FHA Trims Waiting Period for Borrowers Who Experienced Foreclosure

 

The Federal Housing Administration (FHA) is allowing borrowers who went through a bankruptcy, foreclosure, deed-in-lieu, or short sale to reenter the market in as little as 12 months, according to a mortgage letter released Friday.

 

Borrowers who experienced a foreclosure must wait at least three years before getting a chance to get approved for an FHA loan, but with the new guideline, certain borrowers who lost their home as a result of an economic hardship may be considered even earlier.

 

For borrowers who went through a recession-related financial event, FHA stated it realizes “their credit histories may not fully reflect their true ability or propensity to repay a mortgage.”

 

In order to be eligible for the more lenient approval process, provided documents must show “certain credit impairments” were from loss of employment or loss of income that was beyond the borrower’s control. The lender also needs to verify the income loss was at least 20 percent for a period lasting for at least six months.

 

Additionally, borrowers must demonstrate they have fully recovered from the event that caused the hardship and complete housing counseling.

 

According to the letter, recovery from an economic event involves reestablishing “satisfactory credit” for at least 12 months. Criteria for satisfactory credit include 12 months of good payment history on payments such as a mortgage, rent, or credit account.

 

The new guidance is for case numbers assigned on or after August 15, 2013, and is effective through September 30

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WHY ARE MY CREDIT SCORES DIFFERENT?

Factors contributing to someone's credit score...
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Your credit score is a three-digit number that helps lending institutions assess their risk associated with lending you money.  They are used for loans, credit cards, renting, insurance and background checks on employment.

People with lower credit scores may pay higher interest rates or may not be approved at all.  Those with higher, less-risky credit scores often qualify for lower interest rates and special options.  Credit scores are calculated based on computer “predictability” models that analyze credit information and patters from your credit report against those of other consumers.

There are trillions of score combinations used in the calculations.  Most scores are calculated and provided individually by each credit bureau, including the three major ones in the United States, which are Experian, Equifax and TransUnion.  Additionally, many lenders use third-party credit scoring systems, such as FICO, NextGen, CE Score and VantageScore.  For consumers, the variations in scoring models and score ranges can create some confusion.

In 2006, the three major bureaus joined forces to create a single credit scoring system called the VantageScore.  The VantageScore and FICO model lead the industry as competitive rivals in credit-scoring systems.

Your VantageScore may not be exactly the same if your lender only orders a credit report from one of the bureaus.  This is because the data each bureau receives may be slightly different.  If your lender does not report your payment history to Equifax but does report to Experian and TransUnion, it will create a difference in scores.  The VantageScore should be more consistent across all three bureaus since the mathematical formula is the same.

Unlike FICOs traditional 300-850 credit score range, the VantageScore ranges from 501-990.  There is no way to compare the results of the VantageScore to a FICO score especially when the formulas are constantly changing.  However, to put some perspective in place a 650 FICO score approximately compares to a low, 800-range VantageScore.

The one constant for both scoring systems is that paying your debts on time will typically be the primary factor that positively impacts your credit score.

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What you Should Know Before Buying a Home

This past week, I have posted several articles on credit reports.  Below are a few things you should know before buying a home:

1)  Get Pre-Qualfied – you will need to find out what you can qualify for and obtain a Pre-Approval letter before going out to look at homes.

2)  If you have marginal or bad credit, consult your lenderthey will be able to advise you on whether your credit history will prevent you from qualifying for a home loan.

3)  You will need a down paymentDown payment requirements vary depending on the type of loan.  There are a few down payment assistance programs, but gone are the days of lots of  ZERO down loans, unless you are a Veteran.  Consult with a lender about the programs available in your area.

4)  You will need funds for closing costs – In addition to your down payment, you may need to have additional funds for closing costs (i.e. Escrow, title, mortgage insurance, taxes, loan fees and fire insurance).

5)  Some loans have “points” and some do not – A point is a loan origination fee equivalent to 1% of the loan amount.  Together with the interest rate they constitute the yield on your loan for the lender.  Some lenders charge a higher interest rate to compensate for charging no points.  It is important to comparison shop lenders to make sure your loan is at a competitive yield.

6)  Should you select a mortgage with a fixed rate or an adjustable rate?  It depends on whether mortgage rates are at a high or a low point when you purchase, and on how long you plan to live in the home.  If rates are low, a fixed rate would be more attractive and if rates are high, an  adjustable rate might be attractive since subsequent rate drops could reduce your monthly payments.  Also lenders may offer a low rate during the first few years of an adjustable mortgage to make it appealing to you.

7)  Be aware of the two main type of loan categories – Conventional Loans and Government Loans (FHA/VA) .  Both of these loan types are available with fixed or adjustable interest rates and some require mortgage insurance.

8)  If you are a low or moderate income home buyer – there are some local and state housing agencies, like the California Housing Finance Agency(CalHFA) that have special loan programs available.

9)  Why might I have to pay mortgage insurance?  Generally, conventional loans that require larger down payments do not require mortgage insurance.  Mortgage insurance is always required on FHA loans.  Mortgage insurance protects the lender from potential loss if you should default on your mortgage loan payment. 

