Eric's Blog

Credit Scores Explained!

Eric at Eagle Nationwide Mortgage Co. — Wed, 27 Aug 2008 18:14:48 -0500

As we continue to experience credit challenges in today's market, it's important to be able to educate your clients as much as possible. And some of the most common misunderstandings out there revolve around credit scores. So here is information you can pass along to your clients in a concise, easy to understand way!

First, there are three main credit bureaus, Transunion, Equifax, and Experian. In a mortgage application, we will use the middle score (not an average, but the middle score) of the lowest scored applicant on the application. Credit scores can vary widely between the bureaus as each of them have different formulas that they use. So what goes into those numbers?

Your credit score consists of 5 main categories:

Payment History, Amounts Owed, Length of Credit History, New Credit and Types of Credit. For the average person, the percentages look like this:

Chart courtesy of www.myfico.com

Your payment history looks at both the positive and negative sides of how you've paid your bills in the past. For instance, if you have never missed a payment, this 35% of your score will be fantastic. If you miss a payment, it counts less and less against you the further away that late payment is. For instance, a late payment this month will drag down your score much more than a late payment two years ago.

The second biggest category is amounts owed. This is where people tend to hurt themselves when they don't understand credit scores. If you have two credit card accounts both with $5,000 limits and on one of them you carry a $4,000 balance, you are using only 40% of your available credit. That's not bad. But what happens if you cancel the other account since you're not using it and it doesn't have a balance? Now you're using 80% of your available credit. That's a big red flag!! So keeping your accounts with zero balances open is really a positive thing.

Doing that also helps with the 3rd largest percentage item, length of credit history. Think of this category like a bank would. If you were a bank lending your money, would you want to lend it to someone that has had credit for 25 years or someone that's had one credit card open for 6 months? Exactly, I'll take the person with the track record please. That's why this is a critical part of the credit score.

The 4th category is new credit. In general, the credit score will dip immediately upon opening up a new account until a track record is proven on the account (typically the score will improve back to 'even' after 2-3 payments on the new account). This is also a part of the credit score where people can really have a negative impact on their score even though they're putting themselves in a better position. Let's say you get that attractive $5,000 balance transfer offer in the mail. And you have a $5,000 balance on a card. So, you open the new account and transfer the balance. Well, it's good for you (better terms) but bad for your score!! Why? Again, think like the bank. All they see is that you just opened a new account and bam!, the card is maxed out immediately. This could be seen as though you're living off your credit cards! (And even worse, most people cancel out their old account which gives you a double whammy to your score!!)

Finally, the types of credit are also a part of your score. Lenders (especially when related to a mortgage application) want to see that you've been able to handle different types of credit. So preferably, there's a mix of credit cards, auto loans, prior mortgages, student loans and sometimes utility accounts to show that you make sure to pay all of your accounts on time.

Of course, there are also other minor factors that play into the score, but this gives you a basis of understanding you can share with your clients. Most importantly, you can see from this explanation that it's not just about paying your bills on time. It takes into account a host of other factors to help arrive at that mysterious number, your credit score!

100% FHA Financing Doesn't Exist and Other Truths About Mortgage Programs

Eric at Eagle Nationwide Mortgage Co. — Mon, 11 Aug 2008 23:45:44 -0500

Well, I see it again, and after trying to bite my tongue as long as I can, I have to lay the record straight.

100% FHA Financing DOES NOT EXIST. Yes, it's true. It doesn't exist, never has, and never will. The fact is that FHA requires a minimum of 3% down here in AZ (It can be a little less in other states but 3% is a nice safe number to remember). So the maximum financing that can be delivered to a client on an FHA loan is 97%.

So, why do people advertise 100% financing? Because it's sexy. What they should be advertising (at least for the time being) is $0 Out of Pocket FHA Loans Available. Is that possible? Yes it is. Is it 100% financing? No.

So what's the difference? Well, the difference is that FHA does allow for that 3% required down payment to be a gift. And that gift can be from anyone. Including the seller through FHA approved Down Payment Assistance Programs (at least until October 1st). So, if the seller agrees to pay for this assistance AND agrees to pay the buyers closing costs, then yes, indeed, a buyer can buy a house with $0 out of pocket.

Now, the comment I'll hear is 'all you're talking about is semantics'. Really? Try putting a sign rider up offering '100% FHA Financing'. In most states, that will get you a phone call from the government entity that regulates mortgage advertising. Also, if you're a realtor and you have that sign on your listing, you better hope that you're really good at explaining yourself because your seller might be a wee little upset that s/he all of a sudden has to contribute 3% more to the transaction to make this '100% Financing' program work.

While I'm at it, 102% Financing through USDA doesn't exist either. It's a 100% program that works in rural areas. There is a 2% funding fee for these loans which can be financed into the loan (which is where people get 102%). However, many people just advertise this as 102% financing as though that extra 2% can be used to pay for closing costs, get a little cash back at close, etc. In reality, you'll still have the same closing costs, the 2% is a contribution to the program and the Loan to Value is 100%. Oh by the way, there are some very restrictive geographic locations (especially here in the Phoenix Metropolitan Area) as well as some income limitations that make this a program that is great for the right borrower looking to buy the right house (of which there aren't many in Phoenix).

