Credit Matters

The recent changes in the market can be attributed to many different variables but none more noticeable than the Sub-Prime Mortgage problem that is affecting current loans and the ability of the home owners/investors to make payments. The sub-prime lending that was rampant about 2-3 years ago made it easier for those with deficient credit history and non-qualifying income to receive a loan. When most of these deals were put into place they came with the caveat that house prices would increase and thus make it possible to refinance into a better loan when a) their credit deficiencies were cleared or b) they could qualify for the loan. Clearly, this was not the case. As things began to turn in late 2006, homes were not moving as quickly as they were being built and the next wave of homebuyers balked at the home prices. Coupled together with rates adjusting on the ARM (adjustable rate mortgage) products and the home-owners inability to make payments and we now find ourselves in a huge market correction that has never before occurred.

What does that have to do with you and the rest of those anxious home buyers? It means that it is important to take the necessary steps to be educated about purchasing a home so that you don't "bite off more than you can chew" in the process. It may seem silly, but maybe the best plan is not to buy your dream house the first, second, or even third time around. It is hard to enjoy the house of your dreams when you are constantly worried if you can make your payment. Trust me, my dream homes is the home owned free and clear. A goal in life should be to find yourself living debt free but that is a subject for a different blog.

Back to credit...

A major component of the loan approval process hinges on your credit score. Underwriters accept what is known as a tri-merged credit report. This report calculates the credit score from each of the three credit reporting agencies (Equifax, Transunion, and Experian). Most investors and lenders will accept the middle score of the three (or your average credit score). There are times when there are large swings in your score, mainly due to the different credit companies reporting procedures, but often the scores are very similar.

Note: You are entitled to one free credit report per year by the Fair Credit Repoting Act. I have used http://www.annualcreditreport.com/. It is the only free site and authorized by the FTC for supplying the reports. It is a good tool to see what you financial debt obligations are and if you have paid them on time.

Your credit score can affect what products you have available to you and what interest rate you may receive. The catchy part is some investors (the ones who purchase the loans if the loan is brokered) don't penalize or better a person's interest rate if their score is above 680+. While others will have different breaks at 700+, 720+, etc. Typically, if your score is 720 or better then your credit will help you in the process. If your credit is <660,>

Make payments on time. There are three time frames to consider. 30+, 60+, and 90+. If you are over 30 days late in making your minimum payment on credit cards, car loans, mortgage payments, etc. then you are considered delinquent. These are all reported to the agencies and negatively impact your score. Over 60 days is worse and by 90+ you are in default (really bad for your credit)

Total balance on Credit Cards should not exceed 30-35% of the max credit allowed on the card. For example: On a $1000 credit limit, your total balance due at the end of the period (when the agencies are reported to) should not be over $300-$350. Your credit score is linked to the amount of credit used vs. the amount available.

Consider signing up with one of the agencies for periodic credit checks. For as little as $10/month you can sign up for a service through either Equifax, Experian, or Transunion where they monitor and give you updates on your credit status. This can help against fraud as well as keep an eye on any other adverse activity that may affect your credit report.

Lastly, understand that though you may be discouraged now about your credit situation, you can always improve it. Think of it like this, if you have adverse or deficient credit, it can mean to an underwriter that you were irresponsible with the credit given to you in the past. Credit isn't a free gift but it is an opportunity to prove that you are trustworthy in making payments and handling responsbility. If you haven't handled your past credit efficiently, it may be time to begin taking control of the situation and improving your credit.

(There are other situations that may impact your score: Bankruptcy, Divorce, Death, Injury...the comment above is not to make light of different situations that may be present that were out of the control of the person(s) involved - sometimes things happen in life that may knock us down, but knowing how to manage issues now may help in the future and allow us to stand a bit taller)

There are more things to consider with credit and various ways to make changes but these are the basics. If you are in significant debt, maybe focus on eliminating that debt first before moving up or into home ownership. If you have good credit and can afford the home, then get pre-qualified and start house hunting. It is a great time to buy if you are ready for the responsibility.

Loan Process

Before we get started this week, I am going to give you a few organization tips for you finances to help in the loan process.

Here are three key items to consider that will help you begin to organize your financial life so you can see what it will take to qualify for your next home purchase or refinance.

1. Income

• How are you paid? -- Salary (W-2 wage earner), Commissions, Bonuses, Independent Contractor (1099-R), Cash.
• What is your monthly income? -- Once you find out how much you make, there are two things to consider your Gross Income (before taxes) and Net Income (after taxes - what you actually take home)

2. Debt

Three main types of debt -- Mortgage, Installment, and Revolving.

