Wednesday, September 19, 2007

Factors That Affect Interest Rates

By now every consumer seems to know about the existence of FICO Scores...but what are they really? FICO Scores are essentially indicators of risk, that is, how likely you are to pay your mortgage on time and not go into default. The best way around the score game is if you qualify for FHA or VA or another government initiative designed for entry level homeowners. Naturally there are government caveats on these loans...subject of another blog. There are many factors that affect your interest rate:

FICO Scores affect rates and your borrowing power!
If you apply for a home loan with a FICO credit score of 720+ you will most often be offered the current lowest interest rate if you are able to fully doccument your income and assets and own or are refinancing a solid property. As a 'stated income' applicant with limited or no documentation, the required FICO scores have been raised in 2007 to 700 or better to qualify for decent rates, depending on the specific lender's guidelines. Many conventioanl lenders won't fund self employed borrowers with 'stated income/assets' at all.

It's best to discuss methods of documenting your income that may work for your situation with your mortgage planner. We find it hard to negotiate great rates below 620 FICO scores. Low to mid 600's is generally considered the Alt-A category offering moderately higher rates. Sub Prime Lenders (made famous this year) work with borrowers who have extenuating circumstances and FICO scores as low as 500 or who cannot document their work history or income sufficiently for a conventional loan. Many sub prime borrowers have excellent credit, just short work histories!

For comparison on a Fixed Rate Loan:
720+ FICO = 6.5% for full documentation of income and assets.
680-720 = 7.0 % for full documentation
620-680 = 8.0% for full documentation
540-600 = 10.0% for full documentation

Below 540: You will be charged even higher rates and may only qualify for 'hard money' and shorter terms. The difference in your monthly payments and cost of financing is pretty impressive and will mean the difference in how much house you can afford to purchase.

In addition, there are higher loan costs in points and fees for having sub-par credit. Generally, it's all about risk and the extra work necessary to get your loan closed.

Derogatory credit issues:
1. If you have a history of late payments with creditors within the last twelve months.
2. If you have fewer than three active lines of credit.
3. I you have filed bankruptcy within the last seven years (four years is fund-able with most banks)
4. If you have suffered an foreclosure in the last 10 years.
5. If you have unpaid collections or charge-offs within the last 2-4 years (depending on the lender).
6. If you have liens or judgements against your title.

Title issues:
Liens against a title must be paid off before or at closing to provide a 'clear title' for a lender. In the case of paying off an existing mortgage company, this is straightforward process handled by our escrow agent. In the case of unpaid collections expect additional interest fees or to pay them at closing. Also, if someone else is listed on your title (often in the case of divorce) you must secure a quit claim deed from the other party and submit your divorce or settlement papers.

Beware of adding your children on title. If they are over 18 they can cause serious credit liens without your knowledge by credit card abuse or other bad behavior. According to some states, children under 18 cannot be legally responsible to hold title to mortgages unless their net worth exceeds 2 million dollars.

Property issues:
1. If your property is zoned rural or agricultural over ten acres (some allow 50 acres).
2. If your property is in a flood zone, wetland or hazardous area.
3. If your property appraiser cannot provide three comparable property sales within 2 miles and six months.
4. If the appraiser's report reports significant damage or safety issues (legally they must note this) to the structure.
5. If a manufactured home is pre-1976 era, has been moved, or had additions to alter its structure... it is fund-able with very few lenders at very high rates.

Note: there are many other issues which individual lenders use to establish the rate they offer a borrower, based on their own portfolio of property and risk ratios. In fact, some lenders specialize in higher risk portfolios because they can charge more for the money. The more sub par issues you have on your Credit Report, the greater risk you are considered by a lender, and this is reflected in your score (read more about Credit Scores on previous blogs) As a result, up go the lender's requests for documents (conditions) and potential fees for underwriting and appraisal reviews. Not to mention your bank or broker will charge more for their time.

Now don't let all this talk about rates get you down. The most important aspect of a mortgage is your ability to afford one! Two main factors besides credit history affect your acceptance:
1. The Loan to Value (LTV) which means how much you are borrowing against a property's worth. If the LTV% is under 75% the rate often improves.
2. Your Monthly Payment or Debt to Income (DTI) is usually the kicker...i.e., how much can you afford to pay toward your housing cost every month.

Most lenders have great short term products to help you get a home loan or refinance for a year or three. These loans will help you improve your FICO score and you won't miss out on that wonderful new home at today's prices!

Happy borrowing! 

© 2007 susan templeton

Friday, May 18, 2007

Trigger Lists: Is Your Credit Report Private?

The Federal Trade Commission is allowing the Credit Reporting Bureaus: Equifax, Experian, Innovis, and TransUnion, to re-sell your credit report information.

Here's What Happens:

You go to a bank or mortgage company to discuss your financial situation and they pull a credit report to qualify you for a loan. This triggers an alert in the system that you are in the market for credit. The bureau then compiles lists of consumer reports and re-sells them to other lenders on 'trigger lists'. They are re-selling not just your contact details but may be sharing your actual credit report.

Buyers of the lists target the top FICO score clients first. You may start getting unsolicited calls. Lots of calls. The callers may even imply they are calling from your bank or processor. We have heard of fantastic offers and ridiculous teaser rates for huge sums of money. It doesn't seem to matter if you have an unlisted number --the calls just keep coming.


To stop this cold, egister your phone number on the Do Not Call List. You can then report the offenders at the Do Not Call Registry www.donotcall.gov. The fines are pretty stiff so if you tell a caller you are on this list it's unlikely that person will call again.

