Helping Washington State homeowners learn more about their mortgage options.
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.
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.
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.
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…]
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…]
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.).
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).
Rhonda Porter is a Licensed Mortgage Originator MLO121324 living in the greater Seattle area. Rhonda began her career in 1986 in the title and escrow industry and began her mortgage career in 2000. She enjoys helping people understand the mortgage process and started writing The Mortgage Porter in late 2006. Read More…
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