Applying for a Mortgage When You’re Self-Employed

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QuickenLoans.com| May 12, 2015| Kevin Graham| Link

Anyone who’s been self-employed knows you don’t just sit around eating cheese balls and watching soap operas every day. You work your tail off to put food on the table and make a living. You can even make a really good one.

Because you’re not employed by a traditional business, there’s some additional documentation required to qualify for a mortgage. It doesn’t have to be a hindrance; it just requires a little preparation.

Employment Verification

One of the great draws of self-employment is the ability to strike out on your own and be your own boss. Taking responsibility for your own success can be very freeing.

It does, however make the process of verifying your employment a little different. What would normally require a phone call to your employer instead requires you to furnish a little bit of paperwork. The good news is you can provide any of the following as documentation:

  • Current statement of bond insurance (policy must be at least two years old)
  • A letter from your licensed CPA, enrolled agent or tax preparer
  • Letters from clients indicating service has been performed
  • A membership letter from a professional organization that can verify through your membership at least two years of self-employment.
  • Any state license and business license that may be required in your profession
  • Evidence of workers’ compensation and employer’s liability insurance
  • A DBA (Doing Business As) issued at least two years ago

If you’re using a DBA for verification, you must prove current self-employment with two months of recent business account statements, creditor statements or company invoices.

Income Documentation

Quicken Loans Mortgage Banker Dennis Spensley said one of the most important things a client can do to move the process along is to have income documentation ready at the beginning.

He went over what documents are needed if you’re a sole proprietor.

“When I am helping a self-employed client, I try to set the right expectation upfront,” Spensley said. “We’ll need two years of tax returns, both business and personal. We also typically need to have the client’s accountant prepare a (year-to-date) profit and loss and a balance sheet. If they have extended (their tax filing time) for the previous year, we’ll need a copy of the extension form and a profit and loss prepared for the previous year as well.”

If you’ve been self-employed for less than two years, it may be necessary to show additional documentation regarding the likelihood of continued income.

While the specific forms necessary are dependent on how you incorporate your business, in general, we’ll need personal tax returns (and, if it’s a corporation, W-2s) as well as a statement showing your portion of the business’s profit or loss. Profit and loss forms might include a Schedule C, Form 1120S or K-1, depending on your business structure.

It’s important to note that you generally can’t qualify if you show an income decline of greater than 25%.

Get Organized

Spensley also noted it’s helpful if you can separate your business assets from your personal assets.

“Self-employed clients typically have their business and personal assets intermingled,” he said. “If they can keep the funds that they will use for down payment and settlement fees isolated from their business assets in a personal savings account, that would work best.”

Depending on the type of loan, a minimum contribution to the down payment is required from your personal funds. Separating it from your business accounts will just make things easier.

 

It’s Business As Usual for Interest Rates

Model of a house behind a fence from dollars

RISMedia| June 19, 2015| Suzanne De Vita| Link

Prospective homebuyers may see a few more weeks of near-zero mortgage rates following news that the Federal Reserve will maintain its current interest rate policy. Economists have long anticipated a rate change in September of this year.

“The (Federal Open Market) Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its two percent objective over the medium term,” the Fed statement read.

Though the Fed does not set mortgage rates, its actions tend to impact those that do. After the unexpected employment gain in May, 30-year-fixed mortgage rates rose to 4.04 percent, marking the first week since November of last year that rates topped four percent.

“The housing market can handle interest rates well above four percent as long as inventory improves to slow price growth and underwriting standards ease to normal levels so that qualified buyers–especially first-time buyers–are able to obtain a mortgage,” said Lawrence Yun, chief economist of the National Association of REALTORS®, in a recent market update.

“You may see a 4.5 percent conventional interest rate by the end of the year,” opines Joe Petrowsky of Right Trac Financial Group in Manchester, Conn. “If the true employment numbers improve, rates should move up, but based on our current economy, it would be a bad move on the part of the Fed to raise rates. My sense is the Fed will attempt to raise rates throughout this year.”

