Credit Scores

Free Annual Credit Report: https://www.annualcreditreport.com/

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Ever wonder what lenders look at? How much a single inquiries impact your scores? Just want some tips to keep your credit profile as clean as possible?

C.F.P.B information on mortgage lenders pulling reports: https://www.consumerfinance.gov/ask-c…

Free Annual Credit Report: https://www.annualcreditreport.com/

Now that you’ve decided to start the home-buying process, it’s time to figure out which loan program is best for you. Since everybody’s situation is completely different, you’ll want to have a discussion with a mortgage professional help provide direction. After months of online browsing, it’s likely you’ve run into a jumble of curious letters, acronyms, and confusing names like FHA, VA, Fannie Mae, and Freddie Mac. What do they all mean and how do you know which one is right for you?

First off, lets look at the primary differences between an FHA loan and conventional loans, which includes Fannie, Freddie, and Jumbo loans. Even if it’s not your first time purchasing a home, it’s important to familiarize yourself once again since many historical differences between these types of loans have changed in recent years. The remaining differences have to do with mortgage insurance and a few underwriting guidelines.

Loan-Level Price Adjustments
Two very similar individuals with similar income might be better off on two completely different loan programs. One reason is because of Loan-Level Price Adjustments charged on conventional loans. These are risk-based fees assessed to mortgage borrowers using conventional financing. Since these fees are built into loan pricing (the premiums lenders earn by delivering your loan to Fannie Mae and Freddie Mac), the borrower typically doesn’t pay in the form of money but their interest rate gets adjusted. For example, an individual with an 800 credit score will have a better interest rate than somebody with a 660. Makes sense, right? Well, there are several other price adjustments. A condo or multi-unit property will likely have a higher interest rate than a single-family home. Your down payment percentage and whether or not you are buying a primary residence, second home or investment property can also impact your interest rate.

For a “vanilla” loan scenario where somebody has 5% down, a 780 credit score and purchasing an owner occupied single family detached home, this person would qualify for the best pricing possible. Their interest rate and monthly mortgage insurance would be the lowest available, keeping their monthly payment as low as possible with just 5% down payment. So, a conventional loan would be the best program for this particular borrower. However, FHA has far less pricing adjustments and is a bit more forgiving when it comes to your credit history and current credit scores. If the person in this above scenario had a 620 credit score, their interest rate and mortgage insurance would be substantially higher on a conventional loan due to the Loan-Level Price Adjustments. In this case FHA might be the better option since there total monthly payment would be lower.

Derogatory Seasoning, Credit Scores and & Debt Leniency
FHA has always been known as a “first-time homebuyer” program, even thought it’s not. People still label it this way because it caters to many individuals who have the some of the characteristics of a person who might be buying for the first time. Whether it’s a recent grad needing Mom and Dad to co-sign, somebody with very little savings or a person just starting to build up their credit, FHA can be very accommodating. However, there are many reasons why FHA might be the right program for move up buyers.

FHA has a much shorter seasoning period than conventional loans for people who are recovering from a bankruptcy, foreclosure or short-sale. FHA will allow for individuals with compensating factors to purchase with a credit score as low as 500, where as the minimum allowed by conventional is 620. FHA may also allow for debt-to-income ratios (the percentage of your gross monthly income allocated towards all your month debts) above 50% where conventional typically caps people around 45%.

Mortgage Insurance
The Federal Housing Authority (FHA) is a government agency created in 1934 to help more Americans own homes. Specifically, it provides mortgage insurance to the lender making the loan in case the borrower defaults (fails to pay) on the mortgage. The insurance premium is due no matter what size of a down payment the borrower makes.

FHA loans require a portion of the premium upfront (or at the time the mortgage is made) and monthly for the life of the loan (in most cases) and stays in place no matter how much equity accumulates in the property.

Conventional loans require mortgage insurance for the same purpose as an FHA mortgage (to protect the lender in case of a default on the mortgage), but only for loans with less than 20% down payment. The insurance is provided by private companies, which is where the term PMI comes from (private mortgage insurance.) PMI on a conventional loan only carries a monthly premium and no ‘upfront’ portion is due, and it can be removed based on the equity in the property. Through a combination of paying down the mortgage and property appreciation, borrowers can contact the lender when they have at least 22% equity and request the insurance cancelation.

Compared side by side, mortgage insurance on an FHA loan will end up costing the homebuyer more money over the life of the loan. The portion of the insurance premium that is due upfront on an FHA loan is typically added to the original loan balance, and the monthly payment is made on the total amount. While FHA interest rates generally are lower than rates for conventional loans (with less than 20% down payment), the payment on the FHA loan is likely to be higher for the same property.

More Differences Between FHA and Conventional Mortgage
FHA used to stand out as the best option for buyers with less cash available for a down payment because it allowed a down payment of a minimum of 3.5% of the purchase price. Now, however, Fannie Mae and Freddie Mac have programs that will enable borrowers to make a down payment as low as 3% of the purchase price.