The biggest concern is if your actual credit report is being released. Your credit report contains great deal of personal information including account numbers, balances and collections. This puts your mortgage lender you originally consulted in a very awkward position as they are now effectively competing for your business with strangers --people with whom you did not choose to share your personal financial information. Unfortunately some unsolicited callers use misleading tactics--claiming to be from 'your bank' or processing department. This may be a breach of your consumer privacy.

The National Association of Mortgage Brokers is very concerned that the reporting agencies are not properly vetting the credentials of all the lenders who are buying these lists. The Consumer Data Industry Association claims this practice is about providing consumer choice. The problem with this approach is that your financial information may be at risk.



Stop this practice: "Opt Out" on this website: www.optoutprescreen.com or call 1-888-567-8688
Recently, a client called to discuss questions from my processor. It turned out the person who had called her was not my processor. I was mystified how they could have known that she was discussing a mortgage until I heard about trigger lists. These days people refinance and move so frequently, I guess the odds of someone expecting a call from 'their bank' must be in their favor. Your lender should provide the names of people who will be contacting you about your loan ahead of time so you can be sure with whom you are speaking.

I assure you that responsible lenders are protesting this practice. I urge consumers to express your concerns or personal experience to your Congressional Representatives at  http://www.congress.org/

Loannetter
© 2007 susan templeton loannetter

Thursday, April 26, 2007

Stop Unwanted Credit Offers--OPT OUT!

"Soft Hits" to your FICO score at the Bureau level add up...here's a quick way to end the junk mail and save your shredder!

Did you know all those "Pre Approved" credit card offers you get in the mail are actually hurting your FICO score? Of course the disclaimers suggest this is not the case...however my lenders beg to differ. We have seen examples of real live human beings who experienced an improvement in their FICO scores after using this simple method of 'Opting Out'. By the way, when you open any credit or bank account, you should be offered this option but it's not actually something every banker remembers to do.

So, to end the weekly mail deluge and OPT OUT of unwanted credit offers. Click this link:
www.optoutprescreen.com. You can choose to opt IN if you want these offers, opt out for 5 years or opt out forever. By removing your name from these lists you are eliminating ‘soft hits’ to your file….which do add up and lower your credit score. Should you miss the junkmail you can always opt back in later.

If you choose to opt out, unauthorized credit card companies are NOT allowed to check your credit to offer financing, new cards, etc. You will be removed from the marketing lists the bureaus share with subscribed lenders. Over time ‘opting out’ should help improve your FICO score....at least this prevents the bureaus from selling your file (another new 'trend' that consumer groups are trying to stop). Recently at least one of our credit bureaus has suggested they can legally sell their lists to non lenders...when will the madness stop?


Advantages of Opting Out:
1.
Lower your risk of identity theft. By limiting the sheer number of offers you receive, you are limiting the opportunities for an identity thief to steal your mail and get credit in your name.
2. Less junk mail!
3. No negative effect on your credit score or ability to obtain credit.
4. Protecting your privacy!

Happy Opting!
Loannetter

© 2007 susan templeton loannetter

Tuesday, February 06, 2007

Happy FICOS = Happy Couples!

How to make the most of sharing your credit:

Are you recently married or about to become half of a couple? Your personal FICO score and that of your significant other’s could affect how you move forward as a team in the financial world. Buying a home and trading in your wheels for something more exciting (or less?) often requires a joint application once you are sharing a life and the associated joys.


  1. Your FICO® scores will figure highly in the kind of loan and terms you will be offered so here are a few pointers:
  2. You both have individual FICO scores based on previous history
  3. You do NOT have a joint FICO score
  4. As you open Joint Accounts, like credit cards and mortgages, the new history you create together will affect both your individual scores
  5. When applying for loans, lenders usually look at both of your FICO scores when evaluating your loan application
  6. Joint applicants will be tied to the lower of the two applicant’s FICO Score
Which means: If one of you has stellar credit, your low score partner may mean higher rates on joint purchases. What’s low? A FICO score of 500 is really unacceptable. 600 is passable while 700 is considered gold standard. 200 points is a very wide range in the FICO world. You need even higher scores to qualify for ‘stated’ or ‘no ratio’ loans.

It is not uncommon for a spouse who seldom uses credit cards to have the higher score. However, this does not mean you can use the higher score partner to qualify for a loan. The main borrower in most instances must also be the “primary wage earner” and could qualify on their income alone for the debt ratio limits without the other person’s income.

If you must use both your incomes to meet debt ratios (affordability) and one partner has a very low score you may be turned down even if one partner has a very high score. Some non prime lenders offer a ‘high score’ program but you can bet the rates reflect the higher risk factor. In the worst case you may not qualify for any loan. Even hard money lenders have their low score limits.

So what are you to do about your errant beloved with a lower FICO score? Sign up for a personal finance course at your local community college…or better yet read: Smart Couples Finish Rich by David Bach. A few new good habits will be easier with appropriate cheering from the ‘tidier’ partner. Habits can be changed with sufficient motivation.

Now if you really need to apply for a loan using the higher partner’s score--that may be an option--as long as you both appreciate the effect on that partner’s score will be negatively affected by a single late payment. The best habit is to keep your credit clean and healthy is by maintaining low balances on revolving credit and pay everything on time. Consider setting an ‘early reminder’ on your calendar to make payments ahead or have them as automatic drafts for a week ahead of the due date.

Whatever your strategy…once the good behavior starts the FICO scoring system will reward you with a higher score. Take a few pointers from your high FICO score partner and do as they do...and your marriage will be all the happier.

Wishing you every credit sanity!

© 2007 susan templeton