Qualifying for a Mortgage

The American dream is to own a home. There are several types of loans available to qualify for a mortgage. There are loans that you can qualify for with low down payments such as 3 percent down.

A problem that you can run into when accepting too many credit offers is acquiring too much debt. It is easy to lose track of what credit cards you have by adding several new credit cards. If you don’t cancel the credit cards that you have and are not using, this will hurt you when you are trying to establish new credit. By not keeping track of what credit cards you presently have, you risk the danger of being overextended and sinking into more debt.

Consumer advocates blame banks and other credit card offerers for inundating consumers with more than 2 billion credit card solicitations, tempting creditworthy and not-so-creditworthy individuals to live beyond their means.

Getting a new home loan or a refinance on your present home is basically the same criteria in qualification. A residential loan application must be completed. Other documents that will be reviewed are credit reports, an appraisal, verification of deposits in your bank, verification of your employment, tax returns for two years, and pay stubs. Once all the documents are in, the file is reviewed. A loan package is prepared and sent to an underwriter (lender) for an approval. If there are any problems in your past, it is a good idea to inform the loan processor in advance.

Many individuals who have gone through a bankruptcy or financial problems are now able to qualify for mortgages. There are lenders, known as “subprime lenders,” who will make loans to individuals with past credit problems. Their interest rates are higher than the traditional lenders, but it is a good way for individuals to reestablish their credit. Assuming real estate Prices continue to rise, even with a higher interest rate, the cost would be lower than paying a higher price for the property in the future. My suggestion to clients who have to go to the subprime lenders is to refinance their home after two years. The goal is to have reestablished credit and have a good payment record to qualify for a lower interest rate.

WALK AWAY FROM HOME SCAMS

Q. I have a mortgage that is upside down. I owe more money than the house is worth. I have seen advertisements of a company who says the can take over my properly. The company indicated if they took over our loan it would not affect our credit rating. Is this a good move?

No! There have been many companies popping up offering to assume the mortgages for individuals who have fallen behind in their payments or are upside down in their loans. These companies will charge you a percentage of the loan or a flat fee to take over your property. For example the company would charge you $1,500 to sign over your property to them.

The company would have you sign an agreement stating they are not responsible for making the payments and that you will transfer over the title of your property by a quitclaim deed. The company can dispose of the property any way that it deems necessary.

The objective of such a company obviously is to collect an up-front fee. The company has the property and usually stops making payments. It may try to find a buyer for the property. The buyer who would fall prey to this scheme is one who is unable to qualify for a mortgage due to past financial problems. The buyer would then pick up the payments on the home after paying the company a down payment. The company would then quit- claim deed the property to the new buyer. Most lenders will call the loan due and payable in full if they find out that the originator of the loan is not the one making the payments.

The problem with all of this is that you are still on the original loan. When the company quits making payments on the loan, your credit rating with the mortgage company is ruined.

Once the new buyer has the property, the buyer will make the payments on the loan to the company who sold it to them. The payment is higher than the one on the original loan and a higher interest rate is charged. The company would then make the payment to the mortgage company and keep the difference of the original loan payment and the new payment. This is known as a wraparound loan or AITD (all inclusive trust deed).

The only way you will be released from your obligation to the mortgage company is if the new buyer refinances the loan in his or her own name.

If the company does not find a buyer for the property, it will go into foreclosure. This will appear on your credit report and hurt your chances of getting a new mortgage for many years.

The company that is making you this offer would also suggest that you purchase another home prior to signing over your current home. This is especially attractive if you are not late on your mortgage payment, but owe more on your mortgage than the appraised value of the property. By doing this you would be secure in your new home because your credit rating is good. However, if the company doesn’t continue to make the loan payments on your original home, a foreclosure will occur, hurting your credit report and any future credit or purchases.

These companies are rip-offs. You would be better off trying to ride out the storm and sell after property values increase.

The state attorney general’s office has been investigating these companies for misleading the public.

FICO SCORES FOR QUAUFICATION

Q. I am applying for a mortgage. I was told that I had a good FICO score. What does this mean?

When you apply for a mortgage, your credit report is run. In order to get your FICO score, the lender must be a subscriber to the credit reporting agencies and get FICO scores from them.

Credit report (FICO) scoring is a statistical means of assessing how likely you are to pay back a loan. A score is based on the information listed in your credit report. The score measures the degree of risk you represent to the lender. The score does not include your income, assets, or bank accounts. They don’t use age, sex, race, color, religion, marital status, occupation, homeownership status, length of time at present address, or zip codes to calculate a score.

Fair Isaac Credit Bureau Score models are available through the three national credit reporting agencies, which are Experian, Trans Union, and Equifax. All of the three models are often referred to as FICO scores. The scoring programs known at the three bureaus are: Beacon used for Equifax. Empirica used for Trans Union, and Fair Isaac Model used for Experian.

