The Mortgage Porter

How Much Money are You Spending on Credit Cards?

Tis the season to buy gifts and many of us rely on our credit cards to do so. Not just at Christmas time, but throughout the entire year. It's a convenience many are dependent on. With the fees and interest banks charge for the convenience of credit cards, it's amazing what you really end up paying over the year(s) if you carry a balance. 

I encourage you to read your credit card statements this month as your statement will disclose just how much you paid in interest and fees this year. You may be rethinking the value of your mileage plan (like I am) or what ever "benefit", like airline miles, the bank is extending in trade for this indebtedness. It may be real tempting to close the account after seeing how much the cost for the credit is. Closing your established credit accounts may actually hurt your scores!

If you're considering a mortgage over the next few years, you may want to consider working on paying off the account and only using it once a month for small purchases (like gas or groceries) and paying it off monthly in order to optimize your credit score. Established credit helps your credit scores and your closed account, depending on what else you have impacting your credit, may lower your score. Likewise, new credit may bring down your credit scores - even if it's for doing something that is financially wise, like transferring credit card debt to a lower interest credit card. If you don't use credit cards, you may discover that you need to have established credit (typically three to four different active credit lines that are at least 1 - 2 years old) in order to qualify for a mortgage. Credit is a real catch-22 when it comes to qualifying for a mortgage and your credit scores.

If you own a home and have not yet refinanced, it could be worth your consideration. The additional savings from with your monthly mortgage payment could go towards reducing debt, like credit cards.  

I often work with my clients who are getting ready to buy a home to develop a strategy on paying off their debts, increasing credit scores and/or building savings, depending on what their financial goals are. If you are considering a mortgage to buy or refinance a home, do contact your local mortgage professional before taking action. I've often met with people who have done what would seem like "the right things" to improve their financial scenario, such tapping savings to pay off and closing all debts, only to learn they've wound up dropping their scores and reducing their savings.

I'm licensed to originate mortgages on homes located in Washington state and happy to help you with your home finance needs.

The Risk of Extended Closings

With more short sales taking place, many home buyers are having to wait months before their closing date is here. The same may be true for those who are buying homes that are being constructed.  With a delayed closing, there are some additional risk involved that buyers should be aware of so they can take action, when possible, to protect themselves. Some risks, borrowers have more control over than others.

Credit Reports Expire. Credit scores change constantly and are intended to reflect your current credit scenario. Credit reports that lenders use are valid for 90 days - meaning from the date pulled from when the report is delivered to the lender (this shaves a few days off).  Should your credit need to be repulled due to an expired credit report, if your credit scores have dropped, this may impact qualifying for your mortgage program and your interest rate. Any new debts, including those that have "no payments" or "zero interest" will be factored into your debt-to-income ratios and may also impact qualifying for your new mortgage.

TIP: Do not make changes to your credit, unless advised by your mortgage originator. Closing good credit accounts may lower your scores and new credit will bring your scores down as well. Try to keep your credit balances below 50% of the total credit line (30% is even better).

Employment or income may change. Lenders will verify your employment and income prior to funding the new loan.  If you've had ANY changes to your employment or income, notify your mortgage originator as soon as possible. Some changes may not make an impact, however if your income is being restructured from a base salary to hourly or commission, you may have issues.

Underwriting guidelines and loan programs may change. Some times changes may be made to underwriting guidelines, or a loan program may change or no longer be available. Just last week, we were wondering what the conforming loan limits would be for the greater Seattle area (they're staying the same at $506,000, however it was hinted they could have been reduced). We also have seen changes with private mortgage insurance companies that may impact qualifying.

TIP: If possible you may want to discuss having a "plan b" with your mortgage originator if you have any unique situations with your loan scenario.

Interest rates. I generally don't recommend locking beyond 60 days (depending on the current climate with rates).  Longer locks are available, however they cost the borrower more. When a closing date is uncertain, locking is a risk as you may be locking too long (paying too much) or not long enough which would create additional cost with extension fees.

If rates rise too high (which can happen quickly), some borrowers may no longer qualify using their desired program...it could cause another scenario where a "plan b" is required.  

