Your Credit Part II

Posted August 22, 2007 by financialbullet
Categories: buying home, credit, money, mortgage, personal finance, real estate

In Part I we discussed the anatomy of a credit score.  In today’s installment I will be discussing how you can get a copy of your credit report and ways that you may be able to increase your credit score.

The federal government allows you to access your credit report annually for free.  There are many websites and television commercials that tout free credit reports.  Be aware most websites and television ads want you to sign up for some other service that does have fees associated with them.

The official site is www.annualcreditreport.com.  I also have the toll free number and mailing address for those that are interested.  This will get you access to review your credit report.  This site will not give you credit scores for free.  Why bother if no score is given?

1) First and most important, is the information listed on the credit report correct?  Can you verify each account listed and agree with approximate payment and balance?  Do you see anything that is outdated and should be removed?  Are there errors on the report?

2) You can see your payment history.  You can see how the companies have reported your payments.  Have you had one 30 day late or three on that car loan since it has been opened?

3) Helps establish a game plan.  By seeing your credit it can help you determine whether you are ready to buy a home or if you need to work on your credit before applying.

If you want to purchase your credit score at this time you can.  Here is an interesting site that gives some insight on how the scores are considered.  As you can see, different agencies consider scoring differently.  In today’s mortgage environment, which is changing rapidly, having a score of 680 or better is preferred.  If you have a score lower than 680, it does not mean that you will not be able to obtain a mortgage.  Many factors are also considered besides credit score.  They include your down payment amount, (see Saving Makes a Difference) and your debt to income ratios.

So you have seen your credit and score?  How do you make it better.

  1. Make your payments on time.  Get current if you are behind on any debt and stay current.
  2. Pay down credit card debt aggressively.  Focus on credit cards that have balances of over 50% of the available line.  Do not close cards that have zero balances  Credit scoring also considers all balances vs available lines of credit.  Closing an account lowers you available credit.
  3. Don’t applying for new credit.  If your goal is to buy a home in the coming months, avoid getting additional debt.  Not only will this not show additional inquiries on your report but also keep your debt to income ratio lower, allowing you to qualify for more home.
  4. Get errors corrected on your credit report.

And how to get those errors corrected is going be Part III of this series.

Your Credit Part I

Posted August 20, 2007 by financialbullet
Categories: credit, money, mortgage, personal finance

You hear so much about it and you know that credit can make the difference in getting a preferred rate or having to deal with a high rate of interest on anything from housing, cars, insurance, and credit cards.  But do you know what makes up your credit score?

There are many different types of credit scores.  We are going to focus on traditional credit scoring models that are used for mortgage transactions.  Scores can range from 300-850.  The average credit score in the United States is 677.

Anatomy of a Credit Score
35% – Past Payment Performance
30% – Credit Utilization
15% – Credit History
10% – Type of Credit in Use
10% – Inquiries

Past Payment Performance – is just as it sounds.  How well you have you paid your debts?  A creditor will report your loan as current as long as you pay your bills within 30 days.  Any longer than 30 days and it will be reported late with the credit reporting agency.  The last 12-24 months history weighs most prominently on your score.

Credit Utilization – is how you use your credit.  If you have credit cards, what kind of balance do you have in relation to the amount available.  If you are over 50% of available balance, it is considered high.  Have you added new credit recently?  That may also play a roll in your credit score.

Credit History – is how long you have had your credit.  The longer you have had credit, the better to determine how you handle life’s ups and downs.

Types of Credit in Use – Do you have a mortgage loan, a car loan, credit cards, or finance companies listed on your credit report?  Too many credit cards or use of finance companies (example of a finance company loan is if you take store financing for furniture) can negatively impact your credit.

Inquiries – How many times have you had your credit pulled.  It can show that you are applying for credit in many places and may have loans or credit cards that are not yet showing up on your credit report.  If you have your credit pulled a number of times within a short period (14-30 days) of time when shopping for a mortgage or car, the credit reporting agencies will only count it as one inquiry.

Part II will focus on where you can see your credit report for free and ways to help improve your score

Your Stengths and Weaknesses

Posted August 16, 2007 by financialbullet
Categories: buying home, mortgage, personal finance, real estate

So far, we have covered the advantages and disadvantages of homeownership and discussed the important of savings in regards to buying a home. And are you still itching to buy that home? Good. Today we are going to cover three aspects that you should consider even before you go in and get that pre-approval: What are your strengths? What are your weaknesses?

Your Strengths

Let’s start with your good points. The following is a list of strengths borrowers like you may possess. Take a look, which strengths do you possess? The more strength you have the better position you will be in to get approved and get the best interest rate possible for your financing.

  • A good and long credit history. The longer you have had credit established helps lenders determine how you handle your finances, even through life’s down times. The payment history of your credit is important also. Have you made your payments on time? The last 12-24 months worth of payment history is reviewed closely.
  • Good reserves. We discussed in my last blog the importance of saving and/or making a down payment on your mortgage.
  • Good job history. This is not as important as it once was but it can still play a roll if other areas of your file are not as strong. If you have been at the same employer for 2 years or more, it shows that your life is stable. Don’t worry if you have changed jobs within the last 6 months if you went to a job that is in the same line of work or higher pay.
  • Good residence time. Of all the strengths you may possess this is the least weighted. Again if you have been in your current location for at least 2 years it is considered stable.