FICO scores range from approximately 375 to 900 points. Acceptable scores can vary according to the type of credit you are trying to obtain. Scores fall into three categories:

1. 650 or above. You are considered the cream of the crop.

2. 620 to 650. You are in a questionable category. This doesn’t mean you won’t be approved, but you will have to provide more documentation to the lender to satisfy its requirements.

3. Below 620. You may have to pay a higher interest rate.

FICO’s scoring models are mathematical tables that assign points to different aspects of a consumer’s profile and credit record. Fair Isaac uses credit data on millions of consumers, and applies mathematical modes to research credit patterns that will be used to predict how a consumer will perform in making their future payments.

When a credit report is run together as husband and wife by a credit grantor for purposes of qualifying for a line of credit, they will each have a FICO score; they are not viewed as one entity. Very seldom will both husband and wife have the same score. When qualifying jointly for a mortgage, the individual who has the highest income is the one whose score will count the most towards an approval.

FICO scores are top secret. Other than the companies who created the scoring system, no one seems to know how many points each factor is as signed. The score is based on all the credit-related information in the credit report. The five main areas that are reviewed for scoring are:

1. Payment history. Includes public records such as bankruptcies, judgments, and tax liens. Also included is derogatory information such as frequent delinquencies, collection accounts, late payments, and charged-off accounts that are noted in the trade line section of the credit report.

2. Outstanding credit. Includes the number of balances recently re ported, the average balances, and the relationship between the total balances and total credit limits on revolving trade lines. You will be penalized if the balances are too close to their credit limit.

3. Credit history. Factors reviewed are the age of the oldest trade line, and the number of new trade lines. Trade lines that are within the past two years are given the most attention in the scoring.

4. Pursuit of new credit. The number of inquiries and new account openings in the last year are reviewed heavily. Recent inquiries are weighed heavily and used against you. Frequent inquiries will hurt your FICO score.

5. Types of credit. The number of trade lines reported for each type of credit such as: bankcards, travel and entertainment cards, department store cards, personal finance company loans, and installment loans.

A person who has a perfect credit report with no derogatory information can still receive a low FICO score by having too much debt.

There can be different FICO scores from each of three credit reporting agencies. To understand why a credit report scored the way it did, listed next to the score are four codes and underneath the codes are an explanation. These are the top four reasons, in order of severity, for the score.

It is important to know what your FICO score is; however the only way you could find your score out is by asking a credit grantor what the score is. You will not receive your score when you request your credit report from any of the three credit reporting agencies.

IMPROVING A LOW FICO SCORE

Q. I turned in my application for a mortgage. I was told my FICO score was too low to get the best interest rates offered. Is there a way to improve my score and try to apply at a later date?

Despite the fact that no one but Fair, Isaac, & Company know how the credit scoring method works, there still seem to be some ideas on how to raise your FICO score.

• Review your past payment history on your credit report. Bankruptcies, foreclosures, collection accounts, and delinquencies will cost you big points. Contact the credit bureaus on any incorrect or inaccurate entries on your report. Do this before you apply for credit. Your payment record carries the most weight on your score.

• Scores are lower for consumers with no bank credit cards or those with five or more bank credit cards. Two to four cards are a good balance. If you decide to close any accounts, do not close your oldest ac counts. The longer you have held an account, the better it is for your score.

• How much debt you carry on your credit cards and other accounts is the second biggest factor in determining your score. If your total debt is more than 75 percent of the total credit limits, your score will suffer. Keep your balances well below their credit limit.

• Avoid frequent inquiries. According to the score models, the risk of default appears to rise after two to four inquiries within six to twelve months. Inquiries are not picked up when consumers check their own credit report.

• Opening several new credit card accounts in a short period can hurt your score. If you have high balances on those new cards, your score will be lowered. Have one or two lines of new credit established within the past two years.

• More recent negative entries on your credit report are worse than problems that occurred years ago. An account that has been delinquent in the past six months will hurt you more than a bankruptcy five years ago. It appears that problems more than two years old won’t hurt your score as much.

• Loans with finance companies will lower your credit score. Finance companies are companies who are a last resort to get cash and they charge extremely high interest rates.

If you are having problems paying your bills, prioritize them to avoid severe damage to your credit report. Pay your mortgage first, then your car payment, followed by payments on your credit cards and other revolving accounts. Don’t make partial payments unless the credit grantor agrees to it and will not report the payments as late.

Once you have tried to raise your FICO score, wait four to six weeks before reapplying for your loan. It takes at least that long to have the creditors update your credit files. Have your loan officer run another credit re port to see the results. If the FICO score is still too low, continue to find ways to improve it.

Don’t allow several creditors to run inquiries on you unless you have first requested your credit report directly from the credit reporting agencies and made sure there were no problems that needed to be corrected first.

