One of the more common questions I am asked is regarding credit scores and how they are determined. Below are some answers from experian.com (one of the 3 major credit bureaus).
What is a credit score?
A credit score is a number lenders use to help them decide: "If I give this person a loan or credit card, how likely is it I will get paid back on time?" Credit scores are also called risk scores because they help lenders predict the risk that you will not be able to repay the debt as agreed. Scores are generated by statistical models using elements from your credit report, however scores are not stored as part of your credit history. Rather, scores are generated at the time a lender requests your credit report and then included with the report.
Credit scores are fluid numbers that change as the elements in your credit report change. For example, payment updates or a new account could cause scores to fluctuate. There are many different credit scores used in the financial service industry. Scores may be different from lender to lender (or from car loan to mortgage loan) depending on the type of credit scoring model that was used.
How scores are calculated:
Developers of credit scoring models review a set of consumers – often over a million. The historical credit profiles of the consumers are examined to identify common variables they exhibited. The developers then build statistical models by selecting the credit variables most predictive of future behavior and assigning appropriate weights to each variable.
Models for specific types of loans, such as auto or mortgage, more closely consider consumer payment statistics related to these loans. Model builders strive to identify the best set of variables from a consumer's past credit history that most effectively predict future credit behavior.
What's in a credit score?
The information that impacts a credit score varies depending on the score being used. Credit scores are affected by elements in your credit report, such as:
Number and severity of late payments
Type, number and age of accounts
Total debt
Public records Credit scores do not consider the following information:
Your race, color, religion, national origin, sex or marital status. U.S. law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.
Your age.
Your salary, occupation, title, employer, date employed or employment history. However, lenders may consider this information in making their approval decisions.
Where you live.
Certain types of inquiries (requests for your credit report). The score does not count "consumer disclosure inquiry” requests you have made for your credit report in order to check it. It also does not count "promotional inquiry" requests made by lenders in order to make a "pre-approved" credit offer – or "account review inquiry" requests made by lenders to review your account with them. Finally, inquiries for employment purposes are not counted.
History of credit scoresCredit scores came into wide use in the 1980s. Long before credit scores, human judgment was the sole factor in deciding who received credit. Lenders used their past experience at observing consumer credit behavior as the basis for judging new consumers. Not only was this a slow process, but it was also unreliable because of human error.
Lenders eventually began to standardize how they made credit decisions by using a point system that scored the different variables on a consumer's credit report. This point system helped to eliminate much of the bias that previously existed; however, it was still tied to intuitive measures of creditworthiness and was not based on actual consumer behavior.
Credit granting took a huge leap forward when statistical models were built that considered numerous variables and combinations of variables. These models were built using payment information from thousands of actual consumers, which made scores highly effective in predicting consumer credit behavior. When combined with computer applications, scoring models made the credit granting process extremely fast, efficient and objective, facilitating commerce and helping consumers quickly get the credit they need.
Thursday, December 13, 2007
Getting Pre-qualified and Pre-approved
Knowing how much you can afford to spend on your new home is one of the first steps in the home buying process. By looking at your income, liabilities and cash available for down payment, I will be able to pre-qualify you to determine the approximate price range for you and your Realtor to search in. This will save both you and your agent time by focusing your search on properties that are within your qualifying range.
An additional step that has become very popular in recent years is getting Pre-Approved. This step is highly recommended and requires a little more work, but is worth the effort. By either filling out a form, or answering some questions over the phone or in person, I can input your information into a computer and run the data through an underwriting program. Once this is done, the credit report is ordered and I will receive a determination on your loan. The information you provided to me may need to be verified, so I will let you know what documents will be needed, but usually it is bank statements and pay stubs.
Once you are pre-approved, the amount of time required for the mortgage contingency and the closing are significantly reduced. Being Pre-Approved lets sellers know that you are serious about purchasing a home and that you are qualified for the purchase.
An additional step that has become very popular in recent years is getting Pre-Approved. This step is highly recommended and requires a little more work, but is worth the effort. By either filling out a form, or answering some questions over the phone or in person, I can input your information into a computer and run the data through an underwriting program. Once this is done, the credit report is ordered and I will receive a determination on your loan. The information you provided to me may need to be verified, so I will let you know what documents will be needed, but usually it is bank statements and pay stubs.
Once you are pre-approved, the amount of time required for the mortgage contingency and the closing are significantly reduced. Being Pre-Approved lets sellers know that you are serious about purchasing a home and that you are qualified for the purchase.
Monday, December 10, 2007
The week in review, December 10
(mortgagemarketguide.com)
"SURVEY SAYS...?" Richard Dawson's classic line on Family Feud is exactly the question that was on many minds at 8:29am ET last Friday morning, awaiting the official results of the November Jobs Report. After Automatic Data Processing (ADP) had released their hot numbers earlier in the week, indicating well over 200,000 new jobs created - traders and analysts began to wonder if Friday's official number might not come in far higher than the expectations of 70,000.
