Charge Offs: All is Not Forgiven

August 1, 2012 by Leave a Comment

Part of what I do as a mortgage originator is review credit reports. I’m often surprised how many consumers think that a debt that has been charged off means that it has been removed from their credit history or “forgiven”. Basically, a charge off is when the creditor is writing the debt off their books for tax purposes, it is not terminating the debt owed by the borrower. Often times, the charge off may turn into a collection or be sold or assigned to a collection agency and therefore, mortgage lenders will view a charge off on a credit report as a collection.

I while ago, “Betty Bellevue” called me to see if she could help her mom obtain a mortgage. A couple years prior, her mom had a car that she “gave back” to the bank. She thought she would only have a “repo” reflected on her credit report and that enough time had passed to where she might qualify for a mortgage. What she didn’t realize is that even though the bank had the car back, she had a “charge off” for the balance of the car loan on her credit and that for purposes of a mortgage, we would treat it as a collection (it would need to be paid off and removed from the credit report).

Distressed home owners with second mortgages may be surprised to find charge offs on their credit report following a short sale. Borrowers are often caught completely off guard by this remaining damaging debt being reflected on their credit report. Depending on how the lender reports the short sale to the credit bureaus, it may be just as detrimental as a foreclosure. If you are considering a short sale or foreclosure, I strongly recommend you find an attorney who specializes in dealing with this type of situation.  Linda Ferrarri has great information on her credit blog about foreclosures and short sales which I highly recommend if you find yourself facing this situation.

A charge off also dramatically impacts credit scores. Once a charge off, or collection is paid, credit scores will initially drop as the credit scoring modules view it as a “new activity” on the borrowers credit. Eventually scores should recover and improve. If you are considering a mortgage and have charge offs or collections, it’s important to discuss how and when you’re going to pay them off (some can be paid at closing which will prevent your scores from tanking during the mortgage process).  

You can obtain a free copy of your credit report at www.annualcreditreport.com.

Washington State’s DFI (Department of Financial Institutions) guide for home owners who are considering a short sale and Foreclosure Help.

Filed Under: Credit Scores and Reporting Tagged With: , , , , ,

Is My Credit Checked Before Closing

June 9, 2012 by Leave a Comment

A “soft” credit check is just prior to closing on your mortgage.  This is to ensure that no new debt was obtained during the mortgage process and that the information on your final application that you sign at closing still represents your financial scenario.

A soft credit check does not impact your credit scores. It will disclose any new debts and credit inquiries.  If there are changes to your credit revealed from the soft credit check, be prepared to explain and document whether or not new credit was obtained. Even if the credit card you decided to open during the transaction has not been used, you will still need to provide documentation regarding this new potential debt.

A “hard” credit check may take place if your existing credit report is set to expire before closing. Different than a soft credit check, the mortgage company will order a new credit report and the terms of your mortgage will be impacted by what the new report discloses, including any changes to your credit scores. This includes your current pricing of the loan and qualifying. 

It’s really best to not obtain any new credit during the mortgage process and avoid applying or inquiring for any credit. Even when the creditor states “six months same as cash” or “this won’t impact your credit” – don’t buy it!  If you do feel you need to make a purchase just prior or during the mortgage process, please discuss it with your mortgage professional first. A new car or big screen tv for your home may delay the purchase of your new home. 

Filed Under: Credit Scores and Reporting Tagged With: , ,

How Much Money are You Spending on Credit Cards?

December 22, 2011 by Leave a Comment

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.

Filed Under: Credit Scores and Reporting

The Risk of Extended Closings

November 22, 2011 by Leave a Comment

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. [Read more…]

Filed Under: Credit Scores and Reporting, Escrow and closing, Residential Purchase

How Disputes on Your Credit Report May Impact Obtaining a Mortgage

October 20, 2011 by 1 Comment

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.

Filed Under: Credit Scores and Reporting, First Time Home Buyer, Rant Tagged With: , , , ,

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

August 5, 2011 by 2 Comments

Shallowcredit 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. [Read more…]

Filed Under: Credit Scores and Reporting, First Time Home Buyer Tagged With: , , ,

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

December 30, 2010 by 1 Comment

UPDATE DEC 19, 2013: New (more expensive) LLPA’s have been released.

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.).

FannieLLPA

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).

Filed Under: Credit Scores and Reporting, Fannie, Freddie and FHFA, FHA

My Interview on NPR: Credit and Refinancing

November 10, 2010 by 3 Comments

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.

 

Filed Under: Credit Scores and Reporting, Interviews, Podcasts, Refinance
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