In the interim, borrowers may choose to lock in a lower rate by timing the lock period with the projected closing date of sale.

A 15-Year Mortgage Can Save You $190K … but Can You Get One?

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April 8, 2015| Credit.com| Scott Sheldon|

One of the best ways to eliminate your mortgage debt is moving into a 15-year fixed-rate loan. With the average spread a full 1% compared to its 30-year counterpart, a 15-year mortgage can provide an increased rate of acceleration in paying off the biggest obligation of your life.

Can you pull it off?

In most cases, you’re going to need strong income for an approval. How much income? The old 2:1 rule applies. Switching from a 30-year mortgage to a 15-year fixed-rate loan means you’ll pay down the loan in half the amount of time, but it effectively doubles up your payment for each month of the 180-month term. Your income must support all the carrying costs associated with your home including the principal and interest payment, taxes, insurance, (private mortgage insurance, only if applicable) and any other associated carrying cost. In addition, your income will also need to support all the other consumer obligations you might have as well including cars, boats, installment loans, personal loans and any other credit obligations that contain a monthly payment.

The attractiveness of a 15-year mortgage in today’s interest rate environment has mass appeal. The 1% spread in interest rate between the 30-year mortgage and a 15-year mortgage is absolutely real and for many, the thought of being mortgage-free can be very tempting. Consider today’s average 30-year mortgage rate of around 4% on a loan of $400,000—that’s $287,487 in interest paid over 360 months. Comparing that to a 15-year mortgage over 180 months, you’ll pay a mere $97,218 in interest. That’s a shattering savings of $190,268 in interest, but there’s a catch—your monthly mortgage payment is going to be significantly higher.

Here’s how it breaks down. The 30-year mortgage in our case study pencils out to a $1,909 monthly payment covering principal and interest. Weigh that against the 15-year version of that loan, which comes to $2,762 a month in principal and interest, totaling $853 more per month, but going to principal. This is why the income piece makes or breaks the 15-year deal. Independent of your other carrying costs and other credit obligations, you’ll need to be able to show an income of $4,242 a month to offset just a principled interest payment on the 30-year fixed-rate mortgage. Alternatively, to offset the principled interest payment on the 15-year mortgage, you would need an income of $6,137 per month, essentially $1,895 per month more in income, just to be able to pay off your debt faster. As you can see, income is a large driver of debt reduction potential.

What to do if your income isn’t high enough

When your lender looks at your monthly income to qualify you for a 15-year fixed-rate loan, part of the equation is your debt load.

Lenders are going to consider the minimum payments you have on all other credit obligations in the following way. Take your total proposed new 15-year mortgage payment and add that number to the minimum payments on all of your consumer obligations and then take that number and divide it by 0.45. This is the income that you’ll need at minimum to offset a 15-year mortgage. Paying off debt can very easily reduce the amount of income you might need and/or the size of the loan you might need as there would be fewer consumer obligations handcuffing your income that could otherwise be used toward supporting a stable mortgage plan.

Can you borrow less?

Borrowing less money is a guaranteed way to keep a lid on your monthly outflow maintaining a healthy alignment with your income, housing and living expenses. Extra cash in the bank? If you have extra cash in the bank beyond your savings reserves that you don’t need for any immediate purpose, using these funds to reduce your mortgage amount could pencil very nicely in reducing the 15-year mortgage payment and interest expense paid over the life of the loan. The concept of the 15-year mortgage is “I’m going to have to hammer, bite, chew and claw my way through a higher mortgage payment in the short term in order for a brighter future.”

Can you generate cash?

If you can’t borrow less, generating cash to do so may open another door. Can you sell an asset such as stocks, or trade out of a money-market fund in order to generate the cash to rid yourself of debt faster? If yes, this is another avenue to explore.