So when the results came in, it did show 94,000 new jobs created during November - but prior month's revisions took back 48,000 jobs previously counted in September and October. So...given this overall tame to semi-weak Jobs number - which generally would cause Bonds and home loan rates to improve - what happened that caused Bond pricing to worsen, and home loan rates to increase by .25%?
First, Bonds and home loan rates had recently improved to levels not seen in well over two years - so Bonds were almost looking for a reason to correct - and a few strong elements inside the Jobs Report were all the reason they needed. The Unemployment Rate stayed at a low 4.7%, which was better than expected. Additionally, the closely watched Hourly Earnings number was up 0.5%, higher than anticipated, and the largest read in over two years. Higher wages and a tight job market are both inflationary...inflation is bad news for Bonds and home loan rates...hence the large worsening in Bond prices and home loan rates. And the action isn't likely to let up soon - read on for a look at what's in store during the action packed week ahead!
Forecast for the Week
The wild ride is quite likely to continue, with the coming week packed full of economic events and happenings. The headliner of the week will be the Fed's Rate Decision and Policy Statement due on Tuesday afternoon. A cut to the Fed Funds Rate is expected - but what remains in question is whether the cut will be .25% or .50%.
Remember, a cut by the Fed makes many borrowing rates lower - like Home Equity Lines, credit cards, and the like - but can often have the exact opposite impact on home loan rates. Why? Because a Fed cut often drives inflation, since spending by consumers and businesses generally picks up in light of more favorable financing rates. And inflation is the worst kind of enemy to Bonds, which provide a fixed rate of return - and the true value of that return is diminished by the eroding effects of inflation. Bottom line: Following the Fed announcement, home loan rates are likely to make some moves, depending on the tone of the Policy Statement, and the size of the Rate Decision itself.
As if that weren't enough excitement, the rest of the week will bring several heavyweight economic reports, including Retail Sales, and the inflation measuring Producer Price Index (PPI) and Consumer Price Index (CPI). Take a look at the Economic Calendar below, and check in with me this coming week for all the details as they unfold.
"SURVEY SAYS...?" Richard Dawson's classic line on Family Feud is exactly the question that was on many minds at 8:29am ET last Friday morning, awaiting the official results of the November Jobs Report. After Automatic Data Processing (ADP) had released their hot numbers earlier in the week, indicating well over 200,000 new jobs created - traders and analysts began to wonder if Friday's official number might not come in far higher than the expectations of 70,000.
So when the results came in, it did show 94,000 new jobs created during November - but prior month's revisions took back 48,000 jobs previously counted in September and October. So...given this overall tame to semi-weak Jobs number - which generally would cause Bonds and home loan rates to improve - what happened that caused Bond pricing to worsen, and home loan rates to increase by .25%?
First, Bonds and home loan rates had recently improved to levels not seen in well over two years - so Bonds were almost looking for a reason to correct - and a few strong elements inside the Jobs Report were all the reason they needed. The Unemployment Rate stayed at a low 4.7%, which was better than expected. Additionally, the closely watched Hourly Earnings number was up 0.5%, higher than anticipated, and the largest read in over two years. Higher wages and a tight job market are both inflationary...inflation is bad news for Bonds and home loan rates...hence the large worsening in Bond prices and home loan rates. And the action isn't likely to let up soon - read on for a look at what's in store during the action packed week ahead!
Forecast for the Week
The wild ride is quite likely to continue, with the coming week packed full of economic events and happenings. The headliner of the week will be the Fed's Rate Decision and Policy Statement due on Tuesday afternoon. A cut to the Fed Funds Rate is expected - but what remains in question is whether the cut will be .25% or .50%.
Remember, a cut by the Fed makes many borrowing rates lower - like Home Equity Lines, credit cards, and the like - but can often have the exact opposite impact on home loan rates. Why? Because a Fed cut often drives inflation, since spending by consumers and businesses generally picks up in light of more favorable financing rates. And inflation is the worst kind of enemy to Bonds, which provide a fixed rate of return - and the true value of that return is diminished by the eroding effects of inflation. Bottom line: Following the Fed announcement, home loan rates are likely to make some moves, depending on the tone of the Policy Statement, and the size of the Rate Decision itself.
As if that weren't enough excitement, the rest of the week will bring several heavyweight economic reports, including Retail Sales, and the inflation measuring Producer Price Index (PPI) and Consumer Price Index (CPI). Take a look at the Economic Calendar below, and check in with me this coming week for all the details as they unfold.
Thursday, December 6, 2007
The sub-prime bailout....one person's perspective.
The predominant message at today's national housing forum, put together by the Office of Thrift Supervision is....we just need some time. The big topic of discussion is a plan to freeze the introductory interest rates that some subprime borrowers pay on their mortgages so they can continue making payments.