Appraisals. The appraised value of your home is based on what other similar homes have sold and closed for near the home. The risk of what a home appraises for is present regardless of the length of closing, however if you're in a neighborhood where more short sales or foreclosures are present, it's possible the values may be trending lower. This may cause underwriting to call for additional sales comparables (comps). If the appraisal comes in lower than your sales price, you may be in position to renegotiate your contract with the seller.  Lenders base your scenario on the lower of your sales price or appraised value. If your appraisal comes in higher than your sales price, goody for you!

Documentation. Be sure to keep your bank statements, documentation of any large deposits, paystubs, etc.  This is not the time to be a "shredder"...after closing you can shred away!

Sometimes having some extra time on your side can be a benefit.  Here are some things to consider if you have a month or two before your closing date:

If your scores are lower than 739, ask your mortgage originator what you can do to improve your score, if needed (some loan programs, such as FHA, are not as credit score sensitive as conventional).

Ask your mortgage originator if you should be building your savings or paying down debt to improve your score.  Depending on your specific scenario, building reserves may be more important than your credit score or the reverse may be true.  Time allows you to do either (or possibly both).

Remember, your loan application is a reflection of you and your financial scenario when the first interview is taken and at closing. It is your responsibility to notify your mortgage originator of any changes from the original application. 

If you are considering buying a short sale anywhere in Washington State, where I'm licensed, I'm happy to help you with your mortgage needs. 

How Disputes on Your Credit Report May Impact Obtaining a Mortgage

Reviewing your credit report and disputing information that is being wrongly reported about you is your right under the Fair Credit Reporting Act. Obtaining your credit report and making sure that it's accurate is financially responsible and your duty to protect your credit. And the Federal Trade Commission provides you tips on how to dispute items on your credit report.  Did you know that lenders may not accept a credit report where it indicates there is a disputed item? 

It doesn't matter if you have perfect credit or a low loan to value, Fannie Mae and Freddie Mac guidelines are forcing lenders to provide a credit report without disputes. I've recently had transactions where the borrower doesn't recall disputing anything and the debtor doesn't have record of the dispute yet this "dispute" needs to be removed from the credit report or the lender/bank will not accept the loan. This is one reason why anyone considering a mortgage for refinancing or purchasing a home should obtain a copy of their credit report very early on. It can take a great deal of time to have disputes removed if a borrower does this on their own.  

The other option is for a "rapid rescore" which whittles down the process to days. The irony in this is that rapid rescore is not free and it is the credit bureaus and reporting agencies who profit when this service is done - I really have a problem with this when my client and the creditor state there are no disputes of record yet somebody has to pay to have these items quickly removed to accommodate a closing date. Often times, the lender absorbs the cost of the rapid rescore however this eventually drives up the overall cost of doing business and eventually, the consumer pays.

In my opinion, this is something that Fannie Mae and Freddie Mac need to change pronto. Well qualified borrowers should not have to go through these hoops or have their mortgage denied. A simple written letter of explanation signed by the borrowers and possibly the creditor *should* suffice instead of requiring the credit report not show any sign of a dispute. Apparently back in 2009, Fannie was reviewing their policy however, I'm not aware of any significant changes.  

If our government wants to help the housing industry and our economy, this practice needs to stop now.

Shallow Credit can leave you in the Deep End when Qualifying for a Mortgage

When in comes to qualifying for a mortgage, lenders are generally looking for borrowers who have established a history of paying their obligations on time. Ideally this would consist of four accounts that have been open and used for the last one to two years.  When someone does not have active accounts, or when their accounts are all new, their credit history appears "shallow" to some lenders.

You don't have to be a first time home buyer to have "shallow credit". 

Recently I helped a couple in Bellevue who were buying a "move-up" home using a jumbo loan for financing. They had excellent credit, plenty of savings and liked to pay cash instead using credit. When they did use credit, they would payoff and close the account immediately. You could see they had a credit history, they even had stellar credit scores, but they lacked having active trade-lines. One lender that we worked with actually declined the loan. Luckily we have several resources for non-conforming mortgages and we closed on the transaction after we switched to a different lender with less rigid guidelines.

Credit scores are impacted more dramatically for borrowers with "shallow credit" over those with established credit.

Because the borrower has less of a credit history to illustrate their borrowing and repayment patterns, their credit scores tend to be more sensitive to situations than a person with a long established good credit history. Don't get me wrong, an established credit user with great scores will suffer a ding if they make a late payment or open a new debt, however it tends not to be as damaging as it is for someone with a lighter history.  