• Mortgage - Amount you owe against a property...can be primary residence, second home, or investment property.
• Installment - Usually a loan in connection with a car and the amount due each month.
• Revolving - Debt associated with credit cards.

3. Assets

• How much do you have in your savings account?
• Do you have any other liquid assets? - Cash that you is easily accessible.

From there you can deduct a couple very important items for what you can qualify for in a purchase and what type of products may be available to you. To find out your Debt-to-Income ratio, first add up all your debt (mortgage, revolving, installment) and divide it by your gross income.

*For example - ($25 C/C, $325 I, $125 C/C, proposed mortgage $1375 / $5500 Income) = 33.6% DTI back end ratio.

There are two ratios - Front End and Back End. The front end ratio is your mortgage debt vs. income and the back end encompasses all debt (see example above) vs. income. Typical DTI ratios are 33%/45%. You can usually qualify for higher ratios, i.e. 43/55 but the higher the ratios the harder it may become to fit the loan.

Lastly, what amount do you have in reserves? In this market, you can expect to put at least 5% down on any purchase of a primary residence. Due to the distress market label (see article from Tuesday, February 26) even the flex products and "My Community" mortgages are requiring a cash contribution. On a $220K purchase price you can expect to need at least $11k in cash to bring into the deal.

Hopefully, this will get you started with finding out how to set your dreams for achieving that home purchase. It is always good to evaluate your current financial situation and discover what it will take to accomplish your goal of home ownership. Please email me or comment on this blog if you have any questions.

Underwriting and Appraisals

Underwriting and appraisals - two items that originators have only limited control of. Our role as originators is to know the products we offer, just like a doctor would know a drug, and to educate people about those products. Within the scope of these products there are many variables. The constants remain; income, assets, credit score, debts. However, within each transaction there is the understanding that the "underwriter" may see something they don't like and either...

A) Ask for more information from or about the borrower
B) Check with "Senior Management/Review Board" for approval
or C) Deny the loan entirely.

There is some responsibility that must be placed on the originator as the "quarterback" of the deal to make sure enough information is collected up front to find the right program. However, there are times when this doesn't happen and we will call it human error.

(Please forgive us for the times we make mistakes - as much as you want the loan to go through, so do we -- our well being depends on it...very high levels of stress)

In order to avoid the small underwriting snag along the way; before you come to the table for a loan, as a consumer, be prepared to answer questions about everything from last night's meal to the time you almost had your tooth knocked out of your head by that remote control airplane. (Don't ask - long story.) In all honesty, we don't mind the information and the more upfront and honest you are, the more smoothly the process can go. From there, we will do our best to find the best program for you based on your plans and financial capabilities. Be willing to learn and we will be willing to teach. You may not like what we have to say or offer, but I am sure that we hate delivering bad/different news than what you were looking for just as much as you hate hearing it.

Note: Underwriting and programs are changing constantly. I cannot stress enough that products/loan programs available today may very well be gone tomorrow (kind of like interest rate changes). Be prudent with your decision but don't hesitate too long unless you are prepared for the changes that can occur.

Appraisals - the quick run down. Completely out of our control and if we knew what your house was worth we would be a licensed appraiser. But, I am not and most LO's I know aren't as well. We do have access to resources that may give us a good estimate, but again a full appraisal by a licensed appraiser is the only way to know what your house is worth - in theory, on paper, based on what other people have listed for sale/paid for a similar house in that neighborhood.

If you aren't sure about the value of your house, you can take the risk and have the appraisal done or you can wait. I would love to pay for every single person's full appraisal but at an average of $350 a pop (though I make a million dollars a year...I would still be able to only do appraisals for about 3000 homes) you can see how costly that would be. The scrutiny placed on appraisals is currently slowing down underwriting times and with the lenders/investors constantly in "Caution" mode (link to article on AZ Central today - reinforces this weeks topics) it is taking a long time for deals to be closed.

Quick Hits:

1. Disclose as much information to your LO as possible (this will help them choose the best loan)
2. Be patient during the process. Understand that some things are just due to the human element involved in underwriting and originating.
3. Appraisals can make or break some deals (especially today) but don't let it discourage you from refinancing or purchasing if you are in need. It just may mean that things need to be adjusted later.
4. Current Market - May take a while for underwriting and it is definitely time to be as clear as possible with your situation and loan request.

Excuse the length of the blog. I am trying to cover a bunch of information quickly so that you have a good base as we move through this year. As I move forward I will try to bring more insight, knowledge, and resources to the table to help you in the process.

Next week-- Step-by-Step look at the overall origination process from initial pre-approval to application to closing of the loan.

Have a great weekend...until Monday!