rate on a 30-year mortgage fell to 4.05% for the week ended Dec. 23, the lowest in 60 years, according to HSH Associates, a mortgage-data firm. And rates on jumbo mortgages—private loans that in most parts of the country are larger than $417,000—also have hit new lows, averaging 4.61%.

"It's hard to argue rates will get much lower than they are today," says Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles.

That's good news for homeowners. A person who refinanced a $400,000 30-year mortgage in February would pay an interest rate of 5.04% on average, according to HSH Associates, and fork over $2,157 a month; at the current rate of 4.05%, he'd save $236 per month, or $2,830 per year.

What's more, demand for refinancing is declining, since many homeowners already took advantage of lower mortgage rates. Applications for refinancing are 17% below this year's peak in September, according to the latest data from the Mortgage Bankers Association.

That and other factors have prompted some lenders to offer incentives to win new business—particularly regional and community banks, which are focusing more on jumbo mortgages, says Stu Feldstein, president at SMR Research, which tracks the mortgage market.

The discounts can be sizable. Regional bank Valley National Bank charges homeowners in New Jersey and eastern Pennsylvania a flat fee of $499 for closing costs on mortgages as large as $1 million. Since average closing costs on a refinance run about 2% of the total loan amount, a person with an $800,000 mortgage could save about $15,500.

A spokesman for the bank says it is aggressively marketing the discount in part to bring in more customers.

While many lenders don't refinance mortgages that are larger than about $2 million, Union Bank—which has branches in California, Oregon and Washington—refinances up to $4 million at no extra cost. (Many banks that refinance multimillion-dollar mortgages tack up to an extra quarter of a percentage point on the interest rate.)

Since November, Union Bank has also allowed borrowers to roll the costs of a refinance, like the appraisal fee and loan processing fee, into the mortgage. And borrowers whose original mortgage is from Union Bank don't have to provide all of the income documentation that other customers do in order to refinance.

In part, the bank's goal is to develop relationships with high-net-worth clients, says Stuart Bernstein, national production manager of residential lending at Union Bank.

Despite the incentives, many would-be applicants remain sidelined because they can't meet the long list of qualifications.

The home-equity requirement is one of the toughest hurdles, says Mr. Feldstein. Homeowners with at least 10% home equity make the cut, but people with less have a tougher time.

Borrowers with 10% to 19% equity in their home usually have to buy private mortgage insurance, whose cost varies based on many factors, including their credit score. A borrower with 15% equity and a FICO credit score above 720 could pay 0.44% of the total loan amount, says Keith Gumbinger, vice president at HSH Associates. On an $800,000 loan that would be $3,520 a year—eating into the potential savings of a refinance.

In December, the federal government rolled out a revamped version of the Home Affordable Refinance Program with relaxed home-equity requirements, to allow more borrowers to refinance. To qualify, the current mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae, and borrowers need to be mostly current on payments.

For regular refinancing, applicants need a FICO credit score of at least 740 to get the best rates, says Mr. Gumbinger. And they must provide copious documentation, including at least two years' worth of tax returns and proof of income as well as recent statements for assets such as retirement and brokerage accounts.

After clearing those hurdles, you might wait about 60 days for refinancing to be completed, says Mr. Gumbinger—longer than the typical 45 days. While some lenders are offering 60-day rate locks for free, others charge a quarter of a percentage point of the total loan amount for the service. On an $800,000 mortgage, that's $2,000.

Or you could opt to take your chances with a free 45-day lock and hope rates don't spike between day 46 and the date your loan closes. With the euro zone still in economic crisis and global investors rushing to the safety of U.S. Treasurys, housing-market analysts say it could be at least six months before rates rise significantly.

By AnnaMaria Andriotis | The Wall Street Journal

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Better Mortgage Rates Start With Better FICO Scores

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If you plan to use a mortgage for your next home purchase, you’ll want to keep your credit scores as high as possible. Credit scores play an out-sized role in determining for which mortgage product you’ll qualify, and to which rate you’ll be assigned by your lender.

The higher your credit score, the lower your mortgage rate will be.

What Is A Credit Score?

History has shown that the best way to predict a person’s behavior over the near-term future is to look at that person’s behavior in the recent past. It’s a concept similar to the First Rule of Physics — an object in motion tends to stay in motion.