You know, to give them some time.
The subprime bailout plan goes something like this: You can afford your payments under the introductory rate on your subprime adjustable-rate mortgage. And you've been making the payments on time. But you won't be able to afford the payments after the rate jumps at the first or second reset. If that scenario describes you, the lender would be encouraged to freeze your interest rate for a few years.
For a few years. And then what?
That's the question that no one is answering. Another way of asking it is: When people say "we gotta buy some time," whose time is being bought?
Let Angelo Mozilo give a hint. "I'd rather be breathing than dead," said the chief executive of Countrywide Financial Corporation, the nation's largest mortgage lender.
If you have a subprime loan and can barely afford the payments before rate reset, and you won't be able to afford the payments after rate reset, is your lender doing you any favors by extending the lower rate for a few years? Eventually, the rate will reset. And then what?
Is it better to lose your home to foreclosure now or a few years from now? If your introductory rate is frozen for a few years, and you keep making your payments, who benefits from that? If you are foreclosed on now, rather than a few years from now, and in the meantime you make thousands of dollars in loan payments, who wins?
You know, to give them some time.
The subprime bailout plan goes something like this: You can afford your payments under the introductory rate on your subprime adjustable-rate mortgage. And you've been making the payments on time. But you won't be able to afford the payments after the rate jumps at the first or second reset. If that scenario describes you, the lender would be encouraged to freeze your interest rate for a few years.
For a few years. And then what?
That's the question that no one is answering. Another way of asking it is: When people say "we gotta buy some time," whose time is being bought?
Let Angelo Mozilo give a hint. "I'd rather be breathing than dead," said the chief executive of Countrywide Financial Corporation, the nation's largest mortgage lender.
If you have a subprime loan and can barely afford the payments before rate reset, and you won't be able to afford the payments after rate reset, is your lender doing you any favors by extending the lower rate for a few years? Eventually, the rate will reset. And then what?
Is it better to lose your home to foreclosure now or a few years from now? If your introductory rate is frozen for a few years, and you keep making your payments, who benefits from that? If you are foreclosed on now, rather than a few years from now, and in the meantime you make thousands of dollars in loan payments, who wins?
Wednesday, December 5, 2007
A note from one of my lenders
Below is a cut and paste of a portion of an email sent to me by a rep with a large National bank regarding some recent changes. Among other things, the email is quite clear that liquiduity for Jumbo mortgages (loans over $417,000) will be tight.
____________
Fannie Mae will be making an announcement shortly that they will be charging an additional 25 bps in pricing on ALL products/loans to make up for present and future losses. I don't have any other information at this time other than it looks like it will be effective for loans that fund on or after February 1st.
Liquidity is getting worse with the non-agency products, so you can expect to see significantly higher rates in these products (i.e., Jumbo Fixed, Jumbo Standard ARM's, Portfolio ARM). This could happen fairly quickly with everyone.
Last, and this won't surprise many of you, there will be a 5% haircut on LTV's in markets with declining values.
I appreciate everyone's patience through these tough times. Despite these changes, we are still having a great winter and rates are fantastic right now. We still have some great niche products (Equity Bridge, Lot Loans, etc) that help set you apart from the competition out there.
____________
Fannie Mae will be making an announcement shortly that they will be charging an additional 25 bps in pricing on ALL products/loans to make up for present and future losses. I don't have any other information at this time other than it looks like it will be effective for loans that fund on or after February 1st.
Liquidity is getting worse with the non-agency products, so you can expect to see significantly higher rates in these products (i.e., Jumbo Fixed, Jumbo Standard ARM's, Portfolio ARM). This could happen fairly quickly with everyone.
Last, and this won't surprise many of you, there will be a 5% haircut on LTV's in markets with declining values.
I appreciate everyone's patience through these tough times. Despite these changes, we are still having a great winter and rates are fantastic right now. We still have some great niche products (Equity Bridge, Lot Loans, etc) that help set you apart from the competition out there.
Monday, December 3, 2007
The week in review for December 3rd
(mortgagemarketguide.com)
"WE'RE SO BUSY WATCHING OUT FOR WHAT'S JUST AHEAD OF US...THAT WE DON'T TAKE TIME TO ENJOY WHERE WE ARE." Bill Watterson in the comic strip, Calvin & Hobbes And while these are certainly wise words for the upcoming holiday season - they also aptly describe the mood in the markets, as Bond Traders look ahead to the end of the coming week, with the arrival of the important Jobs Report. But maybe they should take a moment to enjoy where they are, as despite massive volatility, Bonds saw nice gains last week with home loan rates improving by about .125%.