COST OF REFINANCING

Q. We are thinking about refinancing our home to lower our interest rate. The cost of doing this seems outrageous. Is there a way to avoid all the costs of the refinance?

Some banks and mortgage companies will advertise a no points/no fee loan. This type of loan may be appealing to save money with your closing costs, however nothing is ever free. The company will make its money by charging you a higher interest rate to absorb the cost of the loan and pay the fees for you.

As an incentive to get business, mortgage companies are paid a rebate from the lenders who offer loans. Usually the lower the interest rate, the higher the points. With a no fee loan, the interest rate will be higher, which will give a higher rebate to the mortgage company.

If you analyze both a no point/no-fee loan, and a loan that offers a low interest rate and points, you may find in the long run it would be cheaper for you to pay the points and get the lower interest rate. The points and fees would be put into your loan.

If you plan on being in your home for three years or longer, a lower interest rate with points would be your best way to refinance. The cost of the loan will pay itself out over the three year period.

If you plan on selling your home within two to three years of refinance lug it, the best way to set up your loan would be to pay the higher interest rate and not pay any points or fees. By doing this, you are not using the equity in your home for loan costs.

SUBPRIME LOANS

Q. The past two years I have kept my credit report completely clean in order to overcome previous credit problems. I have built new credit with a car loan and an unsecured credit card. I have been told that if I purchase a home 1 still will have to make a large down payment and have to pay a high interest rate. Is this true?

If you have had past credit problems, and they are more than two years old with new credit established and your FICO score is high enough, I would definitely try to qualify for a loan with lenders offering the best rates.

If you are having trouble being qualified for the lower rates due to a low FICO score, there are several subprime lenders who will give you a loan. I have helped individuals with bankruptcies more than two years old qualify for a new mortgage loan from a subprime lender with only a 5 percent down payment.

The best subprime loan for you is one that has a two year fixed interest rate that converts into an adjustable interest rate after 24 months. After the first two years, the interest rate increases. After 24 months of establishing a good mortgage history, you should refinance the loan with a company offering a lower fixed interest rate. Make sure the subprime loan does not have a prepayment penalty period longer than two years. You don’t want to go past the two years with the subprime loan because the payment can go higher.

If you have had bad credit, the subprime loans are a good way to get a loan, even if you pay a higher interest rate. You can usually write off the interest on your taxes (check with your accountant), and by buying now, you are avoiding paying a higher price for your home later as prices continue to go up.

SHOPPING FOR A LOAN

Q. We are purchasing our first home. Our credit is good. Should we shop around to different lenders to get the best interest rate? Once we are preapproved for the loan, should we lock in our interest rate?

If you decide to shop around to different lenders, it is important that you let the first lender run a full credit report (called a standard factual) that lists your FICO scores. Make sure that you can get a copy of the credit report that lists the FICO score.

Use this full credit report to show to other lenders. You do not want the other lenders to run an additional credit report because the inquiries might lower your FICO score. There is enough information in the credit report for a lender to quote you an interest rate quote and list what charges you will entail.

I would suggest that you use a mortgage company to get your quotes. A mortgage company has access to many different lenders with competitive rates. A mortgage company also can shop for loans that will meet your needs. Because your credit is good, you won’t have to worry about subprime loans. However, a mortgage company would have access to the traditional conventional, FHA, and VA loans, (as well as subprime lenders).

Once you have been preapproved for a loan and you have found the home you want to purchase, you can request to lock in your interest rate. The lock-in can range from 10 to 90 days. That means that the lock-in is only good up to the number of days you have locked it in for. If the loan approval runs over that time period, the lock-in will expire and you will have to renegotiate your interest rates.

It is not a good idea to lock in your loan until you have found your home and been preapproved for the loan. If the market interest rates are fluctuating, you might want to wait and see how low they will go. Locking an interest rate is almost like gambling because interest rates can move up or down daily.

RATIOS TOO HIGH

Q. My husband and I are planning on buying our first home. We went to pre-qualify for a loan. Our income is good and our credit is excellent. The loan company said our ratios are too high to Purchase a home in the price range we prefer. What does high debt ratios mean and can we reduce them?

When you are being qualified for a mortgage, the lender wants to make sure that you can afford to make the payments. The lender will add up all your debts, plus the new proposed house payment (including principle, interest, taxes, insurance, and if applicable, a homeowner association monthly fee). (Installment loans that you are currently paying on will not count in qualifying if there are ten months or less left on the loan.) The lender will then divide this total by your gross monthly income. This will give the lender a ratio for qualification. Each loan program demands different qualification ratios. If yours is too high, ask your lender how high the ratio can be. Determine what debts you must pay off to get to the right ratio. You may need to consider purchasing a less expensive house to fit into the qualifying ratios that are required.

Next: Understanding Your Credit Report

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