Score Big when Buying

Rhonda Caldwell, Associate Broker
Coldwell Banker Residential Brokerage

Score is the Limit When Buying!

Getting ready to buy a house or just thinking about it? Where to buy, what to buy, and how you'll afford it are probably top of mind. But if you're not also concentrating on your credit score - and by concentrating on, we mean actively trying to raise your scores as much as possible - you're not looking at the whole home buying picture.

Find your dream home today!

Not only can does your credit score factor greatly into what you'll pay for your house, it can keep you from being able to buy one, period. "Your credit history determines what loans you will qualify for and the interest rate you will pay," said eloan. "A credit score provides an easy way for lenders to numerically judge your credit at a point in time. It gauges how likely you are to repay your loan in a timely manner. The better your history appears, the more attractive you become as a loan customer."

Thankfully, your credit score is not static; it can (and does) change all the time, and there are all kinds of ways to improve it, some better than others. We're running down the smartest options to boost your score in the new year.

Shoot for perfection

850 is the best score you can possibly get, and, while it may seem completely out of reach, there are people who actually crest that credit mountain and reach the top. "It's the Holy Grail of all credit scores: 850. On the widely used FICO credit score scale, approximately one in every 200 people achieves perfection, at least as of a 2010 estimate by the Fair Isaac Corporation," said The Motley Fool. Careful budgeting and detailed attention to every aspect of their financial picture are the umbrella tactics they use to get and maintain that score - and they're ones you should be using, too.

Or, shoot for 750

If 850 is out of reach within a reasonable timeframe (reasonable being the maximum amount of time you want to wait before buying a home), try for 750. This is the magic number for many lenders and creditors. "It puts the ball completely in the corner of the consumer rather than the lender, said The Motley Fool. "You'll often have lenders fighting for your business, and in nearly all instances, you'll be offered the best interest rate by lenders, meaning you'll have the lowest possible long-term mortgage and loan costs of any consumer."

Talking to your lender about the items on your credit report that have the best chance of raising your score is key. You may think that paying off that old unpaid account from six years ago is an easy way to get a score bump, but is it about to fall off of your report on its own?

Set up automatic payments

According to CreditCards.com, a good 35 percent of your credit score is taken from your payment history. You may have missed payments in the past that you need to deal with now, but you certainly don't want to make another mistake while you're trying to get homebuyer-ready. Almost every creditor, from your utilities to your car payment to any outstanding student loans you may have, offers the option of automatic payments. This is the easiest way to ensure you never miss a payment because you got busy or spaced on the due date.

But, just remember to make sure there is enough cash in your account to cover the payments on the day the money will be coming out. If you have been busy moving funds into savings for your down payment, you'll want to set a reminder to put money back into whatever account your auto payments are attached to.

Ask before you shut down credit cards

The amount of credit you have is a factor in qualifying - or not - for a mortgage. Too much debt is a bad thing. But, long-term credit use that has been managed properly can be helpful to your score. If your lender does recommend getting rid of some of your available credit, it likely won't be older cards. "Length of credit history is considered when determining your score - so the longer you've had a credit card, the better," said CNN Money.

Also beware that closing any card triggers a change in your "utilization," and that might not be a positive. Be sure to consult with your lender first.

Watch your credit limits

Banks don't look kindly on those who have used all of their available credit because it gives the appearance that you're not living within your means. "The amount of available credit you use is the second most important factor in your score," said NerdWallet. "Experts recommend you keep your balance on each card below 30% of your limit — if your limit is $5,000, your balance should be under $1,500."

Of course, even lower is better. Get to 20% or even 10%, and you'll be in great shape. But don't go below that. While it may seem like a zero balance would indicate that you are financially savvy, banks like to see responsible credit management. That means using your cards and paying down the balance to a reasonable level every month.

Pay down your debt…but check with your lender first

If you're trying to weigh the best tactics for improving your credit and you don't have the funds to take care of every outstanding wrinkle on your credit report and pay down your existing debt at the same time, you definitely want to check with your lender before you make any move. Every dollar is important, and while NerdWallet notes that your credit score will "soar" as you "pay off your debt as aggressively as possible without acquiring more," it could be that your lender has a strategy that places more importance on other credit issues in your report, or has structured your credit repair according to a different timeline.