We can apply this theory to consumer credit, too. A person who has recently paid his bills on-time should continue to pay his bills on-time in the near-future.

This is the basis of credit scoring; using your past to predict your future.

To mortgage lenders, your credit score represents your likelihood of making on-time mortgage payments for the next 90 days. “90 days” matters because, after 90 days without payments, a homeowner falls into default.

Higher credit scores correlate with lower default risk which explains why people with high credit scores tend to receive lower mortgage rates than people with low credit scores. This is true across all loan types, including conventional, jumbo, and FHA mortgages.

Like most else in finance, those with the lowest risks get to pay the lowest rates.

Lenders Use The FICO Scoring Model, Exclusively

There are three main credit bureaus in the United States. They are Equifax, Experian and TransUnion. Each offers a bevy of credit-scoring products, available for purchase on their respective websites. Prices range from “free” to several hundred dollars.

None, however, are particularly relevant in the home-buying process. This is because the nation’s mortgage lenders rely on a different credit model — the FICO model.

FICO is named for the Fair Isaac Corporation. It was “invented” in the 1950s and has become the mortgage industry standard for credit ratings. Today, FICO scores are omnipresent to the point that people generically refer to all credit scores as “FICO scores”.

This is akin to calling all adhesive bandages “Band-Aids”. FICO is the brand name — not the product.

FICO scores range from 300-850.

Credit Scores Change Mortgage Rates

Your FICO score has always influenced the mortgage rate for which you’re eligible. In 2008, though, it began to change your loan fees.

In response to major mortgage market losses, in April 2008, both Fannie Mae and Freddie Mac introduced something called Loan-Level Pricing Adjustments (LLPA). Loan-level pricing adjustments are “discount points” added to a mortgage rate, based on a specific borrower’s risk to the lender.

A discount point is a loan fee, paid at the time of closing. 1 discount point is equal to 1 percent of your loan size.

Example : A $300,000 mortgage that’s assessed 1 discount point will have $3,000 in extra fees due at closing.

Fannie Mae and Freddie Mac know that low credit scores correlate to high default rates so, like an insurance policy, they assigned the highest costs to the highest-risk borrowers.

Assuming a 20% downpayment, look at how discount points change based on credit score. Fees get massive for FICOs under 700.

740+ FICO  : There are no discount points required. This loan is “low risk”.

720-739 FICO :  0.250 discount points are charged to the borrower, or $250 per $100,000 borrowed

700-719 FICO :  0.750 discount points are charged to the borrower, or $750 per $100,000 borrowed

680-699 FICO :  1.500 discount points are charged to the borrower, or $1,500 per $100,000 borrowed

660-679 FICO :  2.500 discount points are charged to the borrower, or $2,500 per $100,000 borrowed

Now, not many new home buyers just have that kind of extra cash just laying around. Therefore, as an alternative to paying discount points with cash, many choose to “roll up” the fees into their respective mortgage rates. In general, 1.000 discount point can be “traded in” for a 0.250 increase to your mortgage rate.

Example : A consumer with a 680 FICO score is required to pay 1.500 discount points at closing, or can alternatively accept a mortgage rate increase of 0.375%.

This is why it’s important to keep your credit score high. There are real dollar costs for having scores under 740.

Improving On Your Credit Score

If your credit score is not as high as you’d like, the good news is that you can take steps to raise it — sometimes without even changing your spending habits.

via Trulia

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What’s in your credit report?

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Although each credit reporting agency formats and reports this information differently, all credit reports contain basically the same categories of information. Your social security number, date of birth and employment information are used to identify you. These factors are not used in credit scoring. Updates to this information come from information you supply to lenders.

Identifying Information.

Your name, address, Social Security number, date of birth and employment information are used to identify you. These factors are not used in credit scoring. Updates to this information come from information you supply to lenders.

Trade Lines.

These are your credit accounts. Lenders report on each account you have established with them. They report the type of account (bankcard, auto loan, mortgage, etc), the date you opened the account, your credit limit or loan amount, the account balance and your payment history.

Credit Inquiries.

When you apply for a loan, you authorize your lender to ask for a copy of your credit report. This is how inquiries appear on your credit report. The inquiries section contains a list of everyone who accessed your credit report within the last two years. The report you see lists both "voluntary" inquiries, spurred by your own requests for credit, and "involuntary" inquires, such as when lenders order your report so as to make you a pre-approved credit offer in the mail.