You may also want to explore getting additional funds via selling another property. If you have another property that you’ve been planning to sell such as a previous home, any additional cash proceeds generated by selling that property (depending upon any indebtedness associated with that property) could allow you to borrow less when moving into a 15-year mortgage.

Are you an ideal match for a 15-year mortgage?

Consumers who are in a financial position to handle a higher loan payment while continuing to save money and grow their savings would be well-suited for a 15-year mortgage. The other school of thought is to refinance into a 30-year mortgage and then simply make a larger payment like you would on a 25-year, 20-year or 15-year mortgage every month. This is another fantastic way to save substantial interest over the term of the loan, since the larger-than-anticipated monthly payment you make to your lender will go to principal and you’ll owe less money in interest over the full life of the loan. As cash flow changes, so could the payments made to the loan servicer, as prepayment penalties are virtually nonexistent on bank loans.

There is an important “catch” to taking out a 15-year mortgage—you also decrease your mortgage interest tax deduction benefit. However, if you don’t need the deduction in 15 years anyway, the additional deduction removal may not be beneficial (depending on your tax situation and future income potential).

If your income is poised to rise in the future and/or your debt is planned to decrease and you want to have comfort in knowing by the time your small kids are teenagers that you’ll be mortgage-free, then a 15-year loan could be a smart move. And when your mortgage is paid off, you’ll have control of all of your income again as well.

Proximity to retirement is another factor borrowers should consider when carrying a mortgage into retirement isn’t ideal. These consumers might opt to move into a faster mortgage payoff plan than someone buying a house for the first time.

Keep in mind that to qualify for the best interest rates on a mortgage (which will have a big impact on your monthly payment), you need a great credit score as well. You can check your credit scores for free on Credit.com every month, and you can get your free annual credit reports at AnnualCreditReport.com, too.

Which home loans are best for new buyers?

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Inman| Hank Bailey| January 19, 2015| Link

Renting can certainly be a solid choice while you’re saving for a down payment or repairing or building credit to obtain a mortgage, but recent findings show that homeownership is still a better deal. The cost to rent is rising faster than any other time in the last six years, according to the Bureau of Labor Statistics, while rental inventory stands at a 20-year low.

There is great benefit in knowing what types of loans are available that might assist buyers who require a low down payment so that they can become new homeowners in 2015.

In a recent press release, Zillow added to the conversation: “Over the past 14 years, rents have grown at twice the pace of income due to weak income growth, burgeoning rental demand, and insufficient growth in the supply of rental housing. This has created real opportunities for rental housing owners and investors, but has also been a bitter pill to swallow for tenants, particularly those on an entry-level salary and those would-be buyers struggling to save for a down payment on a home of their own,” said Zillow Chief Economist Stan Humphries. “Next year, we expect rents to rise even faster than home values, meaning that another increase in total rent paid similar to that seen this year isn’t out of the question. In fact, it’s probable.”

Although the increasing cost to rent and lack of inventory might nudge renters into buying a home, the National Association of Realtors points out that tight credit standards, large student debts and the growth of multigenerational households are contributing to the lowest number of first-time homebuyers in decades. Additionally, we are told that rising rent prices mean less money to put away for that down payment.

Even with these difficulties, first-time homebuyers are projected to be more active in the 2015 housing market. These concerns about rising rents and other debts are a concern to first-time or new buyers, but we are also seeing options for homebuyers today. For example, new conventional loan guidelines create an open door for homebuyers even as the Federal Housing Administration has changed its fees and loan structure, making both less buyer-friendly.

Amy Buynoski, a mortgage banker and the vice president of Fidelity Bank, says that the benefit to Fidelity’s program “is it is not FHA, and the buyer can put 3 percent down, and it can be a gift or grant. Mortgage insurance will come off once they have the 20 percent equity, unlike FHA. There is also no upfront funding fee at closing. Credit score requirements are relatively low at 640, but this is subject to approval (based on the body of the credit and strength of the buyer). One buyer on the loan does have to be a first-time homebuyer or have no homeownership in the last three years, and they do have to take a class.”

