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.

Filed Under: Credit Scores and Reporting, The Fed - FOMC

Book Review: The Big Score by Linda Ferrari

October 28, 2009 by Leave a Comment

Ferraribookcover2 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. 

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

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.

Filed Under: Credit Scores and Reporting

When Your Credit Score Drops During a Mortgage Transaction

July 8, 2009 by 2 Comments

I recently received a phone call from a home buyer who was anxious because her mortgage originator had informed her that her credit score was below 720 and according to her LO, she no longer qualified for private mortgage insurance for the  home she was in the process of buying.

Your credit scores are constantly changing.  When your credit report is pulled, it's only a snap shot of your scores at that time.  Recently, conventional lenders shortened the amount of time they will allow for a credit report to be used from 120 days to 90 days from the date the credit report was pulled.  If your credit report is expiring before your transaction is closing, it may impact you for better or worse–with underwriting guidelines and/or pricing of your mortgage rate.  Depending on what your loan to value is (how much home equity you have or down payment you're using) an expiring credit report with a dropping score can be detrimental to your loan approval.

Here are some steps you can take to try to make sure that your credit scores remain steady during your transaction.

  • Be aware of when your credit report is going to expire.

  • Do not make changes to your credit profile including: 

    • Do not pay off and/or close accounts (without first discussing this with your loan originator).
    • Do not make or finance large purchases. 
    • Do not obtain new credit.
  • Continue to make your payments on time.
  • Do not pay off collections without first contacting your mortgage originator.

It's possible to do something as innocent as paying a collection on an overdue library book only to have your credit score drop. 

You might consider meeting with your mortgage professional well before entering a mortgage transaction (refi or purchase) to review your credit and to see if there are actions you can take to improve your credit score. 

If you find that your credit score has dropped during a transaction, take action immediately.  Find out how this may impact your loan approval and/or interest rate and learn what your options are.

Filed Under: Credit Scores and Reporting

Credit Scores for the Ages

January 2, 2009 by Leave a Comment

I’m taking a few days off from “blogging” to enjoy a little break…this article was orignally posted at Rain City Guide.  You can read the original, along with comments, by clicking here.

It’s funny how sometimes a post will take on a life of it’s own within the comments…such is the case with my recent interview of Jillayne Schlicke.  My intentions were to call out to Washington State LOs to make sure they’re up to speed with the new year approaching…the comments have turned into a discussion of credit scores.  Most likely because of Jillayne’s prediction:

“I expect that underwriting guidelines will continue to go up as banks and conforming paper sold to Fannie and Freddie will raise minimum credit score requirements to 800 and require 20% down.  Everyone else will be pushed to FHA.”

Ardell offered stats from 2005 on credit scores and age so I thought I’d share credit score information from credit reports I’ve provided since the start of 2008.  Not all of the subjects obtained a mortgage loan.

  • Age 18 – 29: average credit score = 697.   Don’t let age fool ya, this group had a high score of 807 and a low of 513.  (This group = 12% of the demographic).
  • Age 30 – 39: average credit score = 735.  High score of 811 and the low at 614. (36% of demographic).
  • Age 40 – 49: average credit score = 739.  High score of 819 and a low of 592. (31% of demographic).
  • Age 50 – 59: average credit score = 759.  High score of 820 and the low at 680. (15% of the demographic).
  • Age 60 – 69: average credit score = 714.  High score of 813 and a low at 589.  (4% of the demographic).
  • Age 70 plus: average credit score = 805. High and low score: 805. (1% of the demographic).

The average mid scores, year to date credit reports I’ve ran is 732 for the borrower and 720 for the co-borrower.  This means that if they are considering locking, the rate would be based on the lower of the two mid scores.  I’m also pleased to see that the credit score criteria that I use (credit scores from 720-739) seems to be appropriate for when I’m post.

From the same interview with Jillayne post, Ardell asks:

“What good is it to say interest rates are at 5.875%, if only people 70 plus can get that rate? False advertising…no? If the average person buying a home can only get a rate of 6.5%, then we have to stop encouraging people to think their rate is going to be something that is unlikely”

Using the credit score data above, it’s very likely that the younger group would be FHA candidates.  Not just because of having an average credit score of 697, most are still working on building their savings and do not have 20% down payment.  Combine a 697 mid score with a 90% loan to value and (now costly) private mortgage insurance and FHA may be the better option.  The key is to investigate all available options if someone decides they should buy a home at this stage of their life.  