While both FHA and conventional both have monthly PMI for low down payment loans, conventional loans allow the borrower to pay for the monthly mortgage insurance by increasing their interest rate above the lowest prevailing rate. This is called ‘lender paid mortgage insurance.’ Typically, a slight increase in the rate of one eighth to a quarter percent eliminates the need to pay a separate MI premium monthly. Since mortgage insurance premiums are tax deductible at lower income levels, some borrowers may find that paying a higher interest rate (mortgage interest to deduct) is preferable to a lower rate and the MI payment. Talk to your tax advisor to find out if this might be a beneficial option for you.

While all mortgages require a property appraisal, FHA appraisals were traditionally more detailed as the appraiser was required to note any “health and safety issues” they saw while inspecting the property. After 2010, however, the requirements for all appraisals have been unified. If the property condition poses a health or safety issue, as noted by the appraiser, an FHA loan will require correction or repair before the loan closing. Conventional loans need the same; however, there may be a small amount of flexibility.

What’s Best For You?
It’s hard to imagine choosing an FHA loan after reading all of this, but it may be the best option for some borrowers. In general, the underwriting guidelines for an FHA loan are more lenient than those for conventional loans. Specifically, FHA may allow a higher debt-to-income ratio than a conventional loan. Credit guidelines are also more flexible both with past delinquencies and more serious derogatory credit events, as well as the depth of a borrower’s credit history.

With property values increasing across the country, along with interest rates, waiting for a credit score to improve or a delinquent record to drop off your report may not be attractive. FHA loans will allow some borrowers to buy a home sooner than they may otherwise have been able to with conventional financing options. If interest rates drop in the future, you can refinance using the FHA streamline, which reduces the usual process and won’t require a new appraisal. Conventional loans can only be refinanced by starting over at square one and going through the full loan qualifying and process again.

The more you know going into the home buying process, the better questions you can ask and the better decisions you can make. But nothing replaces the benefit of working with an experienced lender to fully evaluate your situation and give you the options that will work best for you. There’s so much more to it than the interest rate.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

You should be mindful of your credit profile throughout the entire process of purchasing a home.

Buying a home can be overwhelming for first-time buyers. Lenders will ask you many questions and have you provide documentation to support your application before granting you a loan. And of course, they will require a credit check.

I am often asked if we pull credit more than once. The answer is yes. Keep in mind that within a 45-day window, multiple credit checks from mortgage lenders only affects your credit rating as if it were a single pull. This is regulated by the Consumer Financial Protection Bureau – Read more here. Credit is pulled at least once at the beginning of the approval process, and then again just prior to closing. Sometimes it’s pulled in the middle if necessary, so it’s important that you be conscious of your credit and the things that may impact your scores and approvability throughout the entire process.

Initial credit check for pre-approval
The first thing I encourage any potential buyer to do is to get pre-approved. Many realtors may not even begin to show you homes until you’ve taken this first step. You can apply for pre-approval online, face-to-face or over the phone. Lenders want to know details such as history of your residence, employment and income, account balances, debt payments, confirmation of any foreclosures or bankruptcies in the last seven years and sourcing of a down payment. They will need your full legal name, date of birth and Social Security number as well so they can pull credit.

Once you find a home within budget and make an offer, additional or updated documentation may be required. Underwriters then analyze the risk of offering you a loan based on the information in your application, credit history and the property’s value.

Credit check during the loan process – maybe
Depending on how long it takes from your pre-approval until finding a home, contracting and then closing, a lot of time could pass. As determined by Fannie Mae guidelines, credit reports are only good for 120 days, so if you get pre-approved then find a home a few months later, your report may expire during the process and need to be re-pulled. Other reasons to re-pull might be to if you cleaned up some debt, removed disputes or had erroneous items removed that could impact your interest rate.

Final credit check before closing
Depending on how recent your initial credit report was pulled and how long your contracted closing date is, a lot of time can pass from the start of the process thru the date of your closing. Since your credit report is simply a snapshot of your credit profile, it’s understandable that things can change and new credit incidents may occur on your history. Lenders pull credit just prior to closing to verify you haven’t acquired any new credit card debts, car loans, etc. Also, if there are any new credit inquiries, we’ll need verify what new debt, if any, resulted from the inquiry. This can affect your debt-to-income ratio, which can also affect your loan eligibility.

This is known as a soft pull. We don’t actually generate new credit scores, and it will not show up as a hard pull on your credit record. If the final credit check results match the first, or if your debts have decreased, closing should occur on schedule. If the new report has increased debt, the lender may ask you to provide more documentation and send your application back through underwriting to make sure you still qualify.

It’s important for buyers to be aware that lenders run this final credit check before closing. If you ever need to open a new credit card or make a major purchase before your loan closes, be sure to contact your lender first to make sure the new debt doesn’t affect your approvability or your closing date.

Written By: Chris Ulrich – United Home Loans
NMLS# 215735

Your credit history is the MOST important thing you need to be aware of and should always consider when making financial decisions. Your score is a snapshot of your historic and current ability to repay debt. Believe it or not, having debt can actually be a good thing as it pertains to generating credit scores. While there are several other factors, your credit history is the number one factor influencing your ability to borrow money. So why do your scores change so often? Why is your score lower today than when you received your free online report yesterday?