What can you do to improve your credit history? Here are some tips for if you are considering getting a mortgage:

• Pay your debts on time. NOTE: paying off and closing an account where you have made a late payment will not erase the damage from the late payment...in fact, it might hurt your score more if that account was established...
• Do not close established credit accounts. Credit bureaus LOVE established credit history. If you have an older account, you may want to consider using it to buy a tank of gas or groceries and pay it off each month. If the account is not kept active, it will eventually be treated as a closed account and you will no longer receive points for that positive history.
• Do not obtain new debt. New cars and credit cards will drop your score.  Not only is it a new debt "ding", you're also getting dinged for having a debt at 100% of it's credit line.
• Keep your debts below 50% of the credit limit (30% is even better).  For example, if you have a credit card that has a credit line of $1,000; try to keep your balance below $500 or 50% of that credit line. 
• WAIT to pay off collections. Sadly the scoring system factors this as new activity (kind of like getting a new collection) against your score. Often times it may be best to pay off the collection at closing if needed. Your Licensed Mortgage Professional can help you determine this.

Other tidbits about credit scoring...

• Size doesn't matter with credit scoring. Paying down a smaller credit card has the same impact as paying down a larger one. (I recommend starting with the accounts that will take the least amount of funds to pay down). And a $70 collection hurts your score just as much as a $700 or $7000 collection.  
• Charge-offs hurt. Many borrowers believe that because the creditor has written off a debt, they're in the clear when they actually still owe on the debt. When a charge-off is reported to the credit bureau, they are viewed (and scored) as a collection.  

If you are planning on buying a home in the next year or refinancing, it doesn't hurt to start very early with a mortgage professional who can help you review your credit and provide advice to help you be in the best position possible.  It's more important than ever with tighter underwriting guidelines and mortgage rates that are based on credit scores.  I often meet people who have tried to fix their own credit, believing they're doing what any normal person would believe are the right things (like paying off debt and closing accounts) only to discover they're scores have tanked. It takes time to repair or establish good credit.

If you, or someone you know, is considering buying or refinancing a home anywhere in Washington, I'm happy to help!

"Live" Interest Rate Quotes and other Mortgage Miscellany for Wednesday

Typically I post mortgage rates based on a set criteria on Mondays...however sometimes holidays or the unexpected happen, like jury duty, and I'm not able to stick to my regular routine.  This gives me the opportunity to share rates quotes that I'm actually providing to people who are considering refinancing or buying a home located in Washington state.  If you like this, you may want to follow me on Twitter where I provide "live rate quotes" frequently along with other mortgage tidbits.

8:30 a.m. quoting scenarios for a rate-term refinance using adjustable rate mortgages.  The loan to value is estimated at less than 75% and we won't know for certain until the appraisal is complete.  These rates are based on a 740 or higher mid-credit scores and owner occupied home in the greater Seattle area.  Loan amount is $368,000.  The borrower's goal is to their current monthly mortgage payment and therefore, an adjustable rate mortgage may be worth considering.

3.375% for a 5/1 ARM priced with 0 points (apr 3.396).  With CAPS of 5/2/5, the highest this rate can adjust to in 60 months is 8.375% and the lowest it can adjust to is 2.25% (the margin).  Principal and interest is $1627.

3.75% for a 7/1 ARM priced with 0 points (apr 3.543).  With CAPS of 5/2/5, the highest the rate can adjust to in 84 month is 8.75% and the lowest it can adjust to is 2.25%.  Principal and interest is $1704.

4.375% for a 10/1 ARM priced with 0 points (apr 4.014).  With CAPS of 5/2/5, the highest the rate can adjust in 120 months is 9.375% and the lowest is 2.25%.  Principal and interest payment is $1837.

If the home appraises high enough to produce a loan to value of 70% or lower, it may qualify for an interest only 30 year fixed mortgage.  For that scenario, I'm quoting 5.375% priced with 0 points (apr 5.440).  Interest only payments in the amount of $1648 are allowed for the first 120 months.  Home owner can pay towards principal...after 10 years, the mortgage is amortized for 20 years at 5.375% which would provide a principal and interest payment of $2,506.

