This is a term someone entered into a search engine, like Google, who wound up on my blog. “Is 714 a Good Credit Score for Buying a House?” is a fair question. Just a couple years ago, having clients with credit scores 700 or higher was considered “excellent”. In fact, previously credit scores of 680 or higher were considered good. Now with conventional loans, we have several brackets based on credit scores and loan to value. Many lenders are adopting this with FHA loans too.
LQI: The Potential Kiss of Death for On-Time Closings
August 11, 2010 by 1 Comment
If you're planning on getting a mortgage to purchase a home or for a refinance, please do not obtain ANY credit, increase your credit debts (use your credit accounts) or please don't even THINK of applying for new credit until your new mortgage loan has funded and closed. Why hold off on shopping for your new fridge or washer and dryer that you're going to need or that new sofa from Pottery Barn? Because it could delay your funding (i.e. closing) or worse–it could disqualify you for your loan (kill your deal) right when you're expecting your transaction to close!
Fannie Mae has created Loan Quality Initiative (LQI). According to Fannie Mae, LQI is intended to prevent mortgage lenders from having to buy-back mortgages by increasing the quality of the loan that is being sold to Fannie Mae. LQI addresses more than undisclosed debts on the loan application, including occupancy and borrower identification issues. However in my opinion, the re-verification of credit prior to funding has the potential to impact a transaction more often.
LQI requires that if new debt is discovered when the credit is reviewed, that it be disclosed on the final application. New debt is not limited to a new credit card you used to purchase appliances, it could be that you made a charge on an existing credit card that increased your monthly payment. Maybe you simply filled up your gas tank at $3.00 a gallon…this could possibly trigger a delay in a transaction closing if the borrower has higher debt-to-income ratios or average credit scores. If new debt or inquires are discovered just prior to funding, the loan may have to be sent to underwriting again to include the new debts payments.
Most lenders are doing "soft pulls" on the credit (without the credit score) also referred to as a credit "refresh". However, if new debt is discovered and the loan is sent back to underwriting, a new full credit report may be pulled. If the borrowers mid-credit scores have dropped, this may impact qualifying and possibly the interest rate since conforming rates are based on credit scores. Not so refreshing, is it?
So if you are considering buying a home or refinancing, please do not:
- apply for any credit or loans after you've completed a loan application;
- use your credit cards during the transaction (increasing your borrowed amount on your credit line);
- pay off or close any debts during your transaction without first speaking to your mortgage originator (this can actually drop your credit score).
As tempting as it might be to purchase your fridge (or what ever) so it's ready for your new home when you move in–please don't!! It may cause a delay in your closing or cost your mortgage approval and at this point in the transaction, your financing contingency is most likely waived!
I understand Fannie Mae wanting higher quality loans and that the loan application should reflect the borrower. However everyone knows that the day after closing, the new home owner is probably going to purchase some new appliances and maybe make a trip or two to Pottery Barn or Restoration Hardware. This is a classic example of how the underwriting pendulum is swinging too far. I can tell you that my typical client today is more qualified than those of the subprime era, our current guidelines alone (pre-LQI) have done this. NOTE: Please be responsible whenever using credit…especially after just taking on the largest debts you may have in your lifetime: a mortgage.
PS: Real Estate Agents: please be sure to make your buyers aware of this newer policy.
Photo credit: Rob Young via Flickr
Why It Pays to Get Preapproved Early: You May Think You Know Your Credit Score
April 7, 2010 by Leave a Comment
I recently met with a couple who had relocated to the Seattle area and were ready to make an offer on a home. They’re very qualified with their income stability and enough savings to put a twenty percent down payment on their next home. What surprised them was the credit report. [Read more…]
The Fed is Getting Tougher on Credit Card Companies
January 15, 2010 by 2 Comments
In a press release earlier this week, the Fed announced they have approved the final rule amending Reg Z regarding credit cards which will go into effect on February 22, 2010. The new rules set tougher guidelines on credit cards, especially with regards to protecting consumers against rate changes and how they are billed.
No interest rate increases for the first twelve months. There are some exceptions such as if you have a variable rate tied to an index; if your rate is an introductory rate (which in that case, your rate must be fixed for a minimum of 6 months); and if you're more than 60 days late on your bill.
Increases to your interest rate can only be applied to your new balance. Your old balance will keep the lower rate.
Payments will be applied towards the highest interest rates first when you pay more than the minimum payment. (Some exceptions may apply).
Statements must be mailed or delivered at least 21 days before your payment is due. Your due date should always be the same day of the month unless it falls on a weekend, in which case your due date will be the following business day.
Charges you make "over the limit" may be restricted (not allowed) unless you give your credit card company permission.
If you're under 21, you may need a cosigner such as a parent, to obtain a credit card. Guess those credit card companies will have to stop preying on college students unless Mom or Dad agree to cosign.
No two-cycle (double-cycle) billing. According to the FOMC's site "credit card companies can only impose interest charges on balances in the current billing cycle.
When your rate or fees are going to change, you must be notified 45 days priorto the change taking place. You will have the option to refuse the change, however this probably means that your canceling your account. If you do refuse the change, and your account is canceled, the creditor can impose higher payments by requiring to pay off your account in five years. NOTE: Canceling your account may be damaging to your credit scores. Should you get a notice that your rate or terms are changing and you don't agree with it, you are probably better off (as far as your credit score is concerned) paying off the card by applying more principal than canceling it with the creditor.
