Lone Star Mortgage Solutions
 Proudly Providing Texans with Purchase, Home Equity, and Refinance Loans

 

 

 

1. How does my credit score effect my interest rate. Answer
2. What is the difference between a fixed-rate loan and an adjustable-rate loan? Answer
3. How is an index and margin used in an ARM? Answer
4. How do I know which type of mortgage is best for me? Answer
5. What does my mortgage payment include? Answer
6. How much cash will I need to purchase a home? Answer

Q : How does my credit score effect my interest rate.
A :

 The Credit Score Rating:

Obtaining an affordable mortgage depends not only on what the borrower feels they can afford but, more importantly, on what a loan underwriter says they can afford.  Before a commitment to lend large sums of money is issued, we must be assured that your borrower can afford to repay the loan and that the value of the property is sufficient collateral to guarantee repayment of the loan in case of default.

Lenders, look at a borrower’s credit report and credit references to determine how much credit they have available, what types of credit are available, how timely they’ve made their payments, and how much their total monthly obligations will be if they receive this new loan.<?xml:namespace prefix = o /><?xml:namespace prefix = o />

Good credit can be as important as money in the bank.  When a borrower wants to buy or refinance a home, their credit report carries a lot of weight with the mortgage lender.  Their rating is not based on good character or good intentions – there is nothing personal about it – it is simply a piece of paper that represents how they handled credit in the past – especially the last 2 years. Today, there are three major credit reporting agencies, Experian, Equifax and TransUnion.  The lender generally requires reports from all three then uses the “middle credit score” for qualifying the borrower.

A borrower’s credit history is perhaps the single most important element when evaluating a loan request.  The credit history often reflects the borrower’s attitude toward credit, and it can determine their credit worthiness and the type of mortgage they qualify to receive.  The loan underwriter looks carefully at credit history in order to get a feel for the borrower’s propensity to repay the new loan.

Like 4 chair legs hold up a chair, 4 items support the mortgage – and each must be verified in order to determine the amount of risk the lender will be taking.  They items are: (1) Credit, (2) Income/debt ratio, (3) Job Stability, and (4) Cash available for a down payment and closing costs. Lenders are most interested to see if the borrowers have a good credit record (pattern) during the most recent 2 years. 

The borrower’s Credit rating is used to determine whether to give them a loan or credit card.  The lender examines the credit history to evaluate how promptly they pay their bills - they look at the amount of income, whether they own a home, and how many years they’ve worked at their job.  Credit problems during the previous 2 years probably require they use a “sub-prime” loan program with a somewhat higher interest rate to compensate for the lender’s increased risk. 

The loan underwriter looks at the borrower’s future ability to repay the new loan.  If a borrower has multiple credit lines and every one is maximized, there is a good chance the borrower is headed for problems that could include default on a mortgage.  The underwriter will likely deny this loan unless there are compensating circumstances (like a borrower who just completed school and started a new job which will allow them to repay their debts and make the new loan payments). 

Note: If a borrowers credit report is inaccurate, the borrower will want to get it repaired.  If you are interested in credit repair you may fill out the form at the end of this page.  Often, within a few months, a borrower’s credit grade can be significantly improved. 

Mortgage professionals understand that credit repair is not a silver bullet.  Credit repair is only part of the picture.  Restoring good credit also includes reducing revolving account balances and avoiding certain types of borrower activity.

Here are the 10 leading factors that negatively affect a borrower’s credit score (and the lender’s willingness to fund the loan).

  1. Serious delinquency
  2. Public record or collection filed
  3. Derogatory public record or collection
  4. Time since delinquency is too recent
  5. The level of delinquency on the accounts
  6. Number of accounts that are delinquent
  7. Amount owed on the accounts
  8. Proportion of balances to credit limits on revolving accounts is too high
  9. Length of time accounts have been established
  10. Too many accounts with outstanding balances

The system is heavily weighted toward recent consumer behavior.  The more recent, the more it affects the credit score.  One borrower with a recent 30 day late payment saw his score jump almost 100 points when that late was deleted from the credit report!