9:14 a.m. DOW at 12005 (down about 13) and MBS are slightly negative from this morning.

Q:  What is the minimum down payment allowed for a $200,000 sales price with an FHA insured loan?

A:  $7,000.  Currently FHA allows 3.5% of the sales price as a minimum down payment and the seller can pay closing costs and prepaids.  The 3.5% down payment may be gifted from a family member.

9:30 a.m. quoting 4.750% with zero points for FHA 30 year fixedrate using 3.5% down payment for a $200,000 sales price and a mid-credit score of 650 (apr 5.534).   With this scenario, there is approx. $10,800 due at closing including down payment, closing cost, reserves and prepaids so the most the seller can contribute is $3,800 since the buyer must invest a minimum of 3.5%.  Currently the maximum a seller can contribute is 6% of the sales price which is expected to be reduced anytime to 3% - as of the time of writing this post, a mortgagee letter from HUD has not been issued reducing allowed seller closing cost contributions.

NOTE: annual FHA mortgage insurance premiums are set to increase 0.25% basis points next month.

10:12 a.m. DOW up about 13 and I'm receiving an intraday rate sheet from one of the lenders I work with featuring pricing for the worse.  The good news is that since I don't work for a bank, I work with several lenders and their rates have not adjusted.  MBS haven't budged much since my last MBS update...some lenders just react quicker than others or may have started lower this morning with their initial rate sheet than what they wanted.   Bottom line, it's nice to have options as a Correspondent Lender!

11:20 quoting 4.75% for 30 year fixed FHA (apr 5.563) $150k sales price w/3.5% down payment and seller paid closing costs for home buyer in Kent.  Main goal is to have a total mortgage payment around $1,000 - $1200 per month with $6,000 available funds for down payment.

12:00 quoting 4.875% priced w/0.75 points (apr 5.017) or 5.000% with zero points (apr 5.130) for a condo in Seattle priced at $250,000 with a 20% down payment based on 740+ credit scores.   Condos have a 0.75% hit to fee if the loan term is longer than 15 years or the down payment is less than 25%.

25% down payment with the condo purchase will provide 4.875% with 0 points (apr 5.012) for 30 year fixed closing by April 29, 2011.

12:25 DOW is up about 86 and MBS (mortgage backed securities) continue to slide down from this morning.

12:40 p.m. quoting 4.750% 30 year fixed priced w/0.5pts (apr 4.867) $416k loan amount with an 80% loan to value for home buyers in Bellevue area with 780 mid-credit scores.

12:45 p.m. quoting 4.875% 30 year fixed conforming high balance priced w/0.5pts (apr 4.985) $480k loan amount with an 80% loan to value for a home buyer in Samammish with 740+credit.

1:00 p.m. DOW closes up 67.

3:00 p.m. quoting 4.625% for a 30 year fixed FHA priced w/0.5 points (apr 5.380) for a condo priced at $250,000 with 5% down payment.  The home buyer may put 20% down towards the condo however it makes no difference in interest rate nor the rate of mortgage insurance.  FHA loans have mortgage insurance for a minimum of 60 months AND the loan balance reaching 78% loan to value. 

How Credit Scores Impact Conventional Mortgage Rates

I'm quoting rates right now to a couple in Bellevue who are not exactly sure what their credit scores are.  Credit scores, along with how much the down payment is (loan to value) are huge factors in pricing mortgage rates.  Lenders will look at the mid-credit scores of each borrower and use the lowest mid-credit score of all borrowers

Here's an example based on a 30 day lock with a sales price of $250,000 with a down payment of 20% for  single family dwelling based on conforming 30 year fixed rates available as of this morning at 9:00 a.m.:

Mid-credit score is 740 or higher:  4.625% priced w/1 point (apr 4.830).

Mid-credit score is 720 - 739:  4.625% priced w/1.25 points (apr 4.853).

Mid-credit score is 700 - 719:  4.750% priced w/0.75 points (apr 4.953).

Mid-credit score is 680 - 669:  4.750% priced w/1.5 points (apr 5.003).

Mid-credit score is 660 - 679:  5.000% priced w/1 point (apr 5.212) or 4.875% priced w/1.5 points (apr 5.103).

Mid-credit score is 620 - 659:  5.125% priced w/1 point (apr 5.339).

