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What is a FICO score?
Your credit history has been reduced to a three-digit number, and you should know what that number is, especially if you plan on purchasing anything on credit soon.
This three digit number is most commonly nicknamed a FICO score. This is an acronym for Fair
Isaac and Co. The folks at FICO will not disclose how these scores are arrived at, however, FICO Claims to use 30 elements to determine risk.
We know for sure that they consider Credit Delinquencies (Have you been late on car payments?
Credit Cards? Your Mortgage?) Amount of Outstanding Debt, (Are you 'maxed-out' on your credit cards? Do you have several car loans?) Credit History, (How long have
you used credit? Do you have a long standing history of paying your bills?) Credit Inquiries, (Have you applied for 15 new Visa cards this month? Department Stores? Shopping for a car?)
Do I have a good FICO Score? Your score will fall some where between 300 and 900 with most consumers falling somewhere between 500 and 800.
A FICO in the 500's is a very low score, which translates to lenders as high risk.
In the 600's is considered a medium score. Your payment history will be closely scrutinized and written explanations regarding the derogatory credit will likely be required prior to issuing any credit. Many mortgage lenders will not lend to someone with a FICO of under 640.
A FICO of 680 or higher is considered a high score, again translating to low risk for the lender and lower costs to the consumer.
There is some very powerful proof of the direct correlation between these numbers and the risks involved.
For example, based on FHLMC (Freddie Mac) 1994 loan purchases with repayment performance measured through April of 1996:
Loans with FICO's of 661or greater had less than 1% foreclosures.
Loans with FICO's of 620 to 660 had a foreclosure rate of just over 2%
The clearest illustration of the value of these scores is the fact that loans with FICO's of 619
or less had over 8% foreclosure rate.
So this isn't to say that if you have a low FICO you can't get a loan. In financing a home,
you will just pay a bit more for it because there is approximately an 8% chance that you will go into foreclosure. In fact, if you do discover you have a low FICO, you are in esteemed company. Two years ago,
Federal Reserve Governor Lawrence Lindsey was denied a Toys R Us credit card for a low FICO.
Can I "fix" my credit? You may want to begin your research by ordering a credit report from ALL THREE of the reporting bureaus below:
Equifax Credit Information Services
Atlanta, GA (800) 685-1111
Trans Union Corporation
Springfield, PA (800) 851-2674
TRW Information Services
Chatsworth , CA (800) 682-7654
This way, if there are any errors on your report you can get them corrected. Credit bureaus
are required to respond to your written request within 30 days. It is important that you know that even cleaning up any discrepancies with the credit bureaus will not immediately raise your FICO. Generally, we are seeing a 60 to 90 day time span for either derogatory or positive marks to significantly impact a FICO.
If you find yourself needing to "repair" your credit, please keep in mind that the Credit Repair Companies"
can only correct errors. They cannot erase a poor credit history. If the information shown on your report is accurate, no one can remove it until the 7 to 10 year reporting period is up. It may make more sense (I promise it will be cheaper) for you to work with the bureaus yourself.
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Simple steps to a successful purchase
January 14, 1998
By Dian Hymer
The first step is to find out what price you can afford to buy. The easiest way to do this is to make an appointment with a loan agent (who works for one lender) or a mortgage broker (an independent agent who arranges loans for many lenders). Ask the agent or broker to prequalify you for a home loan. There is no obligation to apply for a loan with the person who prequalifies you.
The next step is to figure out what you want and need in a house. This should include both the essentials,
such as the number of rooms you need, and those nonessentials that you'd like to have. Then, narrow down where you want to live. If you have no idea, ask friends and colleagues at work if they're happy where they live.
Ask the lender who prequalified you to recommend the best areas that have houses in your price range. Drive around neighborhoods. Start visiting open houses in the areas you're considering.
When you know where you want to buy. you're ready to choose a real estate agent to help you find the
house. Ask colleagues for recommendations. Sellers usually interview several agents before they select one to work with. Buyers should do the same, unless they instantly hit if off with an experienced agent who specializes
in the area they want. It's wise not to use an out-of-area agent. If you're looking in several different marketplaces, use one agent for each market.
If you're buying in an area of new housing projects, you may not need an agent. You may have no alternative
but to use a member of the sales staff for the housing development where you want to buy. Some new home projects do cooperate with outside agents. If so, your agent will probably have to register you with the sales office.
The search itself may go quickly, or it could take months. This will depend on how aggressive you
are. You should look at every house that comes on the market that your agent thinks might work. How long it takes to find a home will also depend on how much inventory there is on the market. Try to be flexible with your
search criteria, particularly on the nonessential elements. Be firmer about the essentials on your wish list.
