Major changes go into affect on the FHA loan program on Monday July 14, 2008. These changes are very significant and will impact the affordability of these loans for many borrowers, especially those will less than stellar credit who can’t put 5% down. Basically, almost everybody in todays market.

Essentially, the Upfront Mortgage Insurance Premium (UFMIP)and monthly Mortgage Insurance IMI) will now be risk based. Even though the borrower has the option to pay UFMIP in cash upfront, it is typically financed into the loan. Bear in mind that UFMIP is not part of the regular closing costs. FHA has always charged a flat upfront mortgage insurance premium for every borrower regardless of credit risk. Until last week UFMIP on the 30 year fixed FHA loan was at 1.5%. The monthly mortgage insurance payment has also always been fixed at 0.5% for the 30 Year loan. These percentages will now change effective Monday.

UFMIP will now be charged on a risk basis, i.e., based on your credit score. It will range from 1.25% for lower-risk borrowers to 2.25% for riskier borrowers. In dollar terms this means that on a $200,000 loan UFMIP can range from $2,500 to $4,500. Remember this is on top of the closing costs and down payment already due. Since this can be financed into the loan, your final loan amount will reflect this cost. Having poor credit will now be expensive even on FHA loans.

Monthly mortgage insurance will vary from 0.5% and 0.55% and is determined by the loan to value. If you are putting less than 5% down than its set to 0.55% but if you’re putting more than 5% down it will be 0.5%. Monthly mortgage insurance is calculated by multiplying the percentage to the loan amount and dividing by twelve. So on a $200,000 loan and a MI rate of 0.55% your monthly mortgage insurance payment is $83.34.

First time home buyers who fall in the hefty 2.25% UFMIP bracket do have a way to obtain a slight reduction to UFMIP. If you are borrowing more than 95% of the purchase price (loan to value) and your credit score is below 559 then you may be eligible for a reduction in your UFMIP by 0.25% - so it would be 2.00%. However, you need to complete a HUD-approved pre-purchase counseling session. FHA will only provide the discount after you have successfully completed the course and will ask for a certificate of completion.

Additional Reading on FHA: Is the FHA Loan Program Right For Me?

Relevant FHA Down Payment Assistance related posts on other blogs:

Arizona Republic Article on DPA
Dear HUD, Stop Being a Bully
Real Estate Road Signs - “Buy A House for $500 Down”
Down Payment Assistance Programs

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Tags: FHA, mortgage insurance, upfront mortgage insurance
Categories: Credit Scores, FHA, Mortgage Insurance, Uncategorized
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The Washington Post is alleging that Senator Obama received a special “discount” when he purchased his home in 2005. This is what is being reported:

He locked in an interest rate of 5.625 percent on the 30-year fixed-rate mortgage, below the average for such loans at the time in Chicago. The loan was unusually large, known in banker lingo as a “super super jumbo.” Obama paid no origination fee or discount points, as some consumers do to reduce their interest rates.

The article discloses the income of the Senator and the property type. Obviously this would have been a full documentation loan disclosing assets on a super-super Jumbo loan.

However, the article fails to mention one very important aspect of interest rates. The senators FICO score. This makes a big difference. The article states that the average loan rate for a similar program was 5.94 percent. So, supposedly he received a 30 basis point “discount”. Well considering the average credit score in Illinois is 684, if the Senators FICO score was well above 720+ then a 30 basis point difference is well within the range. So, I don’t understand why the Post is making such a big deal about a $300/month savings for a higher credit score borrower. They obviously don’t read my blog otherwise they would have read about the four corners of a mortgage.

Based on some of what I have read about the Senator, for example he has no revolving credit card debt and he’s lived frugally all his life, I have a hard time believing that he would have a below average credit score. This is pure speculation on my part and I have nothing to back it up. However, I am willing to give him the benefit of the doubt on this.

I will reveal one thing on what I think about Senator Obama. Even though I disagree with most of his political platform, I like him. I still admire him and have a lot of respect for him. He’s a decent man, and an all American success story.  I know he’s also a politician, but from what I have seen so far (especially after all these years of the Clinton and Bush slime machines) I believe when it comes to character he’s heads and shoulders above both of them.

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Tags: credit scores, Mortgages, senator obama
Categories: Credit Scores, Interest Rate, Mortgages
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Whether you foreclose, do a short sale or go through a deed in lieu of foreclosure your credit is shot. The extent to which your score falls may differ, but to any future creditor it is all the same. Not only that but when you apply for credit in a few years, its really important to not have any derogatory items on your credit report for at least 24 months prior to an application. For example lets say you do a short sale this month (June 2008) and you apply for a mortgage in June 2011. Then you should not have any derogatory items (late payments) since June 2009. Also, from the recent changes to credit guidelines it may be well after 2011 that you can even apply for a mortgage loan.