Another option that’s not always available in metro areas but can be found within rural residential markets is the USDA rural development (RD) loan. There is no mortgage insurance with an RD loan, but like a loan through FHA, there is an upfront funding fee at closing, and it is a 100 percent loan. These are for purchase loans on primary residential properties only, and the loan has a nice renovation component that is much simpler than FHA’s PowerSave Pilot 203(k) loan program in case the buyer would like to make some updates or upgrades to the property after closing.

The downside is that it’s possible to make too much money to qualify, and the property must be eligible for the loan. According to Jennifer Sims of Homestar Financial, “FHA and USDA (RD) are both great loans for first-time and second-time homebuyers. The USDA is a true 100 percent loan in eligible rural areas if you qualify under the income limits for the county. FHA also has a great loan, which can allow gift funds for the low 3.5 percent down payment. Both allow medium credit scores with some open collections as well. The USDA loan is the loan that can allow you to get into a home for truly 0 percent down as long as the home appraises. Also, there can be a repair escrow feature on both loans. The USDA can authorize up to 10 percent or $10,000 (whichever is less) to make repairs for appraiser-required issues. And FHA has a rehab loan called the 203(k) where you can borrow between $5,000 and $35,000 for upgrades or repairs to your home.”

As noted, FHA is still the old fallback and perfect for buyers rebuilding credit; it’s a bit more forgiving of past credit indiscretions compared with conventional loan guidelines. The costs and limitations are real. Mortgage insurance is expensive, and it will never fall off the FHA loan. For someone who had a credit blemish in the past, an FHA loan might be the best route to take to get back into homeownership.

Financial Housekeeping Tips to Close Out the Year

Zillow Blog| Vera Gibbons| December 30, 2014

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As the year comes to a close, it’s a good time to do a little financial housekeeping. Here are a few smart moves to consider:

Tackle your outstanding credit card debt

Seven percent of Americans are still carrying debt from last year’s holiday season, according to Consumer Reports. Come up with a pay-off strategy — whether that’s paying off the cards with the highest rates first or paying off the card with the lowest balance — and put it to work. You’ll save a bundle on interest.

Reduce your tax liability

If you own stocks and mutual funds outside your retirement accounts, 2014 has been a prosperous year. But on April 15, you’re going to have to share some of your good fortune with the Internal Revenue Service, so it’s wise to start looking for ways to minimize the bite now.

Do you have any poor-performing investments? You can sell them at a loss to offset capital gains from other investments sold throughout the year.

Some other tax moves:

  • Clean out your closets and make charitable donations
  • Give the gift of cash — you can give up to $14,000 to as many individuals as you’d like without filing a gift-tax return, but you must do this before Dec. 31
  • Gift securities
  • Contribute to your 401(k)
  • Defer income if 2014 was a high-income year.

Reassess your housing situation

Reconsidering your housing is important now because mortgage rates are below 4 percent and projected to rise to 5 percent by the end of 2015, according to Zillow.

With rents projected to rise faster than home values in 2015, it’s a good time to put the wheels in motion if you have any intention of buying a home. After all, a 1 percent rise in mortgage rates reduces affordability by whopping 11 percent.

Mortgage Lenders Set to Relax Standards

Wall Street Journal|November 28, 2014|Joe Light| Link

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Some of the largest U.S. mortgage lenders are preparing to further ease standards for borrowers after the release of new guidelines this month from mortgage giants Fannie Mae and Freddie Mac .

The new guidelines, to take full effect Dec. 1, resulted from an agreement in October meant to clarify when lenders would be penalized for making mistakes on mortgages they sell to Fannie and Freddie. Lenders have blamed the lack of clarity for tight credit conditions that have made it difficult for many consumers to qualify for a mortgage.

Relaxing the lending standards potentially could make it possible for hundreds of thousands of additional consumers to get mortgages.

Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute, said the moves are “going to be big,” but she added that “it’s going to take time” to see the full impact of the changes.

The Urban Institute, a Washington think tank, earlier this year estimated that as many as 1.2 million additional home loans would be made annually if mortgage availability were at “normal” levels.

Some lenders, including Wells Fargo & Co. and SunTrust Banks Inc., said borrowers should begin to see initial changes in a few weeks, including faster turnaround times for mortgage applications to be processed.

Currently, it can take two months or longer between the time a consumer makes an application and the loan is made.

Lenders also are expected to widen the scope of the types of borrowers they will accept by reducing credit-score requirements and giving greater leeway to consumers whose credit history suffered because of one-time events, such as a job loss or big medical bill.

Economists have long maintained that tight credit could be holding back the housing recovery and damping economic growth. On Tuesday, the S&P/Case-Shiller Index showed that U.S. home prices grew 4.8% in the 12 months ending in September, their slowest pace in two years.

After the financial crisis, Fannie and Freddie made banks repurchase tens of billions of dollars in loans that the companies said didn’t meet their standards. In turn, many lenders stopped making loans to all but the most pristine of borrowers.

In many cases, they required borrowers to have substantially higher credit scores and put in place other measures—so-called credit overlays—that were more stringent than what Fannie and Freddie required.

With the new agreement, “I’ve been told with absolute confidence that some lenders are lifting almost all of their overlays,” said David Stevens, president of the Mortgage Bankers Association.

Wells Fargo, the nation’s largest mortgage lender, lifted its credit-score overlay earlier this year, which the bank said was in anticipation of the agreement with Fannie and Freddie. Now it says borrowers can expect a smoother process of getting a loan with less “excessive” paperwork.

“It’s providing greater certainty for all the parties so that you can lend more confidently and make the whole judgment process much easier and more clear cut,” said Mike Heid, president of Wells Fargo Home Mortgage.

For example, under the previous system, Mr. Heid said a borrower who had a late payment on an auto loan might have been asked to write a memo describing what happened, even if such a mistake wasn’t critical to the decision to make a loan or not. That was because Wells couldn’t be certain what would trigger a repurchase demand from Fannie or Freddie, he said.

Now, they are less likely to be required to ask for such documentation, he said, which should speed the process of securing a loan.

Jerome Lienhard, CEO of SunTrust Mortgage, said the new guidelines likely would allow the company to lift its overlays by “a pretty meaningful amount.” He said the bank is still analyzing which overlays to remove, but he is confident many will be eliminated. “This is real. This is substantive,” he said.

Before the new rules were put in place, Mason-McDuffie Mortgage Corp. in San Ramon, Calif., typically wouldn’t make a loan to a borrower with a credit score below 660, said Bill Godfrey, the company’s executive vice president of capital markets. Now, he said he believes the company will lend down to 620, the limit for loans backed by Fannie and Freddie.

“We will be able to be looser and open up the net wider,” said Mr. Godfrey.

Not all lenders are poised to relax their underwriting rules. On an earnings call a few days after the agreement was announced, U.S. Bank Chief Executive Richard Davis called it “a good sound bite” and indicated that his bank wasn’t prepared to make changes.

“Unless we are convinced that the rules are going to be permanent and there is not going to be a look back or a reach back in future times…we are simply going to stay on the sidelines in the concerns of both compliance risks and other uncertainties,” said Mr. Davis.

“You won’t see us start to expand our criteria much past what we’ve done,” said Bank of America Chief Executive Brian Moynihan at an investor conference this month.

Isaac Boltansky, an analyst at Compass Point Research & Trading, said some lenders are still too “shellshocked due to litigation and the shifting regulatory environment” to ease credit conditions soon.

Still, overall, Fannie Mae CEO Timothy J. Mayopoulos this month said lenders were “reacting positively to those developments. I do think that lenders are nonetheless concerned about other factors in the environment that we do not control.”