I could go on and on about deceptive advertising (don't get me started on No Cost Loans), but if you're a real estate agent and want straight talk and solid education about different mortgage programs, then contact me. If you want catchy headlines promising programs that have asterisks and start off with "Well, technically it's not 100% financing", just wait 15 minutes and I'm sure we'll all see another one.

100% FHA Financing Doesn't Exist and Other Truths About Mortgage Programs

Eric at Eagle Nationwide Mortgage Co. — Mon, 11 Aug 2008 18:50:07 -0500

Well, I see it again, and after trying to bite my tongue as long as I can, I have to lay the record straight.

New Bill Introduced Resurrecting DPA's

Eric at Eagle Nationwide Mortgage Co. — Mon, 04 Aug 2008 00:32:25 -0500

Well, that didn't last long. House Bill 6694 has been introduced in the House to restore Down Payment Assistance Programs.

This is information taken from an email received from AmeriDream:

"The Green-Miller-Waters-Shays plan would re-authorize and reform non-profit downpayment assistance and secure it as an allowable source for FHA borrowers. The bill seeks to ensure that providers of the downpayment assistance operate in a transparent manner to guard against conflicts of interest. The bill also includes language to ensure that FHA maintains its financial stability by permanently authorizing the Secretary to assess higher premiums to higher risk borrowers."

It appears from commentary and various blogs that the elimination of Down Payment Assistance programs in last week's housing bill was simply a way to get that bill the support it needed to pass. It had been planned throughout discussion of that bill that this new law would be proposed, voted on, and sent to the Senate before the end of September. That would allow this new bill to take effect in advance of the October 1st deadline (currently the expected cutoff date for Down Payment Assistance programs in last week's housing bill).

Basically what this means is that there will be a lot of uncertainty as to what programs are and will be available to first time home buyers in today's market.

Here's Why HUD's DPA Policy Change is Worthless

Eric at Eagle Nationwide Mortgage Co. — Wed, 30 Jul 2008 17:28:33 -0500

I have read pros and cons over the past few of the elimination of Down Payment Assistance Programs. There's one thing that hasn't been discussed that in my opinion causes this change to be worthless at best and dangerous at worst.

The reason DPA programs like Nehemiah and Ameridream were able to flourish for so long is that gift funds on FHA loans can come from anywhere. Unlike Fannie and Freddie's rules that the gift can only be made by a relative, FHA has no restrictions on who can provide the funds except that it can't come directly from the seller. Therefore, all the DPA programs did was provide a nice, safe, above board way for these gifts to happen.

Well, with this law enacted today, they eliminated these companies, but did not do what was fundamentally necessary to change the program--ie, make gift funds required to come from relatives. All they did was increase the need for Guidos (my name for all illegitimate companies that profit off good intentions) who instead of charging a reasonable $499 processing fee, will charge whatever the market will bear (and even worse, take what is currently full disclosure and make it a behind the scenes scenario rife with potential for abuse).

So, Congress, thank you for your attempt to help make the FHA program better, but you've either gone too far or not far enough. Either way, you've done an injustice to affordable housing and programs that can help fulfill the American Dream. Here's hoping you fix the problem before it actually becomes a problem!

Outlying Agents Need to be Ready!

Eric at Eagle Nationwide Mortgage Co. — Wed, 30 Jul 2008 17:14:41 -0500

Agents who specialize in the outlying Phoenix areas such as Anthem, Buckeye, Goodyear, Queen Creek, Maricopa, etc should be prepared for a nice uptick in business as these outskirts are the only areas in the Phoenix metropolitan area that will qualify for 100% financing after DPA programs go away October 1st.

Brush off your marketing lists, look for renters in those areas and have your follow up systems in place. And of course, if you need a mortgage consultant to help you with those things, I'm only a phone call or email away!

Thanks,

Eric

It Is Official--Wachovia is out of Wholesale

Eric at Eagle Nationwide Mortgage Co. — Mon, 21 Jul 2008 18:30:46 -0500

Well, it's official (see the official notice below). Wachovia is out of the wholesale mortgage business. What does that mean for brokers, realtors, and most importantly, buyers? Well, it means that there is one less option in the wholesale market for them. The good news is that Wachovia has offered extremely reduced programs for the past 6 months, so they haven't been a primary option for many for quite a while.

As for further shocks to the mortgage broker model, this was a widely anticipated measure. It will not send shock waves through financial markets, nor will it shake other companies' confidence in the wholesale channels. In other words, the broker world will go on and continue.

To: Wachovia Mortgage, FSB Brokers and AEs

From: Tim Wilson, Head of Loan Origination for Wachovia Mortgage

Subject: Wachovia Mortgage, FSB to Discontinue Lending through Third Party Brokers

As you know, the mortgage industry is experiencing a very challenging market environment. Declining housing values, increased foreclosures, disappearing mortgage lenders, and a struggling secondary market are all symptoms of this market turmoil.