I had discussed this point in response to a visitor question back in December 2007. Recently another reader, who happens to be a very knowledge mortgage broker, left me a comment clarifying the current guidelines and how things are viewed today. I figured it would be to everyones interest to have the comments published as a post. So, below is the response from Catherine Coy to my post from last December “Will “Forgiven” Debt Affect My Credit Score?”

You’re very mistaken as to the impact of foreclosure vs. short sale vs. deed-in-lieu.

As a mortgage broker myself, I get many calls these days from consumers wondering what affect a short sale or foreclosure (or deed-in-lieu of foreclosure) will have on their credit. This is an important topic because the last real estate downturn (during the 1990s) preceded the widespread use of FICO scoring and automated underwriting systems.

Some real estate agents and short sale investors (those seeking to purchase a homeowner’s property prior to foreclosure)–and even some mortgage professionals–suggest to the distressed homeowner that a short sale isn’t as damaging to one’s credit as a foreclosure. Given the inherent conflict of interest—a real estate agent makes a commission on a short sale and doesn’t in a foreclosure—the real estate professional should proceed cautiously when counseling a seller. The practical reality is, short sale or foreclosure, one’s credit will suck either way.

Many mistakenly believe that a derogatory public record such as foreclosure is somehow worse than petitioning the lender to accept less than owed (short sale). In the world of banking, however, lenders interpret either of these events only one way: the customer did not pay as agreed. It matters not to a lender the manner by which it suffered a loss; only that it did. Lenders go to great lengths to alert each other, by way of reporting to credit bureaus, that the defaulting homeowner is someone who, when the chips were down, didn’t honor a contract.

In fact, lately Fannie Mae and Freddie Mac took an even stronger stand against homeowners who renege on their obligation. “Seasoning” of a foreclosure or short sale is now five years.

Fannie Mae Tightens Guidelines Again
http://calculatedrisk.blogspot.com/2008/04/fannie-mae-tightens-guidelines-again.html

In the world of FICO scoring, there are three credit events that will severely sink a FICO score, and they all carry exactly the same weight. They are (1) serious delinquency, (2) derogatory public record or (3) collection filed. A homeowner in default is technically “in collection.” These events are reported to all three bureaus as “Score Factor Code #22.”

http://www.bayhouse.com/FairIsaac-NextGen-risk-factors.shtml

A foreclosure will remain on a consumer’s credit report in the “public records” section for ten years. In addition, this fact must be attested to on the loan application under “Declarations,” Section VIII, as follows:

(c) Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years? (Y/N)

(e) Have you directly or indirectly been obligated on any loan which resulted in foreclosure, transfer of title in lieu of foreclosure, or judgment? (Y/N)

Because the term “short sale” is not expressly stated, some interpret this as meaning that a short sale is a lesser offense. The truth is, decision makers in the lending industry know that a short sale is no different than a foreclosure or deed-in-lieu. Here are two excerpts from a lender’s underwriting guidelines.

The following items are subject to individual evaluation, no matter how high the
credit score:
• Bankruptcy, foreclosure, deed-in-lieu, short sale.
• Judgments, collections, charge-offs, tax liens.

~ and ~

Foreclosure
None in past 4 years with minimum 3 active trade lines more than 24 months old, with no late payments or derogatory credit after the foreclosure.

Definition of Foreclosure: Any 120 day mortgage late within the last 24 months, any notice of default or settlement on a real estate secured trade line (short sale), any deed-in-lieu or forbearance agreements.

To the homeowner with a mortgage he can no longer afford, the decision to voluntarily vacate through a short sale or be forced out by foreclosure can be agonizing. The sterling credit reputation it may have taken a lifetime to establish is gone with a single event. Most landlords with whom I’ve spoken state that, due to the widespread credit meltdown, they would view a foreclosure as not particularly onerous—provided that all other credit obligations were met on time. A credit report riddled with “derogs” over a broad category of obligations would be viewed negatively.

For the homeowner who, if he remains in default, must eventually vacate his home, there may be an emotional advantage to avoiding the social stigma of the “F” word—foreclosure. He can tell himself and his friends, “I’ve never had a foreclosure,” but to his lender and the credit bureaus, foreclosure and short sale are exactly the same.