FIRST-TIME TIP: Finding the house is only part of the process. Once found, you must then negotiate
the purchase contract with the sellers. Make sure your contract includes contract contingencies to protect you. Minimally, your contract should have an inspection contingency that allows you to complete any inspections
of the property that you deem necessary. You'll also need a financing contingency, unless you're paying all cash. This contingency should provide a time period for you and the property to qualify with a lender. You may want this condition
to stipulate that the property must appraise for the purchase price. The contract should also include a clause that specifies that the property title condition be acceptable.
When the buyers have satisfied their contingencies, the contingencies are removed from the contract. Then
closing documents are prepared and signed by the buyers and sellers. Closing occurs when title to the property transfers from the sellers to the buyers. If a contingency can't be satisfied, the buyers' deposit money is usually
returned to them and the contract is canceled.
THE CLOSING: Buyers are often surprised at the time, energy and patience that are required to buy a house. It's a major undertaking, the results of which are immensely gratifying.
Distributed by Inman News Features
1998 Inman News Features.
All Rights Reserved.
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In an increasing interest rate market, is it still a good time to buy?
In a word YES! Interest rates change every day, sometimes several times a day. Many borrowers prefer to 'lock in' an interest rate as soon as they have found a property.
By locking in the rate you are ensured that during your escrow period if rates go up you are protected. But which rate to lock? And when? When to lock is the tricky question, ideally you could lock at the lowest possible rates at the exact right time, but this is rarely done, unless by accident. The which rate or loan program can be demystified quite a bit.
There are several good loan programs available to home buyers when rates are rising and it could save
you money to know your options.
The benefits of lower interest rates, of course, is a lower monthly payment. Additionally, buyers can
purchase more home for their budget when rates are down. For example,
on a $150,000 loan amount at 7.5% fixed interest rate, the monthly payment is $1,048.82. If
rates only go up .25% to 7.75% this increases the payments on the same loan amount to $1,074.62. A difference of $25.80 per month or $309.60 per year. If rates were to rise a full 1% from 7.5%
to 8.5% the payment on the same loan would go up to $1,153.37. A difference of $104.55 per month and $1,254.60 per year. Obviously, this kind of payment difference could dramatically affect the affordability
of a new home.
Exploring the options of Adjustable Rate Mortgages could keep your payments down so you have more
buying power in an increasing interest rate market.
Adjustable Rate Mortgages (ARM's) offer the ability to have lower payments in the first years of
the mortgage. Typically ARM's start out at about 2% to 3% below the fixed rate mortgage market and adjust annually based on financial market conditions. A 2% savings in the scenario above, from 8.5% to 6.5%
would result in a savings of $205.27 per month or $2,463.24 in the first year alone! Most adjustable rates have adjustment amount protection called 'caps' The cap will ensure that the payment does not adjust
more than a certain amount each adjustment (usually 1% or 2%) and that the payment will not increase more than a total amount over the life of the loan (usually 5% or 6%).
There are variations to the 1 year ARM described above. Many programs are currently available
for your loan payment and interest rate to be fixed for 3, 5, 7 or 10 years before adjusting. These programs give you the comfort of a fixed rate for several years, and are an excellent choice for anyone who does
not plan on staying in their home for 30 years.
If you are like most people, buying a home will involve obtaining a home loan. This process can
be grueling or a piece of cake, depending on how prepared you are. Most Realtors will recommend that you get 'pre-approved' or 'pre-qualified' prior to shopping for a home. You will want to set up an appointment
with a lender and arrive at the appointment equipped with the following information:
- Most recent pay stubs from all jobs, covering one month's pay.
- Your W2 forms and tax returns from the past 2 years.
- Copies of bank statements showing your down payment (or a portion of it) on deposit.
With this information your lender can make an immediate determination regarding how much of a loan
you qualify for, and present you with all the options available to you. If you know you have had some credit problems (ex. A bankruptcy) you may want to ask the lender when you set up the appointment exactly what additional
paperwork, if any, will be required. The more information you are able to provide in the beginning the less surprises and anxiety you will have during the process of your home loan. Once you've been pre-approved,
there's nothing left to do except GO SHOPPING!
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4 point checklist for 1st time buyers.
Question: My wife and I have decided now is the right time to buy a home, do you have a checklist for first-time buyers?
