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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Top
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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Top
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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Top
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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Top
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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Top
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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Top
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. Back to Top
The Pre-Approval Stages.
|
We recommend
that before you begin your house hunting, you begin the loan
pre-approval process. Getting pre-approved requires that a
lender verify your financial information, and it serves as
their commitment to lend a specified amount based on that
information. It will give you a number of
advantages:
|
 |
When you do find a property,
sellers will take your offer more seriously given that you
have a lender that has committed to backing your offer.
|
|
It does give the assurance that
you're looking at homes you can confidently afford to finance.
Your efforts will be focused on properties that match your
financing abilities.
|
|
You'll have an edge over other
buyers who aren't pre-approved. In situations where there are
multiple offers on a property, this can be the difference
between having your offer accepted or losing the property to
another buyer.
|
|
We're eager to help you get
pre-approved either through us or any other lender. If you're
interested, we can begin immediately, just call me driectly at
714-206-2109.
 |
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