10)  Many organizations offer home loan counseling to prospective home buyers– These organizations provide classes for home buyers to cover the steps to home ownership.  They will cover home selection, realtor services, lenders, loan programs, home ownership responsibilities, saving for a down payment, and other important pieces of information.  Many first-time home buyer programs require home buyers to attend this type of class to be eligible for selected programs.

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Watch out for these Credit Repair Scams

credit repair

So you have decided to purchase a home and have reviewed a copy of your credit report.  You have noticed that you have some items that you need credit repair to remove from your credit report.   I would strongly recommend using a credit repair company that you have previously used or have been referred to by either a loan officer or someone who has previously used a credit repair agency.  The following information was furnished by the Federal Trade Commission.

Unfortunately, there are a few scams out there that you need to be aware of:

  • The company wants you to pay for credit repair services before providing any services.  Under the Credit Repair Organizations Act, credit repair companies cannot require you to pay until they have completed the services they have promised.
  • The company doesn’t tell you your rights and what you can do yourself for free.
  • The company recommends that you DO NOT contact the three national credit report companies directly.
  • The company tells you they can get rid of most or all of the negative credit information in your credit report, even if it is accurate.
  • The company suggests that you try to invent a “new” credit identity and then, a new credit report by applying for an Employer Idenification Number to use instead of your Social Security Number.
  • The company advises you to dispute all of the information in your credit report, regardless of its accuracy or timelines.

 

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How to Improve your Credit Score before Searching for a Home

If you are thinking about purchasing a home, it is best to look at your credit report at least SIX months prior to purchasing a home.  It is a good idea to give your credit score a check-up and then take positive stps to improve your credit score if you find problems.  Make sure you check all three of the national credit reporting agencies: Experian, Trans-Union and EquiFax.

Review your credit carefully for items that may be reported incorrectly.  If you believe something is in error, you have the right to contest it.  You will need to contact the credit reporting agency and explain why you believe the item is inaccurate.    Alternatively, you can engage a credit report repair services firm to fix your credit report.

If there are derogatory items on your credit report that are accurate but which could cause problems in your loan application, you cannot have them removed; however, you can take steps to counteract them.  If you have missed payments in the past, take steps now to get your bills current.  Even if it means using the funds that you might be planning to use for a down payment.  It is extremely important that you get your accounts current and keep them current.  There is nothing which can lower your credit score more quickly than late payments.  Over time, this can make a significant difference in your scores.

Also keep in mind that removing all of your credit balances is really not the solution.  In fact, credit can be your friend when you are looking to purchase a home.  Make sure your credit is POSITIVE, not NEGATIVE.  Toward that end, avoid closing out your accounts.  Instead, make an effort to pay down your balances and keep them paid down below the minimum or completely paid off, but DO NOT CLOSE THE ACCOUNT. 

After reviewing your credit report and you see that most, if not all of the credit cards are nearly maxed out, it is time to sit down and plan an agressive strategy for paying some of them down.  One of the critical factors that often determine your ability to be approved for a mortgage is your debt to income ration.  In addition, high credit card balances can drag down your credit score.  Therefore, it is important to look at paying off some of your balances.

By following these steps, you can improve your credit score and improve your chances of being approved for your home loan

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What your FICO Credit Report Score Consists of

It seems today that everything revolves around your FICO score (i.e.  Insurance, Auto Loans, Mortgages, Employment).

Your FICO Score consists of five different categories:

 35% – Payment History
30% – Amounts Owed
15% – Length of Credit History
                                                          10% – New Credit
                                                          10% – Types of Credit

Payment History
– This is the most important category, it gives the overall picture of how well a person handled loans, credit cards and other types of accounts in the past.  Are the payments made on time versus payments that are delinquent.  Time does play an important factor.  If you have a history of past due amounts, the amount of time should play an important role in how a FICO score will be affected in addition to the number of occurrences.  On the other hand, good payments on your past accounts and the number of accounts that were paid on time will be reflected positively on a person’s credit score.

Amounts Owed –
This portion consists of how much you owe, or have a balance on, what types of accounts the amounts owed are a part of as well as the capacity of unused credit a person currently has available to them.  Each type of account is weighted according to the type of loan per se a retail store account versus a mortgage.  This is all taken into consideration when calculating your score.  The amounts owed on card balances and other accounts or loans are totaled and expressed a s a ratio of what you currently owe versus what your currently have avaialbe to you.

Length of Credit History – This portion looks at the length of your overall credit history.  It is calculated by gathering up data on all previous and current accounts and analyzing how long you have had the accounts as well as the time of your most recent activity on the accounts.  Also taken into consideration is the types of accounts that you have been using or have not been making payments on, such as mortgage versus payments on new purchases on your credit card.

New Credit – This section reviews the number of new credit inquiries or new credit that has been obtained and/or applied for, such as new credit cards, car loans, mortgages, etc., as well as any repaired credit or re-established credit for those who have made an improvement on their credit score after their credit score had dropped due to past delinquent account activity. 

Types of Credit – The types of credit has a lot to do with how much of an influence it will have on the actual credit score.  Credit cards or other revolving debt, installment loans, consumer financing and mortgages are all considered when observing the types of credit a borrower has established and/or is currently making payments on.

 Even with the breakdown of categories and the percentages each category bears on your FICO score, it is nearly impossible to figure out on your own.  You can obtain a free credit report online and for an additional fee, you can obtain your FICO score at several sites.

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