This underscores the importance of working with a lender who is skilled and experienced in credit repair. Using the tools our lender gave us, we were able to improve our score by almost 100 points in four months, allowing us to qualify for the home we wanted and get a great interest rate.

Don't be afraid to refinance

You may end up buying a home before you get your credit score exactly where you want it to be. If you're in an appreciating market, which much of the country is, and your score continues to rise after you close escrow, you might be in a position to refinance sooner than you think. Especially if you buy your home with an FHA loan, their streamline refinance program can potentially lower your rate without an appraisal, a credit check, or job/income verification.

A Little Note for Buyers

By:  Rhonda Caldwell,  Associate Broker
Coldwell Banker Residential Brokerage

Consider these few ideas when buying your first home

After years of renting, you are more than ready to take the plunge into home ownership. You dream of having a cozy casa to call your own, and you cannot wait to start the house hunting process.

Your dream home is in sight!

While looking for your first home is exciting, it can also be stressful as unexpected bumps in the road tend to pop up. To avoid as many negative curveballs as you can, keep the following cautionary tips in mind:

Get your finances in order

While, I will work with any first time buyer, many Realtors will not work with home buyers until they have been pre-approved for a loan. In order to be sure that you qualify for a decent amount, spend some time getting your financial house in order. As Bank Rate notes, start by checking your credit score and report, since it will be a key factor in how much you will qualify for, as well as determining your interest rate. You can use a free credit score checking service like CreditKarma, or if you have a credit card like Discover, you should be able to check your FICO score there as well.

In addition, get copies of the actual reports from these companies that show all of your lines of credit as well as the reasons for your score, and go over everything with a fine-toothed comb. Look for mistakes, unpaid accounts and any collections, and if there are any issues, start the repair process at least six months before buying a home. Having a high debt to income ratio may also negatively impact your FICO score; if this is true for you, do all you can to pay down your credit card bills and other debts before shopping for a home.  And most of all, no late payments!  Be sure to pay all of your lines of credit and bills on-time.  Many lenders will scrutinize your credit report and require explanation and back up for late payments.  Avoid this hassle!

Choose your neighborhood carefully

Some first-time home buyers are so focused on getting a certain style of house, they may overlook the quality of the entire neighborhood. The surrounding area deserves as much consideration as the house. Research the local school system, even if you don't have kiddos yet, because it can impact home values.

Check to see how close needed amenities are, like grocery stores, gas stations, coffee shops and hospitals, and do a practice commute to see how long it takes you to get to work. You can also check the local crime stats, and if you drive through it at different times of the day, you can check for unexpected noises and activity levels; like a busy fire station nearby or a sports field where high school bands go to practice.

Make sure technology is working

Once you start the actual home search, you may be pleased to see that some of the homes come with innovative features like a home security camera system, thermostats and other cool forms of technology. Rather than assuming that everything works, either check these gadgets yourself to be sure they are functioning properly, or if you have made an offer on the home, ask your home inspector to determine that the tech is in good working order.

If you find that the security system and other tech is broken or woefully outdated, you can either ask the sellers to change it out to a newer system, or you can ask for a credit so you can purchase a new home security camera system or other tech when you move in. If you go with the latter option, you might want to check out HD security cameras and other home security systems from Lorex Technology; the company offers DIY high definition surveillance systems that are affordable, easy to install and do not require you to sign a contract.

By doing your financial and neighborhood homework and remembering to never assume that anything in a potential home is working properly, your house hunting experience is sure to be more fun and fruitful than stressful and overwhelming.

The New Mortgage Market

Mortgage Market Update, By: Rhonda Caldwell
Coldwell Banker Residential Brokerage

A lot of my first time home buyer clients continue to ask me about mortgage market.  I thought I would start this weeks blog on the status of the Subprime Mortgage market.  

What is a Subprime Loan?

The mortgage markets have many facets and moving parts, with interest rates being tied to the risk of a particular loan.  The key to differentiating between one mortgage and another mortgage is the risk level associated with the borrower that is being assumed by the lender.  Prime rate loans are mortgages that are rated low risk, provide for lower risk of the borrower defaulting on their loans as they have strict guidelines for approval (Demyanyk & Van Hemert, 2011). 