New monthly statements will show you how long it will take you to pay off your credit card making minimum monthly payments as well as what your monthly payment would need to be if you wanted to pay off your card in three years.
I applaud the new credit card rules. Since their not going into effect until February 22, 2010 you may want to keep an eye on your interest rates…with just over a month before they take place, sly credit card companies may try to sneak a few changes in before things get tougher.
Overdraft Protection and Your Credit Score
November 18, 2009 by Leave a Comment
I have to admit, a lot of my content for the articles I write come from my clients or other home owners who have really good questions. When I can't find an answer ready to refer them to here at Mortgage Porter, it's time to write a post! Here's a great example of a question I recently received from one of my refi clients:
"I have a question about a possible impact on our credit score, which you may have some insight into. We have been meaning for some time to get overdraft coverage on our checking account for "just in case" and today, we got that lined up. However, I'm reading over the documents from our bank this evening and it looks like they just issued us a credit card. Is this something that would play poorly on our FICO score?"
Overdraft protection is often a new credit card issued from your bank that is attached to your bank account. Because this is "new credit" it will impact credit scores.
According to Linda Ferrari's book "The Big Score – Getting It and Keeping It"
"New accounts will lower your overall account age and diminish your length of credit history for a period of 3-6 months, so be sure to have cushion in your score. Even if you've used credit for a very long time, opening a new account can lower your credit scores."
How much your score is impacted is hard to say–it depends on your overall credit picture. If you're someone with perfect credit and 800 scores, your credit score may be barely impacted. However, if you are someone with pretty good credit (around 720) BEFORE the new debt (over-draft protection) and you're considering a refinance or using a mortgage to purchase a home, you might have just dipped your credit low enough to have been impacted by higher mortgage loan rates.
Overdraft fees can add up quick and due to recently regulations by the Fed preventing banks from charging overdraft fees on certain transactions (ATM/debt cards) which will go into effect July 1, 2010, banks are sure to offer overdraft protection to help make up for lost revenue.
The Federal Reserve Board on Thursday [November 12, 2009] announced final rules that prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.
If you are considering adding overdraft protection to your bank account, do find out what type of account it is: a line of credit (or credit card) or maybe it's attached to your savings account. If you are considering a mortgage (or other type of financing where credit scores are considered) you may want to delay obtaining overdraft protection until after your transaction has closed to avoid having your credit score dinged.
Book Review: The Big Score by Linda Ferrari
October 28, 2009 by Leave a Comment
Last month I had the opportunity to speak at The Mortgage Girlfriends Mastermind Summit and to meet Linda Ferrari. Linda is someone who I’ve known of for a long time. She’s an expert at credit scoring and is passionate about consumers knowing and understanding their credit score. She is the author of “The Big Score — Getting It and Keeping It”.
This book is a great resource–for young and old alike. We are impacted everyday by our credit scores and Linda does an excellent job shedding light on mystery of credit scoring. Her book is structured in an easy to read and research format. If you need help working on repairing your credit, you’ll find step by step advice in this book. It could be the best $20 you ever spend.
For the record, I paid for my copy and I am not receiving any compensation for my review.
New Credit Card Regulations and Games Creditors Play
October 21, 2009 by Leave a Comment
The Credit Card Act of 2009 was recently signed into law by President Obama with many positive benefits for Americans. Here's some of the Act's features:
- written notice must be provided at least 45 days in advance of a rate increase or significant change in terms.
- prohibition of universal default.
Consumers have the right to refuse a proposed higher rate, and the credit card company may close the account and demand the account be paid off within five years.
One of my clients, with excellent credit scores, recently had two of her department store credit cards inform her that they were going to jack up her interest rates around 5% higher for really no reason at all. She has the right to refuse this and if she does, they will close her accounts. This will most likely show on her credit report as a "closed by grantor" which doesn't look pretty. Even though my client has great credit, this looks as if she had an issue with paying credit and it was the creditor who closed her account–not her. Regardless, a closed account with a balance on it may be damaging to your credit score. Here choices were to accept a 5% higher interest rate or have her account closed with a payment amortized for 60 months (much higher payment).
What did I recommend for her personal scenario? NOTE: Your scenario may require different actions…everyone's situation is unique.
She is currently in the process of a rate-term refinance to reduce her interest rate and to convert her adjustable rate mortgage to a 30 year fixed rate. With her personal scenario, she will use a combination of the refund of her existing reserve account from the mortgage servicer who is being paid off and the "skipped" mortgage payment to apply towards paying off these two department store credit cards. She's lucky.
And it's not just department stores who are jacking up credit card rates on consumers…banks are too:
"Millions of Wells Fargo & Co. credit card customers will soon feel the pinch of higher rates, as the bank and other major credit card issuers rush to get ahead of new consumer protection rules that would limit their ability to jack up rates.
The San Francisco-based bank, the nation's eighth largest issuer of credit cards with $22.3 billion in total balances, said Wednesday it plans to raise interest rates by 3 percentage points on the "vast majority" of its 5.9 million credit card customers. The higher rates will go into effect on Nov. 30 — one day before Congress wants to enact new rules that put strict limits on rate increases on existing credit card accounts. Customers of Wells Fargo will begin receiving letters as early as today notifying them of the change."
Although the Credit Card Act of 2009 is intended to help consumers, it's not going to totally stop the games credit card companies and banks play. Before you react, it's important to know what your options are and how it may impact your credit scores. This is a great "excuse" to obtain a tri-merge copy of your credit report to review your scores and what's being reported about you and your credit.
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