Did you know that Fannie Mae now charges a buyer with a 699 credit score an extra 1.5% fee on a home loan compared to a buyer with a 740 credit score, that is $6,000 extra on a $400k loan amount. It has never been more important than in today’s housing market to have excellent credit scores, especially as the broke government entities Fannie Mae, Freddie Mac and FHA are now charging buyers astronomical fees to raise funds to shore up their depleting finances. There is also a huge pool of potential buyers who have had their credit damaged during the past few years of the housing crisis, who need a little help to improve their scores to get in a position to buy again. Here are 5 credit tips below that you can share with your clients, family and friends so they are given every chance to improve their credit scores and save as much money as possible when they buy a home.
Fannie Mae is charging buyers ridiculous loan fees
So how much extra does Fannie Mae and Freddie Mac charge a buyer for less than perfect credit? Below is a table of Fannie Mae’s Risk Based “Loan Level Price Adjustments” (LLPA’s). This is what lenders use to determine what interest rate a buyer will get on a loan. These LLPA’s take into consideration a buyers credit score and down payment on a home loan scenario. These LLPA’s are subtracted from a borrower’s loan pricing, which pushes their mortgage rate higher.
For example, a borrower with a FICO score between 680-699 who has a 20% down payment, will pay an extra 1.50 point cost on their loan compared to a buyer with a 740 credit score, this is $6,000 on a $400,000 loan. A borrower has two choices how to pay this fee, they can either pay this additional $6,000 as cash as closing, or they will have to take a higher interest rate with the fee built in, which 99% of buyers end up doing.
Check out the buyer with a 620 score, he will pay an extra 3% in fees for the same rate as a 740 buyer, that is $12k on a $400k loan..OUCH. Of course the buyer with the 620 score will probably go with FHA financing as they less credit score driven, but then of course the buyer will have additional mortgage insurance to pay. As the government now funds over 90% of loans in the market place, it is fair to say that the government is broke and they have us cornered when it comes to getting financing. So improving their credit scores is one way that consumers can save themselves money.
Falling Credit in the US
Figures provided by FICO Inc. show that as of 2010, 25% of consumers (about 43 million people) now have a credit score of 599 or below, making them a big risk for lenders. This number is up from the historical norm of 15%. At the other end, interestingly, the number of consumers who have a top score of 800 or above has increased in recent years - mostly attributed to them cutting spending and paying down debt.
Here is a chart below that shows how credit in the US was before the recession and after the recession. As you can see there are a lot of people who have suffered some sort of credit damage from the financial crisis.
Creating buyers for tomorrow
There is no doubt that there is a shortage of qualified buyers out there these days. I would say only 1 out of 4 applications that hit my desk is able to get a loan approval, the rest can’t qualify yet mainly due to credit issues. This is because many of these people have suffered credit damage over the past few years. But, there are many of them who are actually not that far away from being able to qualify to buy a home, as they just need a little guidance and help and just need to be put on a plan so they can purchase as soon as possible.
What we must remember is that the financial crisis started in 2007, so there are probably a lot of people who will have already suffered a short sale, foreclosure or Bankruptcy over 2 years ago. For example, the FHA only requires 2 years after a Bankruptcy before a buyer can qualify for a home loan again. Therefore I think it is a great idea to reach out to as many people as possible, i.e past clients, friends and family who maybe have suffered some credit damage recently and ask them if they need some help getting their credit repaired, so they can get in a position to buy again. So what can we do to help?
5 ways to increase credit scores-and fast
To start with here are 5 great credit tips that you can share with clients, friends and family to implement right away, so they can give their scores an immediate boost.
1. Get Your Report
The three main credit bureaus, Equifax, Experian®, and TransUnion®, are required by law to provide you with a free copy of your credit report once every 12 months. To request your free copy (one from each company) visit www.AnnualCreditReport.com or call 1-877-322-8228.
2. Create Some Balance: The trick is to get and keep your balances below 30% of your credit limit on each credit card. Remember, if you pay off any credit cards completely, do not close your accounts as this will negatively affect your scores.
3. Know your limits: Make sure that your credit card issuers are reporting the correct limits on your accounts to the three major credit bureaus. Without an available limit, your account will appear to be maxed out at its highest reported balance each month. This could cost you up to 80 points in certain instances. Also, if you’re in very good standing, ask your creditor for a lower rate or higher credit limit. This will increase the gap in the debt you owe versus the credit you have available. Sometimes hinting about closing an account can suddenly bring out the generous spirit of certain card issuers. Give it a try. The worst they can say is no.
4. Protect Your Interests: Your credit is calculated based solely on the information available to your creditors. For example, if you have a HELOC, make sure it’s listed as a mortgage or an installment account on your credit reports and not a revolving debt. If you had a bankruptcy, be sure that all items associated with the bankruptcy are being reported correctly, that is with a zero balance. This action could increase your score by 50-100 points. Because simple mistakes like these can wreak havoc on your credit score, it’s important to monitor your credit every four to six months.
5. Even the Score: If you find information on your credit report that you believe is inaccurate or incomplete, then you have the right to dispute it free of charge. For the fastest results, visit the appropriate credit bureau’s website and file a complaint on-line. If supporting documents are necessary, you have to file your dispute by mail.
Educating consumers about credit scoring
I think it is imperative that consumers begin to learn more about credit scoring. I also think it is important that we teach consumers and buyers about credit scoring, so they have every possibility to score the lowest interest rate on their loan, because as we seen above, a simple increase in credit scores from 699 to 740 can save someone $6000 on a $400k purchase loan and get them a lower rate. Here are some resources to share. Here is a credit score quiz www.creditscorequiz.org that you can share with all your clients, family and friends so they can test their knowledge of credit scoring. Also here is a new site just released by FICO http://scoreinfo.org/ that you can share too, so they can learn how credit scoring works and what they can do to raise their scores.
Here are two other ways to offer help to anyone you talk to, so you can let people know that you can help them get their credit restored and be put on a plan so they can purchase a home soon. This will ensure you have a pool of clients who will be able to buy in the future.
The “Credit Analyzer” tool
Lets say you have a buyer who has a 600 credit score and needs a 620 to qualify for FHA financing, or you have a client with a 699 score and they want to get their scores over 740, what is the fastest way to get those extra few points that will get them approved for financing or save them a ton of money in fees?
One of the tools we use is the ”credit analyzer” system which our credit reporting company offers for our clients. This predictive credit scoring system will calculate how high scores will go if certain actions are taken in regards to credit, this way a potential buyer now has a definite plan of action to improve their credit scores to meet the qualifications needed for a loan. Sometimes for example, just paying down a $1k credit card a few hundred dollars so the new balance is at 30% of the credit card limit will do the trick. Results from this program can take as little as a few business days.
What if Major Credit Repair is needed?
But what if you know someone who needs serious help getting their credit fixed? i.e they have liens, judgments, short sales, or they need help removing debts from Bankruptcy etc. I send all my clients to Linda Ferrari, you can check her website out at www.lindaferrari.com .She is one of the foremost credit experts in the country and has written books etc on the topic of credit repair. Linda is able to put most people she works with on the fast track to purchasing a home as soon as possible. Her programs usually last 3-6 months. This is a great way to ensure that you will have a pool of buyers that will be able to qualify in the future.
I hope you found some of these tips useful and I hope they save someone lots of money.
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