Borrowers are now required to have good credit scores of 680 and higher, have ten to twenty percent cash available for down payments, bringing equity to their transaction and have great income to support their existing obligations as well as their new loan.  In the early 2000’s the mortgage market began to change (Demyanyk & Van Hemert, 2011).  As the mortgage market began to slowdown, lenders began to advertise loans that were offered to borrowers with more relaxed underwriting standards.  The subprime loans criteria was borrowers using up to an over 50% of their income for their payments, zero money down or 100% financing, and they had FICO scores of less than 600.  These borrowers exposed the lenders and investors to a great amount of risk, as they were somewhat over their heads at closing.  Click the link below for a explanation of Subprime Mortgages.

  Click here for short video on subprime loans.

Other examples of Subprime loan products included interest only loans, and the dreaded 3 or 5 year Adjustable Rate Mortgage, which payments started our low and affordable, but when the adjustment happened, the payment would increase 200 to 300% (Ghent, Hernández-Murillo, & Owyang, 2014).  The loans often front load fees and points and large prepayment penalties if borrowers tried to refinance.  The main difference in the subprime loans is they were not serviced by Fannie Mae or Freddie Mac and initially they were not governmentally regulated, which left the subprime market with  would have the  who had a higher risk of defaulting on their loans, thus creating a “subprime” market (Ghent et al., 2014). 

Lenders Role in Subprime Growth

Initially in the 1990’s, subprime loans were a small part of larger lenders and their programs were seen as a way to give back to the communities in which they had already made millions in profit.  It was to be an entry way to home ownership and real estate wealth for the first time home buyers.  However, as our economy shifted in early 2001, the growth and profitability in this market was astounding, as the subprime loans doubled from 1995 – 2000, however the market jumped a shocking 250% from 2000 to 2003 to $332 billion (Xudong & Bostic, 2009).   From 2000 to 2007, leading lenders, like Bank of America and Wells Fargo, began to cash in on revenue possibilities and created subprime extensions of their existing business models.  In fact, many of leadership within these banks had their compensation and bonus packages tied to the growth and success of this subprime market; thus explaining the leadership’s desperate desire to increase the growth within such a risky market, at any cost.  Leaders like Angelo Mozilo, CEO of Countrywide Financial and IndyMac Financial, both leaders of the subprime market in 2007, as well as several others at the time, continued to encourage their staff to drive more loans to the subprime market, even though in 2007, many of the earlier 5 year Adjustable Rate Mortgages had already began to go into default and the real estate market began its free fall.  Mozilo was the most notable culprit, receiving an outrageous salary in 2006 of nearly $470 million in salary, bonus and stock options (Agarwal, Ambrose, Chomsisengphet, & Sanders, 2012). 

Leaders like Mozilo were in this game to make money, as it was a completely unregulated market.  Driven by greed, and huge profits and personal compensation, there was no reason to change the rules and stop approving the very high risky loans.  They made the rules and the rules of the game were to make as much money as possible, without any regard to the borrowers, the community and the market as a whole.  Click picture below for subprime market information (Agarwal et al., 2012).

By late 2004 to 2007, as the subprime market surged, lenders began to become even more creative in offering subprime products to the public, with loans like the 5 year ARM, Hybrid loans, Option ARMs, etc. (Demyanyk & Van Hemert, 2011)   Although the real estate market bubble was growing, the revenue being generated from this financial market was astounding, a hand full of lenders continued to lend to the poorest of the poor, in the minority lead neighborhoods and continued relax their normal lending requirements to drive more low income borrowers to the real estate mortgage market (Demyanyk & Van Hemert, 2011).   

Social Responsibility in the Subprime Market

In the late 80’s and 90’s, subprime loans made up a small percentage of the mortgage market, but, as the economy began to decline and compensation and bonus packages began to shrink for several banking leaders, the focus of giving back to the community no longer remained a priority, as lenders saw the profitability of this subprime market (Gilbert, 2011).  They began to target areas that would present the best opportunities for them to maximize their compensation, not to preserve and grow struggling communities with home ownership (Richter & Craig, 2013).  In fact, research has shown that during the height of the subprime market from 2000 to 2007, there was a positive correlation between the amount of loans made in communities with minorities living below the poverty level (Richter & Craig, 2013).  The lower they reduced their underwriting standard, the higher the profitability to the markets.  Additionally, research showed that lenders would advertise seeking specific minority racial groups that would be first generation in realizing the American dream of home ownership, who would unquestionably agree to the terms of their financing.  They drew lines in these neighborhoods, and each home door to door would have been financed through a subprime loan product (Nguyen, 2011).  Today, these neighborhoods are completely vacant, filled with   blighted property and crime.