Answer: To prevent making a serious mistake, here are the four most important steps to take
when buying a home.
| 1. |
Price range. Before shopping for a home, shop for a mortgage. Get pre-approved by the actual lender (not just pre-qualified, which means only "we think you can
get a mortgage"). Then you'll know the price range you can afford. |
| 2. |
Neighborhood. Inspect at least 10 homes within your price range in various neighborhoods throughout your town. Sunday open houses are a great opportunity to quickly
inspect many houses. |
| 3. |
School Quality. Even if you don't have children, check the school quality where you are considering buying. Good schools help home value appreciation; bad-quality schools
stifle market value appreciation, because middle-class families won't move into a neighborhood with bad schools. |
| 4. |
Physical Condition. With all this information, narrow your choice down to a specific neighborhood. Then be sure to include in your purchase offer contingencies for (a) mortgage
financing (just in case the house doesn't get appraised at your offer price) and (b) your approval of a professional inspection report so you don't get stuck with a "lemon" house. |
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Action as dual agent must be disclosed.
Question: We wanted to buy a home in a great neighborhood where homes rarely come up for sale, so we signed an agreement with a buyer's agent. She found
us a home, which we bought in October. At a holiday party, we met the sellers. They told us they paid a 3% sales commission. Since we paid our buyer's agent a 6% commission, shouldn't he have told
us he was also being paid by the sellers even though there was no listing?
Answer: Yes. Your buyer's agent was acting as a secret undisclosed dual agent.
This is illegal when not disclosed to both the buyer and the seller. You should report the matter to your state real estate license officials for discipline of the agent, who will probably lose her license.
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Referral bonuses - are they legal?
Question: When we sold our home in the New York area, the real estate agent who listed our home for sale referred us to an agent with the same franchise in our
new location. Everything worked out great. When I asked the second agent if my agent from New York would receive anything from this sale, she vaguely replied that he gets a referral fee. Now I'm thinking
perhaps we overpaid for our new home so our agent could pay that referral fee. Is real estate fee splitting illegal?
Answer: Real estate referrals are big business. They are perfectly legal.
All you agent in New York had to do was pick up the phone and give the information on your move to a real estate referral office. When you bought your new home, your New York agent received a referral fee of about
10% of the selling agent's commission.
Referrals really aren't fee splitting. The home buyer (or seller)
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"Shopping" victims have no legal recourse.
Question: We make an offer to buy a house through the listing agent we met at a Sunday open house. When she prepared our offer, we didn't question the five-day
period for the seller to accept. On Monday, she told us the seller was considering our offer. But on Thursday she phoned to tell us the seller accepted a better offer through her same firm. Was this
illegal?
Answer: No. You were an "offer shopping" victim. Your offer should have been
made valid for just one day. Then the listing agent wouldn't have had time to "shop" your offer to get another buyer willing to offer more. But offer shopping is not illegal.
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Condos are usually better than co-ops.
Question: I received a tremendous job promotion. The bad news is that it's in New York City. My wife and I decided I should accept it, and she is looking
for a place for us to live. To avoid a long commute (and since our two daughters are grown), we decided to live in the city. She has inspected several condominiums and co-ops that are acceptable. What's
the difference between a co-op and a condo? Which is best?
Answer: Except for the obvious structure differences, a condominium is much like a single-family
house. You have individual ownership of your unit and can finance it with an individual mortgage.
A cooperative apartment is much different. A nonprofit corporation owns the building.
The shareholders are the co-op apartment owners, who have proprietary leases for their units. The big disadvantage is that financing is more complicated than for condominiums. As a result, co-ops usually sell for less than comparable condominiums.
My recommendation is to buy a condominium rather than a comparable co-op.
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Pre-qualified couple can't get a mortgage.
Question: A mortgage broker took our loan application and said we are pre-qualified for a mortgage. Our offer to buy a house was accepted. We paid a $2,000 deposit to
the seller. But when the mortgage broker submitted our loan package to several lenders, it was rejected because we lost a house by foreclosure a year ago. We forfeited our $2,000 deposit. Is the mortgage broker liable to us for the
$2,000 because he said we could get a mortgage?
Answer: Mortgage pre-qualification means nothing. As I constantly advise, get pre-approved for a mortgage before shopping for a home. I doubt the mortgage broker has any liability to you, but you could sue him in Small Claims Court for $2,000 and let the judge decide.
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It's worthwhile to pay your own taxes.
Question: We are in the process of buying our first home. The lender asked if we want our insurance and property taxes included in our mortgage payment. What do you advise?
Answer: Don’t do it. Unless you are required to include insurance and property taxes in your mortgage payments, such as on a VA, PMI or FHA mortgage, you should pay theses bills directly. Some mortgage loan servicers overcharge for these escrow impounds. This is "free money" you give to the loan servicer. (A few sites require paying very low interest on these escrow impounds.)
For example, I have a mortgage where the lender collects one-twelfth of the property taxes with each monthly
mortgage payment. Last month, the loan servicer refunded $138 overcharges to me. But the loan servicer has several hundred thousands mortgages. Imagine how many millions of dollars of "free money" this lender uses without
charge to earn investment profits.
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