Can Shopping Around for a Mortgage Keep You from Getting One?

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November 19, 2014| Zillow.com| Link

Almost all home buyers know that higher credit scores mean lower mortgage rates, so it’s no surprise that one of the top questions home buyers ask is: will shopping for mortgage rates lower my credit scores?

The short answer is “No.” But only if you manage your mortgage shopping process correctly. Here’s how to preserve your credit score while shopping for the best rates.

Is it safe to have multiple lenders run my credit?

Three bureaus generate your credit scores: Equifax, TransUnion and Experian. Lenders report your monthly activities on student loans, credit cards, auto loans and mortgages to these bureaus, who then score you on an ongoing basis. Your credit scores change constantly each month based on factors like:

  • Credit card balances relative to limits
  • Number of open accounts and length of time accounts have been open
  • On-time versus late payments
  • Number of inquiries

When it comes to that last factor, credit card inquiries hit your score harder than car and mortgage inquiries. For example, if you’re out shopping at three department stores and allow all three stores to process new credit cards for you, the bureaus’ scoring models are coded to lower your score for each individual inquiry.

Each inquiry would lower your score by up to five points, or more if you have just a few accounts and/or a short credit history. The inquiries would stay on your credit report for 24 months, and your score wouldn’t recover for about 12 months — until you demonstrated strong payment history and balance-to-limit control on those new cards.

Car and mortgage inquiries make less of an impact because the bureaus know consumers shop for these big-ticket items. The bureaus’ scoring models are coded to “de-duplicate” multiple mortgage inquiries, since the end result of those inquiries would be one mortgage.

For example, if you were shopping for a mortgage with three lenders, and all three ran your credit one week, the three inquiries would show on your report, but would be scored as only one, so your shopping process would cause your score to shift by up to five points instead of up to 15.

How long can I shop for mortgages without damaging my credit?

Equifax, TransUnion and Experian are constantly changing scoring models. The newer the model, the longer a consumer can shop for mortgages with multiple lenders and have all inquiries scored as one. There’s no law requiring lenders to upgrade to the latest model, and it’s impossible to know which model is being used by which lender at any given time.

The oldest scoring models still being used by lenders de-duplicate multiple mortgage inquiries posted on your credit report in the past 14 days. The newest models de-duplicate multiple mortgage inquiries posted on your credit report in the past 45 days.

Obviously, the newer models allow for more shopping time, but since you won’t know which credit scoring model your various lenders are using, it’s safest to get your mortgage shopping done (including having lenders run your credit) within 14 days.

Will lenders take a credit report I ran myself?

You’re reminded constantly by the media and advertisements that you should check your credit regularly, but before you do anything, you must understand the following critical points:

  • Federal law requires mortgage lenders to check your credit history and scores when approving your loan. So even if you have your own report, the lender can’t accept it. If they’re going to lend to you, they must run their own credit report on you. They will run scores from all three bureaus, and typically use the middle of the three scores to finalize your rate and make loan approval decisions. However, some lenders might provide initial rate quotes if you can provide a reliable and recent credit score estimate.
  • Federal law also states consumers must be able to obtain a free credit report every 12 months. The only government-sanctioned place to do this is AnnualCreditReport.com. This service provides a stripped down report that doesn’t give you a credit score. There is a charge for the version of the report that includes your score. Before you pay a third party that lenders won’t accept, remember that if you’re a serious mortgage shopper (rather than someone just monitoring your credit history for other reasons), you’ll need to allow a mortgage lender to run your credit report. That lender can brief you on your credit scores and history.

Does Bad Credit Last Forever?

Christine DiGangi| Credit.com| Link

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There’s no sugarcoating it: Going through foreclosure, bankruptcy or debt collection is unpleasant.

When going through financial problems, it may seem like things are far from getting better—including your credit score—but having a few bad marks on your credit history doesn’t mean you’ll never bounce back.