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While these families were already struggling economically, they are now faced with the additional burden of losing their homes and not being able to now secure any housing after foreclosure.  What was most revolting, those that were living at or below the poverty level, research showed also having limited to no formal education and may not have been able to understand the complexities of their loans and their requirements (Nguyen, 2011).

During this time, banks and finance company continued to act extremely socially irresponsible as once the profits continued to flow, they came into these impoverished communities pretending to  help these struggling communities realize the American Dream, when in fact their goal was to increase their profits (Gilbert, 2011).  There was no intention of these loans ever getting repaid, and as such they defrauded their investors as well as the affected communities.  Unfortunately, however, no one realized the ramifications of the actions of this rogue subprime industry, until the real estate bubble finally burst in 2008 and foreclosures reached record levels, countrywide (Xudong & Bostic, 2009).  

Corrective Measures to Subprime Industry

House Bill (HB) 3915 has played a major role in changes to the subprime market.  First, they established the National Mortgage Licensing System Registry to bring uniformity to the mortgage markets, nationally (Black, 2008).  Initially $45 million was authorized to the Federal Bureau of Investigation to investigate any instances of mortgage fraud, in general.  They instituted HUD and it Office of Housing Counseling to advertise and teach and offer technical assistance to borrowers regarding home ownership in contrast to renting.  The most important component, which also has the largest grey area is that mortgage brokers have got to exercise a duty of “care” to their clients and must make a reasonable assessment as to whether the application can repay the loan, as opposed to simply approving loans for profitability (Black, 2008).  This will be evidenced by examining the number of prime loan origination versus subprime originations.  Directing prime rate borrowers to subprime products, is also prohibited especially those that are of the same credit worthiness as a result of their race, ethnicity, age or gender.  Finally, HB3915 also lowered the front end expense like no longer allowing borrowers finance points and fees and lowering the APR to no more than 8% over the treasury interest rate (Black, 2008). 

Capping interest rates and educating subprime borrowers is a terrific start for government regulation, however, unless corporations exercise their social responsibility to care, unfortunately, there will always be a way around these new laws (Santos, 2011).

References

Agarwal, S. s. f. o., Ambrose, B. W. b. p. e., Chomsisengphet, S. s. c. o. t. g., & Sanders, A. B. a. g. e. (2012). Thy Neighbor's Mortgage: Does Living in a Subprime Neighborhood Affect One's Probability of Default? Real Estate Economics, 40(1), 1-22. doi:10.1111/j.1540-6229.2011.00311.x

Black, J. W. (2008). MORTGAGE REFORM AND ANTI-PREDATORY LENDING ACT OF 2007: A SUBOPTIMAL RESPONSE TO A SUBPRIME PROBLEM. University of Florida Journal of Law & Public Policy, 19, 497.

Demyanyk, Y., & Van Hemert, O. (2011). Understanding the Subprime Mortgage Crisis. Review of Financial Studies, 24(6), 1848-1880.

Ghent, A. C., Hernández-Murillo, R., & Owyang, M. T. (2014). Differences in subprime loan pricing across races and neighborhoods. Regional Science and Urban Economics, 48, 199-215. doi:10.1016/j.regsciurbeco.2014.07.006

Gilbert, J. (2011). Moral Duties in Business and Their Societal Impacts: The Case of the Subprime Lending Mess. Business & Society Review (00453609), 116(1), 87-107. doi:10.1111/j.1467-8594.2011.00378.x

Nguyen, T. H. (2011). Fraud and the subprime mortgage crisis. [electronic resource]: El Paso [Tex.] : LFB Scholarly Pub., 2011.

Richter, F. G. C., & Craig, B. R. (2013). Lending patterns in poor neighborhoods. Journal of Economic Behavior and Organization, 95, 197-206. doi:10.1016/j.jebo.2013.03.005

Santos, J. A. C. (2011). Bank Corporate Loan Pricing Following the Subprime Crisis. Review of Financial Studies, 24(6), 1916-1943.

Xudong, A., & Bostic, R. W. (2009). Policy incentives and the extension of mortgage credit: Increasing market discipline for subprime lending. Journal of Policy Analysis & Management, 28(3), 340-365. doi:10.1002/pam.20436