It's also important to know that the credit score consumers are able to pull online may be different than what a mortgage originator, car finance person or credit card company will obtain as they have different scoring modules.   Credit scores are also reflective and change constantly based on different factors (balances, new credit, late and on-time payments).

I have worked with clients where with just a few simple adjustments, we were able to improve their credit score during the transaction and improve their rate.  Just being one digit off from an credit bracket can make a significant difference in the cost of your mortgage. 

Depending on what your mid-credit score is, FHA may be a great option worth consideration--even with a larger down payment!

Adjustments to Conventional Mortgage Pricing Means Higher Rates on January 1, 2011

UPDATE JAN 3, 2011:  Not all lenders are implementing this fee increase (yet).  This is perfect example of an advantage of working with a correspondent lender since we work with more than one bank or one banks products/rates. 

Conventional mortgages (Fannie Mae and Freddie Mac) are increasing their LLPA, also known as "Loan-Level Price Adjustment" effective on all mortgages with a term greater than 15 years on loans they purchase on April 1, 2011 or later.   Although this doesn't go into effect until April Fools, wholesale lenders will make these adjustments to their rate sheets well in advance so that they don't have to take the price hit when the sell the loan to Fannie or Freddie.   I am receiving memos from the lenders we work with stating that these price adjustments will go into effect on loans locked January 3, 2011.

The new price adjustments are outlined in the red box below.  The changed adjustements are in bold in the red box (click on image to enlarge).  You can view Fannie Mae's complete LLPA schedule here - there are additional hits that may apply depending on your scenario (such as condos, subordinate financing, etc.).

 

LLPA's are nothing new.  We've had them for the past couple of years and the adjustments are typically factored into your rate.  Remember, typically (but not always) 1% in fee equals 0.25% in rate.   So if your "low-mid" credit score is 700 - 719 and your loan to value is 75.01% or higher, your interest rate is going to be about 0.25% higher in rate than someone with a 740 or higher credit score with a loan to value of 60.01 - 75%.

The hardest hit with this adjustment is borrowers with credit scores of 699 - 640 with loan to values over 80%.   These borrowers should consider FHA insured loans for financing which do not have the same level of price hits as conventional (at this time).

The best pricing is for borrowers with credit scores 700 or higher AND a loan to value of 60% or lower.   Borrowers with a 740 or higher credit score and less than 25% down payment or home equity will now be hit with a 0.25% adjustment.

These price hits impacts loan amounts of $567,500 or lower for homes located in King, Snohomish and Pierce Counties.   For a complete list of Washington state conforming loan limits, click here.

Risk based pricing is one more reason why people who are considering a mortgage, regardless of if it's to purchase a new home in Seattle or refinance their existing home in Bellevue, should start early with the preapproval process.  Just being one digit off on your low-mid credit score may cost you.  A qualified mortgage professional can help you make the right moves with the goal of improving  your credit score if given enough time.  

If you need a mortgage for a home located in Washington State, I'm happy to help you.  I've been originating mortgages at Mortgage Master Service Corporation since April 2000 and I've been licensed since 2007 (when mortgage originator licensing was first mandated in Washington).

My Interview on NPR: Credit and Refinancing

If you listen to the soothing voices of NPR in the mornings, you may have heard NPR's Wendy Kaufman's interview discussing the challenges of refinancing with lower credit scores.  I actually meet with Wendy about a week ago in Bellevue so she could interview me for this piece which I'm told will be airing again around 8:50 this morning PST on KPLU (88.5 a.m.).

You can also read the text version which includes a link to the broadcast:  Home Loan Blues: Refinancing Isn't So Easy

Here are some points I'd like to add to the interview:

It is more challenging to refinance (or purchase) in today's market.  Especially if you compare it to the wild subprime era of a few years ago...however the pendulum is still swinging tighter.  Mortgage guidelines absolutely needed to swing back from subprime, however some people may surprised to experience a mortgage transaction today.   The broadcast included a borrower who had to take clear copies of his documents--that would have happened before too assuming his supporting documentation (bank statements) were even required.   Today's underwriter is asking a lot more "why" instead of simply checking off a box that was generated by a streamlined automated underwriting system.  Qualifying for a mortgage is not impossible but you do need to be cooperative and provide what your mortgage professional asks of you...including that last page of your bank statement, even if it's blank.

