With 2010 underway, I must point out to my readers the realities and differences of what a good credit score is and what a GREAT credit score is. It is now more important than EVER that you re-evaluate what you think is a high FICO credit score and what lenders think is a high credit score. If you have low scores, you must repair credit report now.
With historically low rates, many homeowners are watching closely for the right time to refinance their mortgages. Those with good credit may well recall the comfort in knowing that they could get approved by just about any mortgage broker at the most attractive rates.
A few years ago, a score of 620 or higher was good enough. That increased to 680 in early 2008. Then it jumped to 720 in April last year and 740 in August!
In the past, any score of 700 or higher would get a double thumbs-up from credit experts. Now, rate adjustments begin kicking in at 740, with every 20-point drop adding another adjustment.
In other words, many people who were taking pride in their credit habits either must pay significantly higher or try to make quick changes to nudge their scores upward. What used to be great is now only good. Refinancing that would have worked a year ago might well not make sense.
I have students & clients all the time who literally wind up with a score of 739, 719, 699, 679 … and it costs them money to either fix it or pay for it!
One of my recent students, who always had a score of about 740, went to do a refinance and found her current score at 719. The reason was, she put a new washer and dryer on a store credit card. Many store cards are actually revolving credit, and your limit may well be equal or about equal to the purchase you’re trying to make that day.
Another reader of my program, Crushing The Credit Bureaus was interested in lowering the rate on an existing mortgage, the borrower could verify substantial income, assets and personal credit history, but the borrower’s credit score had taken a hit after co-signing an auto loan for his son that had not been paid timely.
As a result, the borrower, who otherwise met every other criterion, was unable to refinance the loan at a rate that made economic sense for the lender.
Another wrinkle in today’s market: Even those with FICO scores of 740 or higher are penalized for buying in a geographic market on the downswing. The scary part about this is that this adjustment affects all borrowers, regardless of score, if in a declining market.
In many cases, the added costs of rate adjustments are enough to make a refinance that would otherwise make sense have no benefit to the borrower.
How Did This Happen?
The nation’s two largest mortgage lenders, Fannie Mae and Freddie Mac, suffered major losses in the market last year and then redefined risk, announcing price adjustments for borrowers with FICO scores below 720.
And, in case you were wondering, these fees have nothing to do with your mortgage company or its various products and cannot be negotiated away.
All mortgage bankers, brokers and credit unions must comply with the higher interest rates and delivery changes in all traditional mortgages. Only entities intending to hold the mortgages in their own portfolios can follow their own guidelines.
Worse news may be coming down the road. There are many factors, including proposed legislation and regulation, that continue to change the mortgage lending landscape. In the near term, it is more likely that this benchmark will continue to rise than fall.
Some of you may have heard about these new credit restrictions, but the actual cost to is often a surprise when you sit down with a broker.
Today’s new lending requirements:
• Great credit.
• Stable job, with a minimum of two years of employment.
• Reserves after closing, including a minimum of two to six months of mortgage principal, interest, taxes and insurance.
• Down payment from the borrower’s own funds.
• Low debt-to-income ratio. The required ratio varies between banks but is generally less than 40 percent, according to many in the industry.
• Good loan-to-value percentage. It also varies, but it’s often cited as less than 80 percent.
Having equity in your home is a major factor in getting approved for a refinance and in finding the best rate. The more equity in the home, the less risk there is to the lender if the home is repossessed.
What Steps To Take To Improve Your Credit Score
What can a homeowner who wants to refinance do with a good FICO score that’s not good enough?
Virtually everyone can raise their scores by at least 10 (points) to 20 points, sometimes significantly more in 30 days.
Here’s what to do.
1. Find out what might have gone wrong. Applicants should know their credit score, understand what it means to their loan rates and ask their loan officers to use credit analysis on their behalf. Credit analysis tools are a simple way to identify key score influencers by scrutinizing the information contained in each of an individual’s three credit reports to look for inconsistencies, errors and omissions that may artificially depress the score.
2. Correct any inaccuracies. You can raise your credit scores if something is reported inaccurately and there is proof of a discrepancy.
3. Decrease the percentage of available credit used. This can be done by paying down balances or increasing credit limits. Ideally, this means keeping balances as close to zero as possible, and definitely below 30 percent of the available credit limit.
I have personally seen people increase their scores by as much as 90 points or more, simply by paying off the right cards!
4. Move things around. If one income can be used to qualify for the loan, transfer accounts to “park” the debt in the other party’s name.
5. Get a rapid rescore. It’s the only way to find out fast if an attempt to improve a score was successful. It’s done through your lender and a rescoring company. The process takes about a week, but it can get the loan process back on track. The downside is it costs a few hundred dollars. The credit bureau Experian has seen an increase in rapid rescoring requests.
Aside from working toward a better score, there are two additional options;
One is paying points to buy down the interest rate. This is only a good idea if the borrower will then live in the house beyond the break-even point, meaning the time where the money they’ve paid in points is made up for by way of less expensive monthly payments.
Two, shop around. Some lenders have loans, known as “portfolio” loans, that aren’t subject to blanket rules on credit scores because the lender intends to keep them rather than sell the loans in the secondary market.
In a perfect world, anyone contemplating a refinance or a new mortgage anytime within the next year or so would start working on getting the ideal credit score now..