This article is intended not as a judgment of the motive or character of a homeowner in distress, but to present the facts so that no one is misguided. There’s no credit preservation advantage to short sale over foreclosure. The nation’s two largest mortgage investors, Fannie Mae and Freddie Mac—with certain exceptions—won’t lend again for five years. A consumer’s FICO score will take a huge hit either way until responsible credit behavior supplants the major hit of foreclosure/short sale over a period of time.

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Tags: credit score, foreclosure, short sales
Categories: Credit Scores, FICO, Mortgages
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I’ve written plenty about the importance of having a good credit score and maintaining a clean credit report. From getting a job promotion to finding the right spouse, your credit score can play a much more ubiquitous role than ever before. That was then, but this is now. In today’s changed lending landscape your perfect score doesn’t mean as much as the lenders ability to verify your income! It’s that simple. “Good credit, bad credit, any credit” doesn’t fly anymore. It’s more like “good income, verifiable income, consistent income”!

During the boom years (2002-2006) income verification during the mortgage application process pretty much fell by the wayside. Lenders were not paying too much attention to where you made your money, how you made it and the likelihood of it continuing for the next three years. They simply looked at your credit score and “assumed” you’d be able to make the monthly payment. I know that is somewhat of an exaggeration, but that is the exact kind of mindset lenders had and in many cases the root of the current credit problem.

Now that enlightenment has reached everyone from Alan Greenspan to hedge fund accountants, lenders have finally accepted the fact that borrowers need to be able to make the monthly payment. This realization is turning lenders old fashioned grumps demanding to see proof that your employer exists, your check is real and that you indeed have a certain career stability. This means if you fill out a mortgage application today you will be asked detailed questions regarding your income and employment and depending on your exact situation the level of scrutiny can vary significantly.

For regular full time salaried borrowers receiving W2’s at the end of the year, the requirements are minimal. All you need to do is furnish a few recent pay-stubs and a copy of your most recent W2 and you’re essentially good to go. If you receive more than 25% of your income in the form of commission then you may need to furnish two years of tax returns. The clunker on these is any un-reimbursed employee expenses that reduced income. That can make your effective earnings lower and decrease the amount you can afford. Additionally, a decreasing commission income trend will also play a factor in the under writing decision.

Life is most difficult for the self employed borrower with the smart accountant. Don’t forget that self-employed also includes those who receive 1099 income as well - so its not just a business owner. Two years of personal tax returns is universally required in these cases but I am starting to see requests for two years of business tax returns as well. Of course, the tax returns always show a very low income and unfortunately there is very little that can be done to account for this lowered income. This is because the lender will make the loan decision on the taxable income - and in many cases the income is simply too low. There are some things which can be added back to the income but only very much. The five or six times I’ve gone through this process for a self employed borrower I haven’t been able to add a whole bunch back to their income.

As you can see, it’s a different world out there. It’s still very important to have good credit and all the other things like down payment, but income verification is increasingly more important. The only real way to make income less important in the credit evaluation process is to put more money down. If you are able to put 25% or more down then in many cases I’ve seen the income verification requirements reduced. However, not everyone is in a position to make a higher down payment.

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Tags: credit score, home loans, income verification, Mortgages
Categories: Credit Scores, Mortgages, Pre-Approved
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Believe it or not credit reports do contain errors. I don’t think any error on your credit report should be considered minor. Because errors in your report can significantly alter your credit score and end up costing you thousands of dollars in the form of higher interest rates, inability to refinance a loan etc. Additionally, there is a growing trend where employers, vendors (if you’re self employed), new business partners etc. are checking your credit before they decide to establish a relationship with you. So, it is ever more important that you diligently monitor your credit report and actively correct any errors you find!

If my long winded advice here doesn’t convince you then read the story of Mark S. Blythe. According to the Orlando Sentential, “Mark S. Blythe’s loans fell through and his business went on the skids — all because a computer glitch spewed bad information on his credit file, sending his credit scores into a free fall.”

The complete fallout of this error is mentioned later in the article:

Blythe’s credit file, in particular, was spammed with several loans he had never taken out with the former R-G Crown and a delinquency record that included 19 late payments. Bank officials said they acted immediately to restore accuracy to the customers’ credit files in early December. But Blythe said he continues to suffer financial fallout long after the bank claims the problem was solved.

“I’m fighting to survive,” he said. “First, my credit scores were trashed and my business came to a halt. Now, my line of credit has been cut off and that’s the last thing I have to operate with. All of this has happened because Fifth Third has not really fixed the errors they reported.”