There are three credit bureaus that lenders pull information from; Trans Union, Equifax and Experian. They each generate a score, and we the lender use the median score as your qualifying score. If you are buying a home with a spouse, partner or co-borrower, we look at both median scores and then take the lower of the two for qualifying. People are often surprised that their score is lower than they expected. Often times people will tell me that they got a free report online and their score was much higher. Why is this? Each of the three credit bureaus use multiple scoring models and algorithms to determine your score. You may hear a credit score often referred to as a FICO score. This is the overlying scoring system. Fair Isaac Corporation (FICO) has multiple models that are updated and released from year to year. For example, Classic 04 and Beacon 5.0 are often used in the mortgage industry but can have a much more conservative scoring process than the models used when purchasing a car, or getting a free consumer report. So no, we cannot use your online credit report. We must pull our own report. And yes, it’s very important to have your lender pull your credit early in the pre-approval process to manage your expectations and help identify any potential issues or discrepancies you may be able to correct.

While the scoring algorithms aren’t public, we know what impacts your scores the most. And no, having your score pulled by multiple mortgage companies will NOT affect your score. I’ll dive into that later.

Pay your bills on time.
Your credit card won’t report you late until it’s 30 days past due, but get in the habit of paying early. I’ve seen a single 30 day late payment drop scores more than 50 points. If you continue to fall behind, multiple 60 and 90 day late payments will destroy your scores.

Revolving debt vs. Car Loans, Student Loans & Mortgages
Having good credit comes from a history of repayment. Car loans, student loans and mortgages can help develop a long term history of good credit standing. As long as these are paid on time, these are good items to have on your credit report. Revolving debt, i.e. credit cards, need to be tamed. Again, it’s okay to have credit card debt but read ahead on how to handle this debt.

Keep your credit card balances “low”
It’s perfectly fine to have credit cards. In fact, showing your ability to pay these cards on time is what generates a healthy credit record. The key however, is keeping your debt utilization low. What does that mean? Try to keep your credit card balances below 40% of the limit. Percentages are key! If you have a card with a $15,000 limit, then keep that balance below 40% or $6,000. Better yet pay that card off so your utilization is 0%. Somebody with a $25,000 credit limit with an $8,500 balance will likely have better credit scores than somebody with a $2,000 balance on a $4,000 card. Sure the debt is higher but the person with the higher credit limit has a lower utilization percentage. Be careful when opening cards to buy products. They often set the credit card limit to the cost of the product. I’ve seen this with somebody who bought a $2,000 television on a Best Buy card. Sure, it was no payment and no interest for 12 months. Great, right? Not for this person. The card limit was set to $2,000, so he was actually maxed out, 100% utilization, for several months.

Don’t close out old cards
As I mentioned, your credit history is important. When you close out a card, eventually that history attached to that account will go away. More importantly, your overall utilization percentage goes up. For example, if you have two credit cards with a $10,000 credit limit and the balance of one is $0 and the other is $4,000, your combined utilization is 20%. If you close out the zero balance card, your total utilization just went to 40%. Don’t trust yourself with that second card? Cut it up. Shred it. You don’t have to use it. I just don’t recommend you close it out.

Pay off collections
Sometimes the oldest collection can come back to haunt you. When you have a bad debt that the credit card company couldn’t collect on, they will sell that debt to a collection agency for cents on the dollar. The collection company will try to recoup dollar-for-dollar to be profitable, but often they’ll negotiate with you since they bought the debt for less than what you owe. If you don’t pay it, the debt could get sold to another collection agency years later. This could bring it back to life on your credit report where you’ll once again get “dinged” with late payments.

Write letters
If you find something erroneous on your credit report, contact the creditor and get documentation agreeing it was an error. Send that information to the three credit bureaus so they can correct the errors.

Credit Inquiries
Yes. Too many credit inquiries can affect your score. Just one credit check can have a negative but small impact, but just like your car, you need a checkup. Have it pulled annually to make sure nothing populates out of the ordinary. Think of it as a score card. You should visually see your credit history and see if there are ways to improve your scores. If you are having it pulled several times by several credit card companies, this for sure can impact your scores. The bureaus know that you’re attempting to acquire more revolving debt. They’ll penalize you for multiple attempts. A common misconception is that multiple pulls by a mortgage company will hurt your credit. As a consumer shopping lenders for your home mortgage, rest assured that multiple inquiries from multiple lenders will not affect your due diligence. The Consumer Finance Protection Bureau regulates this and states that multiple inquiries in a 45 day window will only register as 1 inquiry. Read More From The CFPB Here

There are many other factors that can affect your scores, but if you can pay your bills on time and keep your credit card balances low, you will find yourself on the path to 800. If you are in the early stages of purchasing a home or even just entertaining the idea, please give me a call so we can make sure you’re on the right path!

Written By: Chris Ulrich – United Home Loans
NMLS# 215735