Understanding Your Credit Rating

If you are thinking about buying a new home, or vacation home or income property, or real estate of any type, you need to start thinking about your credit reports and what they say about how you pay your bills, because the mortgage lenders will want to see them also before approving your loan. How well you have handled your credit obligations in the past is going to determine the loan you get, or don’t get. 

One good thing is that your credit rating is available to you.  Your credit history is maintained by three different private companies called credit reporting agencies: Equifax, Trans-Union and Experian.
(Their websites and phone numbers are listed at the end of this article)
You can order your report by phone and charge it to your major credit card if you like. It usually takes about a week to arrive. You can even order your report online directly from each of the three agencies, but they have to verify your identity before you can obtain any private information.
 
You want the information directly from each reporting agency, even the mistakes and blemishes and all, so you can see what exactly is on each one.  If you see obvious mistakes, you can get them cleared off in time to start your loan process. Be sure to order a copy from each of the three companies, because if an error exists on even one of the reports, it may negatively affect your chances of getting the loan you want. It is not unusual for one company of the three, to have a mistake on your credit report. 

Your credit report lists all the consumer credit that has been extended to you over the past seven years. It will show what your highest balance has been and what your current balance was on the date last reported by the creditor. It will also show how many payments you made on time and how many late payments were late. Late payments are grouped into categories showing how late you were.  (For example: if your credit card payment was over 30 days late one time, it might not be considered too serious. But if payments were over 60 days late four times, over 120 days late two times and over 180 days late one time, you have had a serious problem. That problem is going to impact your ability to borrow money)

It makes sense to find out about your credit and correct any errors now. Regardless of how many credit problems you have had in the past, there are two good points to remember.  First, negative credit information can be reported in your credit file for only seven years. After that, it drops out and cannot even be considered. The one exception is bankruptcy, which can be reported for 10 years. But after that you start with essentially a clean slate. Second, lenders are much more concerned about how you have handled your credit recently than with what happened several years ago. Even if you have had a bankruptcy, if you have kept your nose clean and paid your bills on time since then, it is possible you could qualify for a loan after as little as two or three years.

One of the best developments in the world of lending has been risk-based pricing. That’s a five dollar term for the ability of lenders to offer higher priced loans to borrowers based on their demonstrated ability to repay. In other words, even if you have slightly fractured credit, you can still likely get a loan. It just may cost you a little more.

 To Reach the Three Credit Reporting Agencies:
1  Equifax can be reached at 800-997-2493.
2  Trans-Union  can be reached at 800-888-4213.
3  Experian  can be reached at 888-397-3742.

Or search them out on the web.

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The Costs of Getting a New Home Loan

Almost every day I am asked about the anticipated costs for getting a ‘purchase money’ mortgage loan.  Sometimes with any luck, the builder, developer or seller will agree to pay at least some of these expenses for you.  But regardless of who pays them, these costs are part of the price of buying your next home, so let’s take a look at the breakdown of the mortgage loan costs.
They consist of closing costs, loan discount points and prepaid items.

1 Closing Costs: The Closing Costs are the actual expenses that the lender incurs in the origination of a new home loan. Some of the costs are related to your loan application, such as the expense of newly updated credit reports on all applicants.  Other fees are related to the house itself, such as the appraisal of the property.  Some of the other costs are payment to the lender for processing your application, such as the loan origination fee.  All these costs are lumped into a broad category called “Closing Costs.”  Unless the seller offers to pay them for you, the Closing Costs are usually paid by the buyer, and often runs between 2 and 3 percent of the total amount being borrowed.  Because different states have different fees and taxes that are a part of the Closing Costs, it’s impossible to generalize the ‘Closing Costs’ fees nationwide.  So it’s important that you talk with a reputable lender ahead of time about what Closing Costs you can expect to pay in your part of the country.  Your Realtor is always available to help you with this subject.

2 Loan Discount Points: The Loan Discount Points are, in essence, a form of prepaid interest.  One Discount Point is exactly equal to one percent of the amount being borrowed.  It is paid in cash at closing, to the lender as a form of interest.  Discount Points have the effect of lowering the stated interest rate you will pay on the loan you obtain. 
For example: a lender might offer you a 30 year fixed rate loan at 8%, with zero points, or the same loan at 7.5% with 2 Discount Points.  Because the Discount Points are considered interest, the yield to the lender is approximately the same.
So why would I want to pay points?  Sometimes new home builders or developers will offer to pay Discount Points as an incentive, or on a special sale, and sometimes employers offer to pay relocation fees in Discount Points.

3 Prepaid Items: Most Banks and other mortgage lenders will want you to set up what is called and “escrow” account.  This is nothing more than a savings account that the lender holds.  Every month you will, in addition to your regular loan payment, deposit a sum for property taxes and for home owners insurance into this account.  When a bill comes due for taxes or insurance, your lender will make the payment for you. This way the lender knows those costs are being paid and on time.  The reason that all this matters today is that, on the day of your purchase, you will be required to set up an escrow account, with about 9 months worth of taxes and about 2 months worth of insurance payments. 
In addition, you will have to pay for the first year’s insurance policy in full. 
All of these costs are called Prepaid Items, and you must pay for them yourself.
Because regulations and customs vary from state to state, the amount you need at settlement may be more or less than the amounts I have discussed here. I suggest that my clients talk to a reputable mortgage lender to get an accurate estimate of what will be needed to buy your next home. Your Realtor is always available for advise on this, and on the other matters discussed here.

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Fannie Mae Tightens Requirements

Government-backed mortgage giant, Fannie Mae, will be implementing stricter requirements to qualify for it’s adjustable rate mortgages (ARMs) and interest- only loans, according to an announcement made Friday by Marianne Sullivan, senior vice president of single family credit policy and risk management at Fannie Mae, said in a prepared release, “Our goal is to make sure consumers can sustain their mortgages and remain in their homes over the long term, while helping our lender partners offer a range of mortgage products for qualified borrowers.”

Effective after August 31,  homebuyers will have to make down payments that are 30 percent of the sales price in order to receive a Fannie Mae-backed interest-only mortgage.

Also, Fannie Mae will only purchase underwritten adjustable rate mortgages to guarantee that borrowers can still afford their payments if interest rates were to increase.

Borrowers would have to indicate that they could keep up with payments if, for example, a loan beginning at a 5 percent rate with a cap rate of 6 percent were to rise to 7 percent.

Borrowers who seek interest-only loans will also have to have credit scores of at least 720 in addition to sufficient cushion funds to continue to make mortgage payments and various housing expenses for 24 months.

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Zero Down Payment Financing program

Effective today, April 1, 2010, and good for a limited time only, FHA has announced a new pilot Zero Down Payment Financing program available to self-employed individuals with credit mid-scores of at least 350.
Based on the huge success of the former NINA (No Income, No Assets) loans and other ‘Alt A’ “No Documentation” loan programs which led the housing boom of 2005-2007, the loans will be available for homes which appraise for at least 80% of list price, regardless of condition.

HUD spokesman Noe Jose said, “The program is a trial effort to find a replacement for the hugely successful Tax Credits for Home Buyers which expire April 30. Those Tax Credits are widely acknowledged as boosting home sales during a period of economic uncertainty.”

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Getting a Conventional Loan in Vancouver and Portland

• The borrower needs to have at least a 700 fico score.
• They need to be under a 41% debt to income ratio. If they have a 740 fico we can go to 45%.
• The property needs to be in the Portland – Vancouver metro area.
• It needs to be the borrowers primary residence.
• It can only be 1 unit properties.
• the 5% down payment needs to be from their own funds. It can not be a gift.

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