fthb credit its a brand new day
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Credit – It’s a Brand New Day
How to Protect Yourself in the
Post Mortgage Market Meltdown
Jim Alroth
Real Estate Resource Home Loans
<619 – What Can It Cost You?• Borrower
– $300K to $400K or More in Interest Costs
• Buyer– 12-28% Less Purchasing Power
*Assumes $400,000 sales price, financing 90%
What is a Credit Score?
• A 3-digit number used by lenders to evaluate the risk associated with lending money.
• Generated by a mathematical model created by Fair Isaac Corporation in the 1960s.
• There are 3 major credit bureaus: Equifax, Experian® and TransUnion® - 3 Scores.
• Scores range from 350-850.
Why It’s Important Now
• 2007 Mortgage Meltdown– ARM Resets to Higher Payments– Declining Property Values– Homeowners Walk
• Subprime Contagion– First Subprime Companies Fold– Hedge Funds– A and Alt-A Paper Follow
Score Talk
• Above 720 = Excellent
• 680 = Good
• 620 = Fair
• Below 620 = Poor
Why Are Higher Scores Good?It’s All About the Likelihood of Default
Bad Credit – What’s the Cost?
• What’s The Damage of Lower Credit Scores?Home Financing: A 30-year fixed with a loan principal amount of $360,000
FICO Score APR Monthly Payment Total Payments Paid
Above 760 5.800% $1,760 $633,600
620-719 6.020-7.120% $1,803-$2,019 $649,080-$726,840
Below 620 8.531-9.289% $2,511-$2,739 $903,960-$983,160
If your score improves to 720-850, you could save an additional $318,329If your score improves to 700-719, you could save an additional $308,047If your score improves to 675-699, you could save an additional $263,094If your score improves to 620-674, you could save an additional $163,422
A borrower who increases his or her credit score from 620 to 720+ can potentially save $884 per month on mortgage payments, $10,608 per year, and approximately $318,329 over the life of the 30-year loan.
Loan Level Price Adjustments
Credit Score Factors
Payment HistoryLate PaysCollectionsCharge-OffsRepossessionsForeclosuresTax LiensBankruptciesJudgments
Amounts OwedCredit CardsMortgage LoansAuto LoansHELOCsInstallment Loans
Length of History
New CreditSoft InquiriesHard Inquiries
Types of Credit UsedA Mortgage LoanAn Auto Loan2-3 Major Credit Cards
Payment History: 35% How do your borrowers pay their bills?
• A recent 30-day late can cost 50+ points.
• Paying a collection that is more than 2 years old can hurt a score.
• Being past due on an account can cost 50+ points.
• Derogatory accounts do NOT always fall off of a credit report automatically after 7 years. They must be disputed.
• A divorce decree does NOT take precedence over the creditor agreement.
Amounts Owed: 30% Managing Debt
• New debt temporarily decreases a score.
• Balances should be kept below 50% at all times to maintain a score.
• Balances should be kept below 30% of the limit for 3-6 months prior to applying for a home loan.
• Debt should NOT be consolidated, it should be distributed evenly over all credit card accounts.
• Going over the limit on a credit card, even by $1, will cause a serious penalty.
• HELOCs can be considered revolving debt, not mortgages.
• Credit card accounts should NOT be closed except in special circumstances.
• Unused credit card accounts will become unrated in 3 months.
Length of History: 15% Mix of Credit: 10%
• Borrowers should hold onto old credit cards, even if the rate is not great.
• New credit users can NO LONGER add themselves to another person’s account as an authorized user to generate a score.
• Mixture is best.
• The type of credit card DOES matter.
• 3 to 5 revolving credit cards with established history is optimal.
Inquiries: 10%
• Hard vs. soft Inquiries.
• 14-day window for pulling reports.
• Inquiries affect a score for one year.
• Inquiries can cost between 2 and 30 points, depending on the current score.
• Pre-approved card offers are NOT really pre-approved.
BORROWERS NEED TO WORK ON OPTIMIZING THEIR CREDIT TODAY!
• Step 1 - Order Credit Reports & Scores: The first step is for borrowers to get a complete picture of their current credit situation by ordering a copy of their credit reports and scores for all three national credit bureaus - TransUnion®, Equifax and Experian®.
• Step 2 - Verify the Data Being Reported: It is the consumer's responsibility to verify the accuracy of the data being reported.
• Step 3- Dispute Any Inaccurate Information: Have borrowers contact their creditors and send letters of dispute to the credit bureaus to have errors on their report corrected. These must be sent via CERTIFIED mail.
Buyer/Seller Action Steps
• Review Credit Report Every 3-6 Months
• Pre-Qualifications Are Worthless!
• Pre-Approvals Good for 120 Days
• Do Not Accept Pre-Approvals From the Unknown and Non-Local
Contact Us
• Jim Alroth
• Real Estate Resource Home Loans
• 815-347-2773
• 708-645-9999
• www.jimalrothloans.com
• jalroth@rrhomeloans.com
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