Wachovia Mortgage has evaluated its business model and decided to reposition its mortgage business. Going forward, we will primarily focus on customers who have relationships with the bank, and who are located in geographies where Wachovia branches are located.

As a result of our new strategic focus, Wachovia Mortgage has decided to discontinue lending through third-party, or wholesale mortgage brokers. This decision will be effective July 25, 2008, which will be the last date on which Wachovia Mortgage will accept loan applications from brokers.

This was a very difficult decision to make. Out of respect for the valued relationships we have had with numerous mortgage brokers over many years, we wanted to make you aware of this change as soon as possible

Patience Is A Virtue--Has The Government Forgot This?

Eric at Eagle Nationwide Mortgage Co. — Thu, 17 Jul 2008 16:36:36 -0500

First off, let me say this isn't a blog entry about who's at fault for everything. I think a lot of people took advantage of a lot of programs and succumbed to the pressure of providing the next big product in order to please clients/realtors/mortgage brokers/etc. However, I think we're close to going too far with unneeded legislation that will further deteriorate consumer confidence in the real estate industry.

Want examples? Sure, read on.

FHA and Down Payment Assistance Programs. These programs have been around for years without any issues with them. They help people obtain loans with assistance from various sources that provide them the required 3% investment and if they can't find their own source, then non profit companies such as Nehemiah and Ameridream can step in and provide it. Now, the FHA has determined that the default rate is too high and are pushing Congress to pass a law to prohibit these companies from continuing to make the American Dream a reality (which, last time I checked is actually FHA's reason for existence, but I digress).

Well, if they're truly concerned about default rates, then why don't we try some intermediary steps instead of just eliminating the program altogether? For instance, if people are using the Nehemiah program, then they aren't putting their own money down, so in theory, there should be no reason people shouldn't have two months reserves in the bank. 2nd, if borrowers are using Nehemiah, then they should be required to attend a HUD counseling session where they go over a budget, pratfalls of homeownership, etc. Third, make FHA delinquency a permanent record on a credit report (and the further in the past a delinquency is the less of an impact it has on the credit report, so people will be able to get 2nd chances, but it will at least always stay with them and make them think twice about defaulting on the loan). Fourth, since it's a higher risk, why not increase the funding fee by .25% payable not by the borrower (who typically doesn't know about the program until they talk to a mortgage broker or realtor) but instead by the broker or bank that offers it? This will have a positive impact of increasing the reserves of the program but not overburdening the borrower with excessive, financed funding fees.

Here's the key part, you have to let these changes fester into the numbers (oh by the way, it took me about 10 minutes to think of the 4 ideas above--I'm sure if our elected politicians realized that there were actually some good mortgage people out there like myself that we could help them come up with a lot of ways to tweak the program instead of eliminating another good option for homeownership, but again, I digress). What I mean by that is you can't look at a 3 month sliver of time to make fundamental policy decisions. There are simply too many outside variables that could compound themselves in such a short period. Implement these rules, wait a year, and then look at the numbers to decide if these programs need to be further tweaked or restricted.

These same ideas could be applied to other changes recently handed down by the government. For instance, stated loans have basically been outlawed. Well, I know a lot of people and have a lot of clients that are always going to be 'paper-poor'. They own their business, make a significant amount of money and take full advantage of the numerous write offs that the IRS allows without thinking about the impact on their qualifications for a mortgage. If you are going to change the laws to require full documentation, then it would be prudent to tweak Fannie/Freddie/FHA/VA et al's handling of business ownership income to include back into income various writeoffs that are not currently allowed. For instance, one of the largest is mileage. If I'm a w-2 employee, does the underwriter consider my commute and back out 58 cents per mile off my w-2 wages? No. But do they allow the business owner who commutes to various job sites to count that mileage as part of the gross income? No! So in essence, we're penalizing small business owners for doing their job correctly from being able to qualify for homeownership.

There are many more items I could discuss, but they all come down to the fact that politicians unfortunately want to be seen as the gallant white knight swooping in to save the day instead of allowing free markets (this is still a capitalistic society, yes?) to gradually implement changes as they see fit. Ultimately, if we move incrementally with small changes and measure their impact gradually, we will be able to keep options open for qualified, well intentioned borrowers, mortgage professionals, and realtors. And then the politicians will actually be able to brag that they helped resolve the 'credit crisis' (well, with a big assist from the people who actually know what we're doing).

Changes to tagline on comments?

Eric at Eagle Nationwide Mortgage Co. — Thu, 17 Jul 2008 15:51:08 -0500

How do I make changes to my tagline? For instance, when I comment on someone else's post, it shows Eagle Nationwide Mortgage Co and doesn't reflect my name. I don't mind my company getting plugged, but of course, I'd like to see my name on the post as well so people get to know me. Am I missing something simple?

Thanks,

Eric

Comments

Eric at Eagle Nationwide Mortgage Co. — Wed, 16 Jul 2008 18:28:28 -0500

Ok, this is going to be very basic, I know, but sometimes you can only try to figure something out for so long before it really starts to gnaw at you!

When I make a comment, my company name shows up as the author, but my name isn't mentioned anywhere. How do I make it so that it's my name instead of the company name?

Thanks in advance,

Eric