Public Record and Collection Items.

Credit reporting agencies also collect public record information from state and county courts, and information on overdue debt from collection agencies. Public record information includes bankruptcies, foreclosures, suits, wage attachments, liens and judgments.

via myfico

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Top 6 reasons mortgage applications are rejected

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By Tara-Nicholle Nelson

Inman News™

Half of refinance applications are abandoned or rejected, as are 30 percent of purchase mortgage applications, according to the Mortgage Bankers Association. All told, the Federal Financial Institutions Examination Council (FFIEC) says that well over 2 million mortgage applications were rejected last year.

Want to avoid falling into that number? It's tough -- especially in light of the fact that mortgage lenders have become increasingly restrictive in terms of their lending guidelines since the housing market crash.

Here, as a cautionary tale and primer on what to expect, are the top six reasons mortgage lenders reject applications.

1. Income issues. Most failed applications falling into this category have income too low for the mortgage amount they are seeking; often, a spouse's credit issues can create this problem, too, as the income the spouse plans to actually chip in toward the mortgage cannot be considered by a lender.

But increasingly, the recent vagaries of the job market are also causing this issue, as people who have changed their line of work or have changed from salaried employee to freelancer over the last couple of years can also have their home loan applications rejected based on income.

2. Muddled money matters. If the mortgage for which you're applying plus your monthly payments on credit card, car and student loan debts will comprise more than 45 percent of your total income, you could have problems qualifying for a home loan. You might also run into problems if you rely too heavily on bonuses, overtime, cash wages or rental income -- all of these can be difficult or impossible to get a mortgage bank to consider, and if they do, they might not take all of it into account.

3. Credit issues. Today, the mortgage-qualifying FICO score cutoff falls somewhere between 620 and 660, depending on which lender and which loan type you seek. More than one-third of Americans, by some numbers, have credit scores too low to qualify for a home loan. Even if your credit score is high enough to qualify, if you have any late mortgage payments, a short sale, a foreclosure or a bankruptcy in the last two years, loan qualifying could be difficult to impossible.

4. Property didn't appraise. Since the whole industry had its hand (among other things) smacked for allowing home values to skyrocket in a very short time, appraisal guidelines have tightened up -- some would say, even more than overall mortgage guidelines. So, it is increasingly common to have the property appraise for a price lower than the sale price negotiated between the buyer and seller.

This is especially common in the refinance realm, as well over a quarter of U.S. homes are now upside-down, meaning the mortgage balance owed is greater than the value of the home. (If you're trying to refinance an upside-down mortgage, consider the FHA Short Refi program -- contact your lender or get referrals to any mortgage broker who makes FHA details to apply.)

5. Condition problems. With all the distressed properties on the market, and with most nondistressed sellers barely breaking even, more home-sale transactions than ever are falling apart due to condition problems with the property. Many lenders will not extend financing on homes where the appraiser points out problems like cracked or broken windows, missing kitchen appliances, electrical problems, or wood rot.

And in the world of condos and other units that belong to a homeowners association, if more than 25 percent of units are rented (rather than owner-occupied) or more than 15 percent are delinquent on their HOA dues, new applications for refinance or purchase mortgages on units in the development are likely to be rejected.

6. Technical difficulties with application. The days when lenders just took your word for it are long, long gone. Applications with incomplete or unverifiable information are doomed.

If any of these mortgage loan application glitches arise in your homebuying or refinancing process, it's critical that you connect with your mortgage professional, be it your banker or mortgage broker, to determine what course of action to take.

In some cases, it might be as simple as buying a stove you find at Craigslist and installing it before escrow closes; but with income issues your mortgage pro will need to help you determine whether it makes sense to pay some bills down, get a co-signer, or even wait six months so your income documentation will qualify.

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How to Repair Your Credit and Improve Your FICO Credit Score

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It's important to note that repairing bad credit is a bit like losing weight: It takes time and there is no quick way to fix a credit score. In fact, out of all of the ways to improve a credit score, quick-fix efforts are the most likely to backfire, so beware of any advice that claims to improve your credit score fast. The best advice for rebuilding credit is to manage it responsibly over time. If you haven't done that, then you need to repair your credit history before you see credit score improvement. The tips below will help you do that. They are divided up into categories based on the data used to calculate your credit score.