A borrower can avoid certain activities that hurt the score.  (1) Don’t open new accounts or apply for additional credit.  New accounts have a downward effect on the credit score.  (2) Pay down the balances on existing accounts to where they owe less that half (below 50%) of the total credit that is available on the account.  Note: it is not necessary to pay them below this level, even though a 40% balance-to-limit ratio is even better just to make sure any fluctuations do not go over the 50% level.  (3) Make all home financing applications within a 14-day period to avoid a negative impact on the credit score from multiple credit inquiries.  The law allows a 14-day window without penalty for credit inquiries for a single purpose (house loan or car loan, etc.).

Credit Scoring: 

Payments received 30 days or more past the due date are recorded as late payments.  A mortgage lender is not usually concerned with isolated minor late payments – they are looking for payment “patterns.”   On a credit report you will find the Credit Score also referred to as the “FICO” score.  FICO is the acronym for Fair, Isaac and Company, the group that developed the criteria for establishing an individual’s credit risk expressed as a numerical score.  Experian uses the “FICO” score, while TransUnion uses an “Empirica” score, and Equifax uses a “Beacon” score. Although each agency has their own system, lenders still refer to all of them as “FICO” Scores.   

Since each agency uses its own system, they will all come up with a somewhat different number for the same borrower.  Therefore, the mortgage lenders generally use the “middle” score as the most accurate for their risk assessment.  Typically, better interest rates (and lower down payments) require a “middle credit score” of 620 or higher.  The higher the score, the fewer loan documents they’ll need to provide and the faster it can be approved and closed.   

Credit scores range from a low of 300, to a high of 850.  The higher the middle score - the LOWER the risk to the lender.  This is why it makes sense to structure loans around the borrower’s credit.  If one borrower has a low score, we may find that taking him or her off of the loan might qualify the borrower for a better program - provided we don’t need their income to qualify.  Functionally, the scoring system was created to simplify the mortgage approval process.   

The mortgage industry has shifted its underwriting criteria towards a “minimum credit score” system. This means that if the score falls below the minimum for a particular loan, the borrower will not receive an approval under that program.  As a useful guideline, if the middle credit score falls below 640, there are very few lenders willing to even consider the loan. 

400 – 499        =          Very Poor                    Mortgage Loans not available

500 - 559         =          Poor                            Mortgage Loans not available 

560 - 579         =          Marginal                      Mortgage Loans not available

580 - 619         =          Fair                             Few Mortgage Loans available 

620 - 659         =          Acceptable                   Can get FHA and VA loans

660 - 679         =          Good                           Most loan programs available

680 - 699         =          Very Good                   Low rates and down payments

700 – 719         =          Excellent                       Less documentation required

720-Higher       =          Outstanding                  All loan programs available 

The scoring system was developed after analyzing millions of actual mortgage and credit files and tracking them for many years.  Scoring uses algorithms to give a different weight and value to over 100 different credit factors, any of which can change depending on the types and relationships of the factors.  Again, I highly recommend you contact us as typically we are able to improve your credit score by 50 – 100 points within 90 days. 


How Credit Scoring Helps a Lender:
 

It allows a lender to base decisions on credit performance and provides objective and consistent assessment - so the applicant is offered the best loan products they qualify to use.  Credit scoring helps remove the potential for bias, and applicants with lower scores can receive favorable programs and terms which increase the lender’s market share.   

Also, scoring gives lenders a method of controlling the delinquency rate and charge offs while speeding up the loan decision. Lenders can relax other loan criteria and accept more loan applications because they’ll have a larger pool of performing loans.  Scoring makes more credit available by helping lenders control losses and evaluate risk. 

What Are the Lender’s Risks? 

Generally any score under 620 represents an increased risk to the lender.  You can see from the following chart how a few points on the score will change the odds and risk to a lender.