So, be vigilant. Check your credit report once a year and review it for accuracy. Make sure EVERYTHING is correct. Contact the creditor if you find any errors. Ask them to correct it immediately. Keep track of the dates of your conversation in a log book. Follow up in 30 days.

Mistakes happen. But you and only you are responsible for making sure your credit is in right order. Getting upset with the mortgage loan officer when you urgently need to refinance your home would not be the way to go about solving this problem.

Related posts on Arizona Mortgage Guru for this topic:

• Top Five Credit Misconceptions
• Learn Your Rights, Fight Erroneous Credit Reporting
• How to Protect Your Credit Score When Your Loan is Sold
• Faulty Credit Reporting and the Growing Trade in Discharged Debt
• Bad Credit Can Cost You Your Next Job and Your Dream Promotion

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Tags: credit bureaus, credit scores, errors, reporting
Categories: Credit Bureaus, Credit Scores
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Your credit profile and ability to obtain future financing is the last thing on your mind if you’re planning on living abroad for a few years. Many Americans simply pack their bags and go off on their adventure without much thought to how this may impact their credit profile. However, once its time to move back home and you want to purchase a house your spotty credit profile can be a big obstacle. This is especially true if you end up living abroad for more than three years.

I have family in this exact same situation so I’ve given this matter some thought. A borrower whom I recently worked with has provided me with an exact idea of how to balance your desire to live abroad and still maintain a foothold in the US credit markets.

The first thing you should do is open a Post Office Box in your home town. Then change all your credit card mailing addresses to this PO Box. This is fairly inexpensive. I’ve obtained PO Box quotes for as low as $10/month. Then, arrange with the PO Box provider to forward all your mail to your address abroad on a regular basis.

There is a problem with this strategy if you’re a paper bill kind of person. However, to pull this off you need to begin making all your credit care payments online - before receiving your bill. This is because you could receive a bill (after forwarding) a few months later.

I suggest you keep four US based credit cards open during your time abroad. Use these cards once a quarter or every six months for a minor purchase (such as gasoline - although in Europe this may not be a minor purchase, considering gas prices). Then clear the bill in the following billing cycle. This maintains activity on your account and demonstrates that you’re making timely payments.

This level of diligence will pay off when it comes time to move back home to the United States. Any mortgage lender will be able to run your credit score with your PO Box address. You may need to provide an explanation of your residence history for the past two years, but that is pretty easy to do.

It’s exciting to have the opportunity to live in a different country for a few years. Many Americans chose to move back after a few years. And when that time comes its better to be prepared than not, believe me my in-laws wish they had done it!

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Tags: abroad, americans, credit report, credit scores
Categories: Credit Bureaus, Credit Scores
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A reader reacts to my post titled “Why Lenders Care About Credit Scores” and sends this excellent question:

How much more of a positive effect does putting a greater percentage down on the home purchase vs. a low credit score.

For example, if I have a credit score of 620, but put down 20% down, how much more “pleasing” is this to a lender vs. if I have a credit score of 750, but put 0% down (or only 5%).

Again, this is an excellent question.

In a regular conventional loan, a higher down payment significantly improves your chances of obtaining an approval. So, if you had a 640 score and put 20% down, you’re more likely to get an approval than with only 5% down. So, in that sense a higher down payment is more “pleasing” to the lender. In the case where the credit score is already very high, then the down payment doesn’t play as much of a role. Meaning, whether you put 5% down or 20% down you will most likely get an approval in either case.

Going back to your question, when you have a score as low as 620, putting a higher down payment will help; but it’s still harder to get an approval compared to putting 5% down with a 740+ score. While the down payment helps, it still does not completely mitigate the possibility that the borrower has had serious credit issues in the past. Having said that putting more than 35% down changes everything. Lenders will most likely lend at any reasonable score with so much down as long as other factors are acceptable.

In terms of loan interest rate the new guidelines stipulate rates based solely on the borrowers credit score. So, whether you put 5% down or 20% down your interest rates will be higher if you have a score less than 680.

Bear in mind these rules apply to conventional loans. If you do the FHA program then these rules have no bearing. The FHA program is not credit score driven and hence will not factor in your score to the same extent as conventional. Also, FHA assumes you will not put any money down (it’s a 97% program and 3% to come from gifts). The approval is based on an overall picture involving your income/employment, liquid cash reserves, borrower credit and property type.

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Tags: credit score, down payment, Mortgages
Categories: Credit Scores, Interest Rate, Mortgages
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From the mailbag: 

If I owe $175K on a VA mortgage on my primary residence and the bank agrees to “forgive” $25K because the best I can sell my house for is $150K will this negatively affect my cerdit rating?