3 Important Things You Can Do Right Now

1. Check Your Credit Report – Credit score repair begins with your credit report. If you haven't already, request a free copy of your credit report and check it for errors. Your credit report contains the data used to calculate your score and it may contain errors. In particular, check to make sure that there are no late payments incorrectly listed for any of your accounts and that the amounts owed for each of your open accounts is correct. If you find errors on any of your reports, dispute them with the credit bureau and reporting agency. 
2. Setup Payment Reminders – Making your credit payments on time is one of the biggest contributing factors to your credit score. Some banks offer payment reminders through their online banking portals that can send you an email or text message reminding you when a payment is due. You could also consider enrolling in automatic payments through your credit card and loan providers to have payments automatically debited from your bank account, but this only makes the minimum payment on your credit cards and does not help instill a sense of money management.
3. Reduce the Amount of Debt You Owe – This is easier said than done, but reducing the amount that you owe is going to be a far more satisfying achievement than improving your credit score. The first thing you need to do is stop using your credit cards. Use your credit report to make a list of all of your accounts and then go online or check recent statements to determine how much you owe on each account and what interest rate they are charging you. Come up with a payment plan that puts most of your available budget for debt payments towards the highest interest cards first, while maintaining minimum payments on your other accounts.

More Tips on How to Fix a Credit Score & Maintain Good Credit

Payment History Tips

Contributing 35% to your score calculation, this category has the greatest effect on improving your score, but past problems like missed or late payments are not easily fixed.

• Pay your bills on time. Delinquent payments, even if only a few days late, and collections can have a major negative impact on your FICO score.
• If you have missed payments, get current and stay current. The longer you pay your bills on time after being late, the more your FICO score should increase. Older credit problems count for less, so poor credit performance won't haunt you forever. The impact of past credit problems on your FICO score fades as time passes and as recent good payment patterns show up on your credit report. And good FICO scores weigh any credit problems against the positive information that says you're managing your credit well.
• Be aware that paying off a collection account will not remove it from your credit report. It will stay on your report for seven years.
• If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This won't rebuild your credit score immediately, but if you can begin to manage your credit and pay on time, your score should increase over time. And seeking assistance from a credit counseling service will not hurt your FICO score.

Amounts Owed Tips

This category contributes 30% to your score's calculation and can be easier to clean up than payment history, but that requires financial discipline and understanding the tips below.

• Keep balances low on credit cards and other "revolving credit". High outstanding debt can affect a credit score.
• Pay off debt rather than moving it around. The most effective way to improve your credit score in this area is by paying down your revolving (credit cards) debt. In fact, owing the same amount but having fewer open accounts may lower your score.
• Don't close unused credit cards as a short-term strategy to raise your score.
• Don't open a number of new credit cards that you don't need, just to increase your available credit. This approach could backfire and actually lower your credit score.

Length of Credit History Tips

• If you have been managing credit for a short time, don't open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.

New Credit Tips

• Do your rate shopping for a given loan within a focused period of time. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
• Re-establish your credit history if you have had problems. Opening new accounts responsibly and paying them off on time will raise your credit score in the long term.
• Note that it's OK to request and check your own credit report. This won't affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.

Types of Credit Use Tips

• Apply for and open new credit accounts only as needed. Don't open accounts just to have a better credit mix – it probably won't raise your credit score.
• Have credit cards – but manage them responsibly. In general, having credit cards and installment loans (and paying timely payments) will rebuild your credit score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
• Note that closing an account doesn't make it go away. A closed account will still show up on your credit report, and may be considered by the score.

To summarize, "fixing" a credit score is more about fixing errors in your credit history (if they exist) and then following the guidelines above to maintain consistent, good credit history. Raising your score after a poor mark on your report or building credit for the first time will take patience and discipline.


via myfico

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How credit scoring helps you

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Credit scores give lenders a fast, objective measurement of your credit risk. Before the use of scoring, the credit granting process could be slow, inconsistent and unfairly biased.

Credit scores – especially FICO® scores, the most widely used credit bureau scores – have made big improvements in the credit process. Because of credit scores:

People can get loans faster. 