Eventually, negative items will age off your credit report, and you don’t have to wait for a clean slate to rebuild your credit standing.

“I understand seven or 10 years feels like a very long time, and it is, but keep in mind there is a light at the end of the tunnel,” said Gerri Detweiler, Credit.com’s director of consumer education. “You can start seeing improvements soon, if you start really working on it, in most cases.”

Bad Credit Doesn’t Last Forever

Most negative information stays on your credit report for seven years (bankruptcy may remain on your report for up to 10 years), and depending on what the tradeline is, its effect on your credit may diminish even sooner.

For example: After a year, a late payment won’t hurt your credit score as much as it did when it first showed up on your credit report. Another year goes by, and it matters even less.

On the other hand, things like debts in collection, foreclosure and bankruptcy are considered more serious indicators of risk, said Anthony Sprauve, senior consumer credit specialist at FICO.

“What it means is it’s going to take them longer to rebuild their score, but they can absolutely rebuild it,” Sprauve said. “That’s the point we try to make with people: Even the worst financial missteps you can recover from in a reasonable amount of time, if you begin to practice the basics of good credit management.”

How to Bounce Back From Bad Credit

Even with some of the most damaging records on your credit reports, you can make improvements to your credit scores by making loan payments on time, keeping your credit card balances low and applying sparingly for new credit.

You’re not forced to sit on the sidelines just because you’re going to have a piece of negative information on your credit report for several years. You can get two of your credit scores for free on Credit.com and monitor your progress as you rebuild your credit.

Keep in mind not all negative informations ages off: Unpaid judgments and unpaid tax liens have the potential to stay on your credit reports indefinitely, Detweiler noted, so if you’re dealing with either of those things, do what you can to take care of them.

On top of that, remember your credit score isn’t the only thing lenders consider when reviewing you as a potential borrower.

“While the score is a very important part of getting credit, loan officers look at a variety of other things,” Sprauve said.

He also emphasized the importance of patience when trying to recover from financial setbacks.

“I always want people to feel optimistic. … It will take time, but they can rebuild their credit.”

What You Don’t Know About Your Credit Score… Could Cost You!

Keeping Current Matters Blog| September 24, 2014| Link

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Informed consumers considering a home purchase today want to do the right thing and plan ahead. Many do not seek immediate professional guidance from a Realtor or a mortgage loan officer. Instead, they hunt for hours online, looking at numerous websites for available homes for sale. They also consult websites to find the best interest rate and terms for future monthly mortgage payments. Many consumers feel betrayed, cheated and at times embarrassed to learn that the credit scores they counted on, to get that specific interest rate for their loan, are not used by mortgage lenders.

When shopping for a good mortgage interest rate, consumers also need to know their credit score, and utilize an online mortgage calculator to compute future monthly mortgage payments. A Google search for “credit score” will yield hundreds of results. The consumer accepts the provider’s terms and conditions to get a free credit score. Terrific! Unaware that in exchange they just received a meaningless credit score that lendersnever use. They also handed over their Non-Public Personal Information (NPPI) to that credit score provider for life.

Before we go any further, let’s look at available credit scoring products available to consumers today:

  • FICO credit score from Fair Isaac Corporation/myfico.com, range 300 to 850
  • Plus Score from Experian, range 320 to 830
  • Trans Risk Score from TransUnion, range 300 to 850
  • Equifax Credit Score from Equifax, range 300 to 850
  • Vantage Score from all three bureaus, two ranges, 300 to 850 and 501-990

What is a FICO Score?

In 1958, Bill Fair and Earl Isaac, a mathematician and engineer, formed a company in San Rafael, California. They created tools to help risk managers make a better decision when taking financial risk. Today, 90 percent of all lenders use the FICO score, first created in 1989 by Fair Isaac, and it’s the only score Fannie Mae and Freddie Mac, the Federal Housing Agency and Veterans Affairs will accept in underwriting loans they guarantee.