Credit Score                              Good Payments to Bad Payment

Below 600                                           8         to         1

620 to 659                                           26        to         1

660 to 679                                           38        to         1

680 to 699                                           55        to         1

700 to 719                                           123      to         1

720 to 759                                           323      to         1

760 to 799                                           597      to         1

Above 800                                           1292    to         1 

Credit scoring indicates that the lower the credit score, the higher the risk of default (defined as borrowers who get 90 days or more behind in payments).  Conversely, the higher the credit score, the lower the risk to the lender.  Lenders still make loans to borrowers with low credit scores, but they must charge a higher interest rate and require a larger down payment to offset the additional risk. 

Credit Scoring Helps a Borrower

It evaluates all applicants by the same criteria – opinions do not enter the scoring equation.  Only changes in a consumer’s credit history will change the score.  It also offers more rapid loan decisions and reduces the documentation required for those with a better credit history. In summary, it makes more credit available by helping the lender control losses and costs.

Common Mistakes When Getting a Mortgage

1.  While getting approved for a mortgage, DON’T buy a new car or appliance on credit. 

2.  DON’T change jobs or quit a job just before you close the mortgage loan. 

3.  DON’T start buying furniture when you get approved for the loan. 

4. When refinancing, MAKE the house payments while the loan is in process.

Credit Graded Mortgages

 

“A” Credit – Loans to 100% of Appraisal

·         Excellent credit past 2 years – 5+ years since bankruptcy

·         Job Stability – over 2 years in same profession

·         Debt Ratio – House payment + Installment + Revolving under 40%

 

> Lowest Down Payment

> Best Interest Rates

 

“AX” Credit – Loan to 95% of Appraisal

·         Good credit past 2 years -  5 years since bankruptcy

·         Job Stability – over 2 years in same profession

·         Debt Ratio – House payment + Installment + Revolving under 45%

 

> Little Higher Rates

> Little Higher Down

 

“A-“ Credit – Loan to 90% of Appraisal

·         Good credit past 12 months – 4 years since bankruptcy

·         Job stability – over 2 years in same profession

·         Debt Ratio – House payment + Installment + Revolving under 45%

 

> Little Higher Rates

> Little Higher Down

 

“B” Credit – Loan to 80% of Appraisal

·         Fair credit past 12 months – 3 years since bankruptcy

·         Job stability – over 18 months in same profession

·         Debt Ratio – House payment + Installment + Revolving under 50%

 

> Higher Interest Rates

> Bigger Down Payment

 

“C” and “D” Credit – Loan to 70% - 75% of Appraisal

·         Poor credit past 12 months

·         Job stability – 12 months in same profession

·         Total Debt Ratio 55% – 60%

 

> Higher Interest Rates

> Bigger Down Payment

 

Credit after Bankruptcy:

Bankruptcy has a very negative effect on the credit score, and stays there for 10 years.  However, that does not mean a borrower cannot improve their score!  There are still ways to maximize the score even if they had a bankruptcy.  It is very common to see trade lines (accounts) that were included in the bankruptcynot showing “Account Included in Bankruptcy” on the credit report.

What does that mean?

Unless the credit report shows the trade line was part of the bankruptcy, it is still being used to calculate a borrower’s credit score and therefore, keeping the score lower!  Re-classification of these accounts to show they were part of the bankruptcy can improve the credit score because the formula does not include discharged accounts!  The very first step after a bankruptcy is to make sure (re-list) all accounts that were included are listed that way on the credit report.

The next step

As a borrower make sure you have no post-discharge derogatory activity on any accounts (new or old).  Nothing brings down a score like late payments after a bankruptcy, however, re-listing accounts that do not show they were included in the bankruptcy, can produce very positive results.

Mortgage guidelines dictate the applicant must establish at least three new accounts since bankruptcy (so don’t let the applicant just start paying cash).  Use “mainstream” credit lenders to rebuild the credit, and always pay early or on time - and add a little extra to the payment.  The applicant’s can only start rebuilding credit after they receive their bankruptcy discharge papers.