The next two groups, 30-49 year olds, would fit the rates that I quote at RCG since the credit score criteria I use is based on 720-739.  Based on Friday’s rates, their rate would be 5.875% at 1 point (total shown in lines 801, 802 and 808 of the Good Faith Estimate or HUD).   This combined group is 67% of the applications with credit reports that I have worked with year to date.

Credit scores 740 and above qualify for a slightly better rate.  Based on Friday’s scenario, they would have 0.25% improvement to fee–so 5.875% would be at 0.75% points (using the above example).  Or depending on how rates were, they could possibly obtain an 0.125% better rate.

The slight dip in average credit score to 714 for ages 60-69 I think just reflects that “life happens”.  Maybe something medical has taken place or you were on vacation and thought you paid that credit card or you’re helping your kids with college or you have an unknown parking ticket or an overdue library book turned into a collection.   I’ve seen many surprised people over the years where they had no idea their credit score dropped.   This is in no way a reflection on this age group, it’s just how the stats came in for this report based on my data.

FHA credit scores (where the credit report was ran and FHA was the identified loan program, the loan may be closed or just prequalified) averaged 680.  FHA is not as credit score sensitive as Fannie/Freddie.  FHA is looking for clean credit (no lates) in the past 12 months.

This data is hardly scientific and is really just a reflection of the people I work with which is really pretty diverse.  I don’t advertise or do cold calling or try to “specialize” in a niche market…so I’d like to think that this group is a good “norm”.

 
Filed Under: Credit Scores and Reporting Tagged With: ,

Game plan for preparing to buy a home when you’re credit score is low

October 28, 2008 by 2 Comments

I don’t blame anyone for wanting to own a home.  Sometimes when I meet with clients and review their current scenario, a game plan needs to be created so they can work on getting themselves into a better position to buy a home.  The last thing anyone wants is to cram themselves into a mortgage they cannot afford or to commit to a long term payment when they don’t have a great track record of making payments on time. Some times a plan may take 6 months or a year or longer before someone is ready to buy a home.

I have someone with low credit scores who wants to buy a home.   She knows she will probably be a candidate for FHA financing because she has little down payment and her credit.  Although FHA is not as persnickety about credits scores as conventional financing, they scrutinize credit history: especially the last 12 months.

This person has a few late payments this year, the last one being as recent as August.  FHA financing is most likely out of the question for her until August next year assuming she does not make any other late payments between now and then. She can work on her credit for the next 10-12 months (until she has 12 months since her last late payment).   She doesn’t have any collections but she does have a few small accounts that are “maxed out”. 

  • Credit card “A” with a balance of $477 and a limit of $500.
  • Credit card “B” with a balance of $323 and a limit of $300.
  • Credit card “C” with a balance of $215 and a limit of $300.
  1. The first thing she should do is focus on getting card “B” under the limit of $300.  She’s getting whammo’d with her credit scores for being extended beyond what her credit limit is with this account (in addition to being maxed out).   She should at least pay it down enough to make sure that her interest fees won’t keep popping her over her limit.
  2. Next she should select one of her two smallest cards to pay down to at least just below 50% of her card limit.   Card “C” would only take about $65 to bring her debt down to 50% of the line limit (300 x 50% = $150).
  3. Then pay down the next card to at least 50% of the limit.  “Card B” will take $150 (assuming she’s paid the extra $23 that has pushed her over the limit) to be at 50% of the credit line limit.
  4. Credit card “A” will take a little extra cash at $227. (500 limit x 50% = $250.  477 – 250 = 227).

She needs to keep her credit below 50% of the credit line at the very minimum.  I know I said FHA is not as picky as conventional.  However, you do want your credit scores above 600 in order to receive better pricing (620 and higher is even better).

Not only will this help her with qualifying for FHA financing, she’s probably also paying higher insurance rates due to her current credit scores. 