What is a Consumer Score?

The three credit bureaus, in their understanding of the credit scoring model created by FICO, decided to create their own scoring models, and in 2004 – 2006 they unveiled the “consumer” scores: Plus ScoreTrans Risk ScoreEquifax Credit Score, and Vantage Score. However, these are not genuine FICO scores, and mortgage lenders don’t use them. Consider this comparison: Would you buy a watch that gives the approximate time of day?

The three credit bureaus work with major financial institutions, professional organizations, comparison sites, personal finance businesses, clubs such as Costco, AAA, Sam’s Club, and many data-mining brokers to bombard consumers in the race of the free credit score mania, all with the enticement of a “consumer” score that is not used by lenders, in hopes of obtaining subscriptions or fees from consumers. Fees that are totally unnecessary!

Know Your Score

Gaining access to one’s own credit report and credit score prior to loan approval with no strings attached could be helpful, and at all times beneficial. With little effort, inaccuracy of information can be instantly corrected at the credit bureau level, and with a few simple steps, credit scores could be enhanced. For example, paying down revolving account balances before a creditor’s statement-ending date (the creditor later updates account information with the credit bureaus), thus reducing revolving account balances at a particular point in time, will positively add more points to a score. It’s priceless.

More Information

Consumers have a legal right to access their annual credit report at no charge once a year from annualcreditreport.com, a site sponsored by the three major credit bureaus: Experian, Equifax and TransUnion.

These reports provide all the basic consumer data, but do not reveal a credit score. If you have a need for the FICO credit score that is actually used by mortgage lenders,myfico.com is the website to visit. For $19.95 per bureau, consumers can purchase a customized credit report with a genuine FICO score.

Additional websites to visit: the Federal Trade Commission (ftc.gov) and the Consumer Financial Protection Bureau (cfpb.gov) for true answers to questions about any financial concepts, financial products, dispute and complaint submissions, and much more.

FHFA’s Dramatic Easing of Mortgage Standards

Realtor Mag Daily Real Estate News| October 21, 2014| Link

mortgage

Federal Housing Finance Agency Director Mel Watt on Monday announced plans to expand home buyers’ access to mortgages by loosening up lending standards.

During the Mortgage Bankers Association’s annual conference, Watt said FHFA will release guidelines “in the coming weeks” to allow increased lending to borrowers with down payments as low as 3 percent. FHFA, which regulates Fannie Mae and Freddie Mac, also will help lenders who sell loans to the mortgage giants by easing standards on borrowers who don’t have perfect credit profiles. The move is expected to help open up the credit box to first-time buyers, self-employed borrowers, borrowers who have had recent job switches, and borrowers who faced financial hardship during the recession.

Watt said on Monday that Fannie and Freddie would not force repurchases from lenders of mortgages that are later found to have minor flaws in them, as long as borrowers have kept up with their mortgage payments for 36 months. Watt also said that lenders wouldn’t be forced to buy back bad loans if flaws were later discovered in the reporting of borrowers’ finances, debt loads, and down payments — as long as the borrowers would have qualified for the loans had the information been accurate.

“Minor, immaterial loan defects should not automatically trigger a repurchase request,” says David Stevens, CEO of the Mortgage Bankers Association. “As a result, lenders will be more confident in offering mortgages to qualified borrowers.”

FHFA said it will clarify to lenders when it will force buy-back loans that were issued based on inaccurate information. FHFA acknowledges that it failed to provide lenders with enough clarity in the past. That caused lenders to get cautious with lending after facing a flood of high-dollar settlements from loans they issued that later turned sour.

“We know that this issue has contributed to lenders imposing credit overlays that drive up the cost of lending and also restrict lending to borrowers with less than perfect credit scores or with less conventional financial situations,” Watt said. Addressing such issues are “critical to ensuring that there is liquidity in the housing-finance market and to providing access to credit for borrowers.”