Your Weaknesses

Of course this would be the opposite of the above. Consider the following:

  • A short or poor credit history. Do you have credit established? Having no credit can be as difficult to find financing with poor credit, maybe harder. Lenders rely on credit reports to establish a track record of how your handle your debts. With no credit established it makes the decision much harder. Have you had issues with making your payments on time? Again, the last 12-24 months is looked at the closest.
  • Little or No reserves. While you may be able to get into the home with little or no money out of your pocket, if you have no savings or reserves it may make life difficult if an expensive appliance breaks or you have some other emergency expenses that need to be paid. In essence, you would have nothing to fall back on if times get tough.
  • Job hoping. Have you had multiple jobs in the last 2 years? It may reflect that you have difficulty maintaining employment and if you can’t maintain employment it makes the mortgage payment difficult to meet every month.

The next couple of blogs will feature how to turn a weakness into a strength (game plan) and your credit.

Saving Makes a Difference

Posted August 14, 2007 by financialbullet
Categories: buying home, money, mortgage, personal finance, real estate

Sure, you can go out and buy a home, do a mortgage of 100% of the purchase price and maybe even have the seller pay your closing costs but is doing so the best idea financially for you?  The benefits of having no money down when you purchase the home are clear: You don’t have to come up with a bulk sum of money at closing and you may have more disposable money to use for furniture, painting or whatever else you need for your new home. But what are the downsides?  As with everything in life, there are two sides.

1) You have no equity in the property whatsoever.  What happens if the value of your home goes down?  You will owe more on the property than what it is worth.  Also, since equity is earned slowly on a longer term mortgage (most 100% financing is done on 30 or 40 year terms), if you were to need to sell the home in the first few years of ownership you still may be required to bring money to closing.
2) The interest rate may be higher.  By putting little to no money down on a home puts the lender at a greater risk.  The lender raises the interest rate to help offset that risk.
3) If your lender requires that you have Private Mortgage Insurance (PMI) on your loan the monthly premium that is paid will be higher that if you put money down on the property.

Putting money down on a purchase of a home will alleviate most of the issues above.  You have instant equity in your home, you will have shown the lender that you are willing to put some of your own risk into your home, and depending on how much you put down you may not be required to have PMI or the premium amount will be less each month.

But what if you don’t want to wipe out your hard earned savings just so you can make a down payment on a home?  If you need or want to do 100% financing you can, but my recommendation is still save as much money as you can before buying.  Showing you have reserves (money saved up) will your overall profile.  If a lender sees that in your savings account you have 3 months worth of mortgage payments saved up it lessens the risk you would have trouble making payments if you came into a rough patch.  The more reserves you have the better.

At application make sure your lender knows if you plan on making a down payment.  Also provide your lender with all your assets.  Your assets would include checking/savings accounts, CDs, IRAs, 401k, cash value in life insurance, stocks, bonds, and mutual funds.  Proving this information can make your approval that much smoother.

First Steps to Buying a Home

Posted August 12, 2007 by financialbullet
Categories: buying home, money, mortgage, personal finance, real estate, rent

Before you head out with a real estate agent, or head to your bank or credit union to get pre-approved for your new home, you should do a little research on your own before jumping in and buying that first home. Today’s blog will focus on the benfits and disadvantages of buying a home.

So, you are tired of renting and want your money to go towards something. Great. But as with most things there are ups and downsides to home ownership.

Advantages of owning a home

Some advantages to owning a home are:

1) A good investment. As you make payments on your home, your balance decreases and you gain equity in your home. Equity is the difference between what is owed on the home (including all liens (normally mortgages) that are against the home and what the home is worth. As time passes your home may appreciate in value adding to your equity. Remember that homes are not guaranteed to appreciate in value and may actually lose value.

2) Tax purposes. In most cases you are able to write off a portion of both your interest paid to your lender and annual property taxes to help with your tax bill. You will want to check with your tax preparer to determine to what extent you may benefit.

3) Ability to Step Up in the future. The more equity you build in your current home will be able to help you buy a bigger or nicer home in the future.

4) Satisfaction and Security. Owning a home is ,after all, part of the American Dream. It also allow you to decorate as you see fit and build a closer bond with your community.

Disadvantages

1) It typically will be more expense to own your home versus renting. You have your mortgage payment, your utilities (which you may not be paying if you rent), maintenance of the property (such as mowing grass, painting, roof, windows, etc, etc, etc)

2) There are No Guarantees. Your home is not always going to appreciate and may actually lose value depending on your market. You may lose money if you have to sell the home in the first few years of ownership, this is especially true if you put 5% or less as a down payment at purchase.

3) If it breaks, you fix it. There is no landlord anymore. Have an issue with the plumbing? It is coming out of your pocket now. There are many, many things that can break in a home. Think about it for a moment. All those things are now your responsibility.

4) You lose some mobility. By buying a home, it makes it harder for you to pack up and leave. It may effect you ability to accepted a new job elsewhere.

Want to compare renting and buying? Click here for a calculator that may aid you in your decision.

My next blog we will be discussing importance of saving and down payment.

Welcome to the Mortgage Bullet

Posted August 11, 2007 by financialbullet
Categories: mortgage, personal finance

Welcome to the Mortgage Bullet.  My goal with this blog is to give you information to help you make the right choices with your mortgage financing and what exactly happens during the origination process.  I will always be open to questions so please feel free to contact me at any time.

Even in today’s market environment you as a borrower can find good, affordable mortgages.  Credit guidelines have been tightening over the last year and within the last few weeks there has been much talk of different lenders not being able to offering financing in the sub-prime or Alt-A markets.   Sub-prime mortgages are made to borrowers with damaged credit.  Alt-A mortgages are those with less than perfect credit, a step above the sub-prime borrower but a step below a prime borrower.

If you have good credit, mortgages are still affordable in all but the most expensive of markets.  If you do not have good credit we will discuss a number of topics in upcoming blogs that can help your score.

In my first set of blogs I will be discussing the steps you need to take to buy your first, or next home, the homework you should do before applying for your mortgage, and what you should be looking for from your lender.   More on this to come.


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