Bond prices improved on a number of factors, including a tame read on inflation via the Personal Consumption Expenditure (PCE) index. Why? Look at it this way - if Bonds were Superman, inflation would be its Kryptonite, because of inflation's ability to erode and weaken the buying power of the fixed return provided by a Bond. So when news arrives indicating that inflation appears to be under control, Bond prices and home loan rates improve on the favorable news.
Another interesting bit of recent news is that major mortgage entities Fannie Mae and Freddie Mac will be moving to "Risk Based" pricing models, meaning that consumers with credit scores that traditionally have been considered "average" may soon be subject to higher interest rates. The best defense is always a good offense - so get in touch with me to discuss your own credit, even if you don't necessarily have the need for a home loan in the cards at the moment. I can help you examine your credit and determine what actions could be taken to improve your credit score - which will save you dollars on all your credit across the board. I'm glad to help - just send me an email at the link above, or give me a call.
This coming Friday commemorates the 66th anniversary of Pearl Harbor Day, "A day that shall live in infamy," and it also features the week's main economic event - the monthly Jobs Report for November, which might touch off some fireworks of its own.
Last month's report came in at twice the number of job creations than had been expected, so the market will be wary of another surprise in the upcoming Jobs number due on Friday - or a large revision to last month's number. Current estimates are for around 75,000 new jobs created in November - and if the headline number or revisions come in to be well above this number, we could see Bonds and home loan rates worsen. On the other hand, if the Jobs number is worse than expected, or if revisions take some of the heat out of last month's number - Bonds and home loan rates may see some improvement.
The chart below shows how Bond prices have been trending higher in recent months, bringing improvement to home loan rates. If you, or one of your clients, friends, family members or neighbors have been thinking about refinancing your home loan or buying a property - now is the time to act. Rates are historically low - and homes are on sale - but it won't stay that way forever. If it's on your mind, let's discuss options together so that we are prepared to act when the time is right for you.
Chart: Fannie Mae 6.0% Mortgage Bond (Friday Nov 30, 2007)
The material contained in this newsletter has been prepared by an independent third-party provider. The content is provided for use by real estate, financial services and other professionals only and is not intended for consumer distribution. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is not without errors.
"WE'RE SO BUSY WATCHING OUT FOR WHAT'S JUST AHEAD OF US...THAT WE DON'T TAKE TIME TO ENJOY WHERE WE ARE." Bill Watterson in the comic strip, Calvin & Hobbes And while these are certainly wise words for the upcoming holiday season - they also aptly describe the mood in the markets, as Bond Traders look ahead to the end of the coming week, with the arrival of the important Jobs Report. But maybe they should take a moment to enjoy where they are, as despite massive volatility, Bonds saw nice gains last week with home loan rates improving by about .125%.
Bond prices improved on a number of factors, including a tame read on inflation via the Personal Consumption Expenditure (PCE) index. Why? Look at it this way - if Bonds were Superman, inflation would be its Kryptonite, because of inflation's ability to erode and weaken the buying power of the fixed return provided by a Bond. So when news arrives indicating that inflation appears to be under control, Bond prices and home loan rates improve on the favorable news.
Another interesting bit of recent news is that major mortgage entities Fannie Mae and Freddie Mac will be moving to "Risk Based" pricing models, meaning that consumers with credit scores that traditionally have been considered "average" may soon be subject to higher interest rates. The best defense is always a good offense - so get in touch with me to discuss your own credit, even if you don't necessarily have the need for a home loan in the cards at the moment. I can help you examine your credit and determine what actions could be taken to improve your credit score - which will save you dollars on all your credit across the board. I'm glad to help - just send me an email at the link above, or give me a call.
This coming Friday commemorates the 66th anniversary of Pearl Harbor Day, "A day that shall live in infamy," and it also features the week's main economic event - the monthly Jobs Report for November, which might touch off some fireworks of its own.
Last month's report came in at twice the number of job creations than had been expected, so the market will be wary of another surprise in the upcoming Jobs number due on Friday - or a large revision to last month's number. Current estimates are for around 75,000 new jobs created in November - and if the headline number or revisions come in to be well above this number, we could see Bonds and home loan rates worsen. On the other hand, if the Jobs number is worse than expected, or if revisions take some of the heat out of last month's number - Bonds and home loan rates may see some improvement.
The chart below shows how Bond prices have been trending higher in recent months, bringing improvement to home loan rates. If you, or one of your clients, friends, family members or neighbors have been thinking about refinancing your home loan or buying a property - now is the time to act. Rates are historically low - and homes are on sale - but it won't stay that way forever. If it's on your mind, let's discuss options together so that we are prepared to act when the time is right for you.
Chart: Fannie Mae 6.0% Mortgage Bond (Friday Nov 30, 2007)
The material contained in this newsletter has been prepared by an independent third-party provider. The content is provided for use by real estate, financial services and other professionals only and is not intended for consumer distribution. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is not without errors.
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