The Truth About Credit Scores and Mortgage Delinquency

Today Eileen Ambrose of The Baltimore Sun reported on a study conducted by FICO into the true damage that happens to a person’s credit score when they miss mortgage payments or go through a short sale or foreclosure.  They analyzed how the score would be impacted if you had a high credit score (780) a good credit score (720) and an average credit score (680) and how long it would then take your score to recover back to its previous level if you had no other damaging factors.

The study produced a number of interesting results.  First, it debunked a myth which exists within our industry, and that is that short sales damage your credit score less than foreclosures.  As both are reported as defaults upon your mortgage and both result in losses for the lender, they damage your credit score equally no matter what your credit score was before.  In both short sales and foreclosures, it can take a long time for your score to recover from the damage caused by a default event (3 years if you have a 680 score at the start to rebuild your score to a 680 again, or 7 years to rebuild your score to its starting point if you had a 720 or above).  Now there is truth that you can qualify to buy a home again sooner after a short sale rather than a foreclosure, as both FHA and Fannie/Freddie have rules about how long you must wait after a foreclosure before being allowed to purchase again, and generally those rules are applied in a much shorter amount of time on a short sale (usually 5 year limit for foreclosures and 3 years for short sales).  If you could get your score back above the minimum of 620-640 used for FHA right now within 3 years of a short sale it would allow you to recover faster than a foreclosure…just it would still take another few years to get your credit score back to where it was previously. 

One other thing from the study I found interesting was how badly being a single month behind on your mortgage affected your credit score.  While I always knew the biggest component of a person’s credit score was their history of paying bills on time, I didn’t realize that a single missed payment would affect their credit score by over 10% of their current score!  If a person with a 680 credit score missed a single mortgage payment their score would drop between 60-80 points.  You might think that missing a payment just once when you have a great credit history might be met with a little more forgiveness than if you had a history of missing payments in the past (or a lower score).  Not so…in fact you get hit even worse for missing a single payment if your credit score starts higher.  If you had a 780 credit score and missed one payment your score would drop between 90-110 points off of that one offense (and that can take up to 3 years of perfect credit records to restore your score back up to your previous 780 level). 

What this study really showed was that you have to be on time with your payments if you want to have a good credit score.  Missing even one payment can do damage that can last for years and is far more significant than you might think if you didn’t know better.  This is very important for people to understand, whether you own a home now, intend to buy one in the future, or even just want to be accepted for nice rental homes instead of having to live in low end apartment complexes the rest of your life.  All of these things require good credit scores to do, and it can take years to restore your score once you damage it!  Share this article with those who are important to you so they can better understand what they need to do to protect their credit scores.  Keep Dreaming!

The article from the “Sun” can be found at: http://www.baltimoresun.com/business/real-estate/bs-bz-ambrose-fico-scores-foreclosure20110502,0,1824554.story?page=1

Will the New Loan Officer Compensation Laws Truly Help the Consumer?

On April 1, 2011 the Dodd/Frank bill adjusting loan officer compensation goes into effect.  This bill states, in a very shortened version, that loan officers and mortgage originators can only offer loans to the consumer in which they get paid exactly the same amount of money as a market priced fixed rate loan.  In theory, this bill is designed to prevent loan officers from steering consumers to loans which pay them more but maybe aren’t in the best interest of the consumer.  In short, this is supposed to make the loan officer always offer the best loan available to the consumer from the start.

Great theory, right?  Laudible goal, sure!  In practice does it do what it is supposed to do…I guess but not really. What really happens from the way this bill is written…

CDA Loans: The Lower Cost Way to Own Today!

If you live in MD, where I do, and would like to buy a home before interest rates rise (currently 4.75 for 30 year FHA fixed) and FHA raises their mortgage insurance rates (4/18/11), but just can’t quite save up the required cash for the 3.5% downpayment, there may be a way for you to still make it work.  Its called CDA, and its a government backed program that will provide up to a $4500 interest free loan to first time home buyers who qualify for their program. 

In order to qualify you do need to have decent to good credit (620-640+), just like you would need to get any other loan in today’s mortgage market.  CDA also requires that you take a class on homeownership and credit prior to signing a contract to buy a home (though this class can be taken online in about 15 minutes unless you are looking to buy in Anne Arundel County, Baltimore County, Hartford County, or Baltimore City, which require in person classes at a certified housing agency).  

What this downpayment help does for you as a buyer is it allows you to buy a home with much less of your own money needed up front, and without increasing your payment over the life of the loan.  If you were looking to buy a home that was $200,000 you would normally need $7000 for downpayment.  With a CDA loan, $4500 would be paid for you, leaving you with only $2500 of your own funds to come up with for downpayment.  Since CDA is still an FHA product, you can ask the seller for up to 6% closing cost help to allow you to complete the entire transaction for just that remaining $2500 downpayment.

The $4500 becomes a second mortgage after your home purchase, but it is not required to be paid on in any form, nor does it accrue interest while you wait.  When you go to sell the home, the loan must be paid back in full out of your proceeds from the sale, but until that point it is almost like you never have to deal with it!

If you do not live in Maryland, there are probably other programs like this one that may be able to help you as well.  Ask a local Realtor or lender for more information.

I hope this helps you to make your home ownership dreams a reality, so Keep Dreaming!

Higher Credit Scores May Soon Be Needed to Buy a Home.

Yesterday, I talked about how many people cannot qualify for home purchases due to having sub 620 credit scores, which is the current limit to qualify for a mortgage.  This limit, even though it already gets rid of over 1/3 of our population is being deemed as not restrictive enough, and we may see it go up to 640 within the next few months.

There are five major servicers in the mortgage industry (Bank of America, Wells Fargo, GMAC, Citimortgage and BB&T) along with some minor servicers.  As we have seen in the past, once one servicer sets a standard the others follow in a domino effect.  In the past few months two of the major servicers have increased the minimum FHA credit score from 620 to 640.   As of Monday, Bank of America announced that they will increase to a minimum of 640 effective 10/4/2010.  We still have two of the major servicers  holding at 620 but our sources are telling us that they could go to 640 within the next few weeks.

What does it mean to you?   Right now we are still at 620, but there is a very good possibility that the 640 will become the new lower qualification limit in the weeks to come.  So this is a call to action for you if you planned to buy but have lower credit scores between 620-639.  You need to look at purchasing NOW because if this change is implemented it could take you out of the market if your score does not meet the 640 benchmark.

In the past few weeks we have seen FHA raise their MI costs on buyers and the credit score limits start to creep up. You may have already lost the best deals (since FHA’s MI change enacts this coming Monday), but you can still get in before the lending criteria gets any tighter or rates start to go back up (which they are bound to do eventually.  As the saying goes, he who hesitates is lost, so don’t lose your chance to get into a home during this great market.