With regards to credit scoring, we continue to see the minimum allowed credit score being raised.  It used to be that a 700 credit score or higher was considered great.  Now there are three different credit score "brackets" with conforming mortgages if your score is in the 700 range.   With higher loan to value loans, like FHA, many lenders are requiring a mid-score of 640 or higher (some lenders may go lower but I expect their credit score standards to increase too at a higher rate).

There are programs available for refinancing your home if you have lost equity and/or have a lower credit score.  If home owners currently have an FHA mortgage or conforming mortgage that qualifies for a Home Affordable Refi, they may still be able to take advantage of today's low rates.  If your home is located in Washington state, I'm happy to review your scenario at no obligation to see if refinancing makes sense for you. 

Listen to the NPR interview where I discuss credit scores.

 

Does Your Mortgage Originators Credit Score Matter to You?

Would you work with a mortgage originator who has a 620 credit score?   Would you prefer to work with a mortgage originator who has a 720 or higher credit score?   Does how someone manages their credit history important to you if they are providing you advice about credit scoring and/or helping you with one of the largest debts you may have in your lifetime?

Starting November 1, 2010, the NMLS and Washington State DFI will begin pulling credit reports on LICENSED mortgage originators.  This is one of the final "background" checks being performed as required by the SAFE Act.  If a mortgage originator works for a depository bank (like Chase, Wells Fargo, Bank of America, Washington Federal, etc.) or any credit union, they will not have their credit pulled and reported to DFI.

I'm not aware of what the "magic number" is that DFI will use for weeding out mortgage originators with lower scores.  I believe they're looking more at credit history than the actual score...but I don't know for sure.  

What I do know is that mortgage originators who are licensed are held to higher standards per the SAFE Act than mortgage originators who are merely registered.   If you're curious about whether or not your mortgage professional is registered (bank/union union LO's) or licensed, you can visit www.nmlsconsumeraccess.org.

What should I do about my credit score, if anything?

I was asked this question via a friend on Facebook:

I had a 785 mid score, with 3 open trade lines (all at less than 30%) until the bank dropped my credit limit to the exact dollar amount of my balances. Now I'm down in the 714 range. I'm now considered a low-mid risk...hmmmmmmmmmpppphhhh! Only way out I can see is paying off Visa.

On the flip side, I don't need my credit score now...don't need a mortgage re-fi, and already have all the insurance I need.

It's pretty stinky when banks reduce your total available credit because the side effect is, your credit is dinged.  What the bank has effectively done is make it appear as though you're a credit user who has maxxed out their credit cards to their limit!  I'd probably contact the bank manager to express you disappointment (to put it mildly) and to see if they will correct this and to learn why they did this.

Credit scoring modules reward borrowers who use 30% or less of their available credit line.  Borrowers who use less 50% or less of their available credit also receive favorable scores.   Borrowers are also being whammo'd by banks when they reduce their home equity lines of credit (HELOCs) if it increases their loan to value over 50%.

If this person was interested in improving their credit score, their goal could be to work on getting each credit card paid down to 50% of the new credit line limit.  I would start with the smallest debt first as the credit scoring system doesn't distinguish between a $5,000 credit card limit or $500 credit card limit.  If this borrower has a $500 limit and they pay it down to $250, it should have the same impact as paying the $5,000 down to $2,500.  Once one card is paid down to 50% of the new limit, continue to make minimum monthly payments and move on to the next lowest credit line limit and repeat until all of your credit cards are under 50% of the available credit line.  The next level of improvement would be to pay your credit cards down to 30% of your credit line limit; so if your lowest credit card line is $500 and you've been maintaining a $250 balance, the next target would be 30% of the credit line or $150 (500 x 30%).

I do not recommend paying off credit cards completely and closing if they're older as the credit scoring modules love established credit with a good history.  You can use your cards to fill your gas tank or buy groceries and paying it off monthly.

Of course, if you don't really care what your credit score is currently because you're not planning on making purchases that will require your credit score, you don't have to do anything.  However, I think it's best to try to have a credit score of 740 or higher as so many things in our lives are priced based on our credit scores. 

Related posts you might find interesting:

New Credit Card Regulations and Games Creditors Play

Overdraft Protection and Your Credit Score

The Fed is Getting Tougher on Credit Card Companies