Most likely this will adversely affect your credit. The extent will depend on how the bank reports the “cancellation”. They could report it as a foreclosure, short sale, deed in lieu of foreclosure or anything in between. If it is a foreclosure then of course that would be the worst case scenario in terms of credit score. Even though a short sale and deed in lieu of foreclosure may not affect your score as adversely as a foreclosure it really shouldn’t be too big of a difference. Even though I can’t say by how much your score will fall, don’t be surprised by what you see.
 
Even though the reporting may vary, in the future, when you go to apply for a mortgage, the lender will most likely view all three as a foreclosure. An instance where you were not able to meet the mortgage payment and hence had to be releived of the obligation through legal action. Regardless of what your credit score is at that point or whether it says foreclosure or not, the new lender will treat it as such.
 
This isn’t a dire situation though. Lenders will still give you a loan but only after a minimum of three years after foreclosure. In fact you can get a 100% loan today three years after foreclosure, as long as you have maintained good credit since that time. I can’t say whether these loan guidelines will not change in the future.

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Tags: debt forgiveness, foreclosure, short sales
Categories: Credit Bureaus, Credit Scores, Mortgages
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I see faulty credit reporting all the time. After pulling credit, I (or Aimee) will review the credit report with the borrower.  It is amazing how many times we see active accounts which have been discharged during a bankruptcy. 

Quite honestly, I’m not sure how much this affects the credit score, but it certainly will not help.  Oftentimes things go smoothly, as long as the borrower has paperwork to prove the debt was included as part of the bankruptcy. However,  with lending standards tightening, you can never be sure.

This Yahoo! Finance article “Prisoners of Debt“ has helped me understand how discharged debt can reappear in your credit report as an active account. It has to do with dubious practices on behalf of creditors and the resulting growing trade in discharged debt papers.

Traditionally, once a debt has been discharged the account is supposed to be worthless. However, creditors are still selling these worthless papers to buyers. It seems to appear that as this sale occurs because someone somewhere believes they will be able to collect on the discharged debt. The article I mentioned above has stories of people who were forced to pay on dishcarged debt when they were about to buy a home.

What is sad is that many people are being trapped into paying back debt they were legally absolved from. This seems to be a thriving cottage industry and some of the major players in this market are even listed on Nasdaq! Wow.

So, what does it mean for you? It means you need to be proactive. Keep tabs on your credit report by doing an annual credit review. If you find errors promptly contact the creditors and ask them to update the report. Alos, make sure you keep records of all your communication (take summary notes of telephone conversations, keep copies of any letters).

Further Reading:

1. How to Protect Your Credit Score When Your Loan is Sold
2. Top Five Credit Misconceptions
3. Learn Your Rights, Fight Erroneous Credit Reporting
4. Additional resources click here.

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Tags: bankruptcy, credit scores, dicharged debt
Categories: Credit Bureaus, Credit Scores, Mortgages
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Not only can bad credit cost you big bucks, it could even cost you that new job you want or the promotion you’ve been working so hard to get.  It’s hard to believe, but it’s true, more and more employers are pulling credit and screening out job applicants.

I vaguely remember a conversation from a few months. The person I was talking to mentioned how he needs to get his credit in order so he could get a better job. I had to give my thumped look. You don’t often get to see my thumped look.

I know business owners and self-employed people may need to furnish credit reports for business loans or big contracts. Also I was aware of top level sales executives at large companies needing to furnish a credit report annually so the company feels comfortable with their money and debt management.  But I was not aware of how this practice had trickled down to include regular folks in regular jobs. 

At first I didn’t think employers could do this and I wasn’t sure it would prove to be terribly informative. But I found they could. I also did some research on how extensive this thing was and found that employers are increasingly relying on credit reports to screen out job applicants. Here is what I found on the Bankrate.com website:

More and more employers are using credit reports to screen employees. The use of credit checks has increased 55 percent since 2000, according to a 2006 national survey conducted by Harris Interactive for Spherion Corp., a leading recruiting and hiring firm.

So what are employers using your credit reports for?

… ”many companies use credit reports primarily for authentication of the name and address history of the applicant, perhaps paired with a separate search of criminal history, rather than for the credit performance of the individuals being considered, especially if there are no significant credit issues.”

Again, is this legal? According to the FTC, it is permitted as long as the employer receives a written permission to pull credit. I guess it’s part of the background check.

There is more at stake with the credit report, manage it well.

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Tags: credit check, credit report, credit score
Categories: Credit Bureaus, Credit Scores, Personal Finance
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