  • Make sure applicants have a checking and savings account and don’t bounce checks
  • Open several charge accounts and keep the balances under 40% of the credit limit
  • Use a Credit Union and make small loans then pay them back ahead of schedule
  • Deposit funds into a CD to guarantee the loan if necessary
  • Pay bills a few days early – especially mortgage and car payments
  • Get new credit cards – YES IT’S POSSIBLE

With even bad credit an applicant can get a “secured” credit card. However, some of these are not “banks” - and as “finance” company cards they don’t help the credit as much.  Some banks give credit equal to the security deposit – while others may give credit up to double the security deposit.

There is a national organization that provides assistance to people who have had to go through bankruptcy.  Contact us about a way to obtain a unsecured pre-paid credit card and earn money while you spend money.  How can you beat it.  Improve your credit score, spend money and make money in the process.  

Reporting Agencies

TRW (Experian)        Main Number 800-682-7654

Dispute Department, <?XML:NAMESPACE PREFIX = ST1 /><?xml:namespace prefix = st1 /><?xml:namespace prefix = st1 /><?xml:namespace prefix = st1 /><?xml:namespace prefix = st1 /><?xml:namespace prefix = st1 />PO Box 2106 Allen TX 75013-2106 Phone 888-690-8086 and Fax 972-390-3854

Consumer Assistance, 660 Central Expressway Exit 28, Box 949 Allen TX 75002-0949 Phone 1-800-422-44879 or 1-800-355-5817

Trans Union                Main Number 800-888-4213

Consumer Relations 1551 E. Orange Thorpe Ave. Fullerton, CA 92632 Phone 800-916-8800 and Fax 714-447-6032

Home Office PO Box 390, Springfield, PA 19064-0390 Phone 800-888-4213 and Fax (312) 408-1050

CBI/Equifax               Main Number 800-759-5979

Information Services PO Box 105518, Atlanta GA 30348 Phone 800-882-0648 and Fax 770-375-2651

Consumer Assistance 652 N. Belt E. Street 133, Houston, TX 77267-4404 Phone 1-800-392-7816 or 800-685-1111

 

 
Q : What is the difference between a fixed-rate loan and an adjustable-rate loan?
A : With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an adjustable-rate mortgage (ARM), the interest changes periodically, typically in relation to an index. While the monthly payments that you make with a fixed-rate mortgage are relatively stable, payments on an ARM loan will likely change. There are advantages and disadvantages to each type of mortgage, and the best way to select a loan product is by talking to us.
 
Q : How is an index and margin used in an ARM?
A : An index is an economic indicator that lenders use to set the interest rate for an ARM. Generally the interest rate that you pay is a combination of the index rate and a pre-specified margin. Three commonly used indices are the One-Year Treasury Bill, the Cost of Funds of the 11th District Federal Home Loan Bank (COFI), and the London InterBank Offering Rate (LIBOR).
 
Q : How do I know which type of mortgage is best for me?
A : There is no simple formula to determine the type of mortgage that is best for you. This choice depends on a number of factors, including your current financial picture and how long you intend to keep your house. Lone Star Mortgage and Real Estate Solutions can help you evaluate your choices and help you make the most appropriate decision.
 
Q : What does my mortgage payment include?
A : For most homeowners, the monthly mortgage payments include three separate parts:
  • Principal: Repayment on the amount borrowed
  • Interest: Payment to the lender for the amount borrowed
  • Taxes & Insurance: Monthly payments are normally made into a special escrow account for items like hazard insurance and property taxes. This feature is sometimes optional, in which case the fees will be paid by you directly to the County Tax Assessor and property insurance company.
  •  
    Q : How much cash will I need to purchase a home?
    A : The amount of cash that is necessary depends on a number of items. Generally speaking, though, you will need to supply:
  • Earnest Money: The deposit that is supplied when you make an offer on the house
  • Down Payment: A percentage of the cost of the home that is due at settlement
  • Closing Costs: Costs associated with processing paperwork to purchase or refinance a house
  •