She has a decent income and no savings.   She needs to use this time of working on her credit to also build up her reserves.  Not only for what the lender will require (3.5% minimum down payment for FHA as of January 1, 2009); but for her sake should her income change or issues arise, she should have a minimum of 6 months worth of living expenses saved (FHA does not require this, I’m suggesting it).

She has been considering homes priced around $275,000.  FHA’s minimum required investment for this home next year will be $9,625.  The seller can pay the remaining closing costs and prepaids as long as she has met the above requirement (which can be a gift or loan from family members)–this would need to be negotiated in the purchase and sale agreement. 

The proposed mortgage payment would be around $2,000 (including taxes, home owners insurance and mortgage insurance).  This is $700 more per month than what she is currently paying for rent.  Once she has corrected her credit, she should practice making a $2000 mortgage payment by paying the difference ($700) into a savings account that she leaves untouched for her down payment and to hopefully create a savings cushion.  $12,000 in savings would be ideal (6 months of mortgage payment) but not required.   If she has no savings, it will take her just over a year to pay $700 per month to come up with the down payment (9625 divided by 700 = 13.75).  Another 17 months to have a savings cushion of $12,000. 

I know this isn’t instant gratification.  It is developing responsible financial habits.  There are expenses to owning a home beyond renting.  One of my last homes required a new roof just months after moving in to the tune of $15,000.  Savings has always been important and it’s even more true in our current economy.

She’s all ready moving in the right direction by contacting a Mortgage Professional who is interested in her long term financial well-being and is willing to help her create a game plan.

Check out my related article:  Getting on Track to Buy Your First Home. 

Filed Under: Credit Scores and Reporting, Debt Restructuring, Economy, FHA, Financial Planning, First Time Home Buyer, Residential Purchase Tagged With: ,

Can I buy a $620,000 home with a low credit score?

October 27, 2008 by Leave a Comment
This morning I received this email:
My wife and I found a house we are in love with. I wanted to write and tell you our situation, maybe you can tell us if we are even in the "ballpark".    The house we like is 620,000. We have 20% to put down. We have very little debt and well documented income. I have a low credit score, 660 or lower. Is this worth pursuing or is the credit score too low?
Based on current guidelines/pricing, you really need to have your credit scores above 660 if you’re considering loan amounts above "true conforming" (presently $417,000). It’s very possible that this couple can buy a home utilizing an FHA jumbo mortgage which leans more towards credit history rather than credit score.  Here are some factors that would indicate whether or not this is a possibility for this couple:
  • Credit history.
  • Loan limits.

Unfortunately the loan limits where this couple are considering to purchase are much lower than what we have in the King County area.  They’re wanting to buy in Clark County which currently has a temporary jumbo limit of $418,750.   They would need about $200,000 for their down payment with the seller paying closing costs and prepaids (est. at $12,000).   Or they could opt for conforming financing with a loan amount of $417,000 and try to get a conventional approval (with a larger down payment, it’s possible).

If they were buying in King, Pierce or  Snohomish County, the loan limit is currently $567,500 and would have the option of putting less than 20% down (as low as 3.5%), should they wish assuming they qualify for the payment.

Regardless of where the property is located, the last 12 months of credit history is more critical than credit score (as long as the credit scores are 600 or higher) for a purchase using an FHA insured loan.

FHA loans are full doc and will need to be sourced and seasoned.  Buyers should be prepared to provide their last 2 years of W2s (and possibly tax returns) as well as at least 30 days of income on their paystubs.

Remember, we should be learning in early November what the new jumbo loan limits will be.  I’ll keep you posted!

Filed Under: Credit Scores and Reporting, FHA, Jumbo/Non-Conforming, Residential Purchase

Just 10 Days Left to Sign Up for FREE Credit Monitoring

September 15, 2008 by Leave a Comment

Due to a settlement made by TransUnion (one of the "big three" credit bureaus) you have a limited time left to sign up for FREE credit monitoring.   In this day and age of identity theft, I highly encourage that you take advantage of this offer.  But you only have 10 days left to do so.

Anyone who has obtained any type of credit over the past 20 years is eligible for this benefit.   For more information, please click here. 

I signed up!  Why not? I hope you will too.

Filed Under: Credit Scores and Reporting
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