Scores can be delivered almost instantaneously, helping lenders speed up loan approvals. Today many credit decisions can be made within minutes. Even a mortgage application can be approved in hours instead of weeks for borrowers who score above a lender's “score cutoff”. Scoring also allows retail stores, Internet sites and other lenders to make “instant credit” decisions.

Credit decisions are fairer.

Using credit scoring, lenders can focus only on the facts related to credit risk, rather than their personal feelings. Factors like your gender, race, religion, nationality and marital status are not considered by credit scoring.

Credit “mistakes” count for less.If you have had poor credit performance in the past, credit scoring doesn't let that haunt you forever. Past credit problems fade as time passes and as recent good payment patterns show up on your credit report. Unlike so-called “knock out rules” that turn down borrowers based solely on a past problem in their file, credit scoring weighs all of the credit-related information, both good and bad, in your credit report.

More credit is available.

Lenders who use credit scoring can approve more loans, because credit scoring gives them more precise information on which to base credit decisions. It allows lenders to identify individuals who are likely to perform well in the future, even though their credit report shows past problems. Even people whose scores are lower than a lender's cutoff for “automatic approval” benefit from scoring. Many lenders offer a choice of credit products geared to different risk levels. Most have their own separate guidelines, so if you are turned down by one lender, another may approve your loan. The use of credit scores gives lenders the confidence to offer credit to more people, since they have a better understanding of the risk they are taking on.

Credit rates are lower overall.

With more credit available, the cost of credit for borrowers decreases. Automated credit processes, including credit scoring, make the credit granting process more efficient and less costly for lenders, who in turn have passed savings on to their customers. And by controlling credit losses using scoring, lenders can make rates lower overall. Mortgage rates are lower in the United States than in Europe, for example, in part because of the information - including credit scores - available to lenders here. Knowing and improving your score can also lead to more favorable interest rates

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What's Not in Your FICO® Score

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FICO scores consider a wide range of information on your credit report. However, they do not consider:

• Your race, color, religion, national origin, sex and marital status. US law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.
• Your age. Other types of scores may consider your age, but FICO scores don't.
• Your salary, occupation, title, employer, date employed or employment history. Lenders may consider this information, however, as may other types of scores.
• Where you live. 
• Any interest rate being charged on a particular credit card or other account.
• Any items reported as child/family support obligations or rental agreements.
• Certain types of inquiries (requests for your credit report). The score does not count “consumer-initiated” inquiries – requests you have made for your credit report, in order to check it. It also does not count “promotional inquiries” – requests made by lenders in order to make you a “pre-approved” credit offer – or “administrative inquiries” – requests made by lenders to review your account with them. Requests that are marked as coming from employers are not counted either.
• Any information not found in your credit report.
• Any information that is not proven to be predictive of future credit performance.
• Whether or not you are participating in a credit counseling of any kind.

via myfico.com

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What’s in your FICO® score

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FICO Scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining your FICO score.

These percentages are based on the importance of the five categories for the general population. For particular groups - for example, people who have not been using credit long - the importance of these categories may be somewhat different.

Payment History

• Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
• Presence of adverse public records (bankruptcy, judgements, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
• Severity of delinquency (how long past due)
• Amount past due on delinquent accounts or collection items
• Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any)
• Number of past due items on file
• Number of accounts paid as agreed

Amounts Owed

• Amount owing on accounts
• Amount owing on specific types of accounts
• Lack of a specific type of balance, in some cases
• Number of accounts with balances
• Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
• Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)

Length of Credit History

• Time since accounts opened
• Time since accounts opened, by specific type of account
• Time since account activity

New Credit

• Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
• Number of recent credit inquiries
• Time since recent account opening(s), by type of account
• Time since credit inquiry(s)
• Re-establishment of positive credit history following past payment problems

Types of Credit Used

• Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)

Please note that:

• A FICO score takes into consideration all these categories of information, not just one or two. No one piece of information or factor alone will determine your score.
• The importance of any factor depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO score. Thus, it's impossible to say exactly how important any single factor is in determining your score - even the levels of importance shown here are for the general population, and will be different for different credit profiles. What's important is the mix of information, which varies from person to person, and for any one person over time.
• Your FICO score only looks at information in your credit report. However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.
• Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO credit score.

via myfico.com

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