Know your credit score and what makes your credit score

Benjamin.Klar@usmortgage.com

www.KlarMortgage.com

Direct (207) 514-0753

How Your Credit Score is Compiled
Most people know that they have a credit score and that they can even get theirs for free. However, many people don't know how their credit score is compiled. Knowing this will help you decide the best ways to manage your financial affairs while focusing on having strong credit and a strong credit score.

What is FICO?

The FICO score is the most widely used credit score model in the country. It is named after Fair Isaac Corporation, who devised this statistical model to help inform lenders. Your FICO score helps financial institutions decide your credit worthiness and can affect everything from your ability to secure a loan to the rate of interest you will pay upon qualifying for that loan.

The three major credit bureaus each have their own version of credit scoring, which means that you actually have not one, but three FICO scores. While your score will vary based on how the bureaus compile their data, the five major components that make up your score are consistent. Here is a typical weighting of those components for the population at large.

Here is the breakdown

35% Payment History
The good news: Paying bills on time is good. The bad news: Missing payments can really sting. If you tend to miss payments, you may want to consider signing up for automatic bill pay to ensure payments are made in a timely fashion.

30% Amounts Owed
An assessment of how much you owe (on mortgages, equity loans, credit cards, car loans, etc.) and how much credit you have available. For example, if you have five credit cards and each has a $20,000 limit, you have $100,000 in available credit. The bureaus are looking for a responsible and low % use of that available credit.

15% Length of Credit History
The longer you've had credit, the better your score will be. If you've had credit with the same issuers for lengthy periods, even better. Jumping around from card to card is not good for your score.

10% New Credit Accumulation
The credit bureaus look at the number of accounts you've opened recently, the number of credit inquiries made about you by creditors and the time that has elapsed since those inquiries.

10% Types of Credit Used
This is the mix of the types of credit you have. Typically, a mix of revolving credit (credit cards) and installment loans (mortgages, car loans etc.) indicates that you know how to manage your financial affairs.

7 Obstacles and credit considerations that could prevent you from getting the best mortgage interest rates.

Benjamin.Klar@usmortgage.com

www.KlarMortgage.com

Direct 207-514-0753

7 Obstacles that could prevent YOU from getting the BEST mortgage rates and programs.

Homes are bottoming out in many markets (according to Zillow’s forecast, which tracks the value of more than 100 million U.S. homes) -- meaning that now should be the time for buyers to think about getting into or re-entering the market and for owners to consider refinancing to a lower mortgage rate. When shopping for a mortgage everyone wants the best available terms because this is typically the largest purchase in any person's life.

So, what are the obstacles that could be keeping you from receiving the best mortgage rates?

1. Self-Employment

Due to the irresponsible lending practices that took place some years ago, lenders now expect borrowers to be able to fully document everything, starting with assets and income. This is not a problem for salaried employees, as they can easily produce W-2 earnings statements. However, this is slightly more difficult for self-employed individuals.

The solution: Gather together your annual and quarterly federal income-tax returns from the past two or three years to prove your Schedule C earnings. Wage earners should produce several years of tax returns if they have a recent employment gap. Investment statements, bank savings accounts, property deeds, and appraisals are all additional ways to document your assets.

2. A credit score below 740

Most lenders require a minimum FICO score of 680 to obtain a mortgage loan, but 740 is the recommended FICO score for obtaining the best possible rate.

The solution: Look through your credit reports from the three main credit-reporting bureaus – Equifax, Experian, and TransUnion – to search for errors that unfairly hurt your score. Also look for black marks such as paid-off loans not reported as such, low credit limits, collection items, and any unfamiliar accounts or derogatory items resulting from identity theft. Dispute and fix anything that does not look right to you. Your credit score will improve once the credit bureaus clean up and correct any of this information.

3. Carrying too much debt

Typically, lending criteria limit the size of your monthly mortgage payment to 28% of your monthly gross income. Your total household debt payments should not be more than 36%. The lowest rates are saved for borrowers who come in below those targets.

The solution: Find a solution to boost your income to pay off your debt quicker. For example, a spouse who is not working could take a part-time job or turn a special skills hobby into income. Moreover, avoid taking out any new loans or opening up a new credit card account. Steer clear of big purchases such as cars, electronics, or appliances. Apply your new extra income to your existing debt, which will then give your balance sheet a double kick.

4. Putting less than 20% down

The old rules are back; this refers to the traditional, pre-bubble mortgage standards known as the four C’s: credit, collateral, capacity, and capital. A down payment is the cash amount of collateral that you put at risk, along with the property’s appraised value, which the lender can take if you stop making payments on your mortgage.

The solution: Find ways to increase your down payment. If you can, sell less-liquid assets and keep more-liquid assets to meet lenders’ high cash-reserve requirements. You could also borrow from your 401(k). If you do access your 401(k) you will have to report it on your application. The payback amount becomes a commitment against your available monthly income in calculating how much you can afford for mortgage payments.

5. An existing mortgage that is under water

If you would like to make your home payments more manageable but your current mortgage is bigger than your home’s market value, you may be hindered by problems #3 and #4.

The solution: The Home Affordable Refinance Program (HARP) could be considered if your mortgage was sold before June 2009 to the Federal National Mortgage Association (Fannie Mae). If your loan is not owned by Fannie Mae or Freddie Mac, you do not qualify for HARP. You could qualify for other assistance programs though.

6. Being denied by one or two lenders

Mortgage standards can be the same across the marketplace and from one lender to another. But don’t let it upset you if the first couple of lenders reject you or offer you rates that are much higher than you’d like.

The solution: You should still shop around. Lenders write a certain percentage of mortgages to have in their own portfolios with no intention of ever selling them to Fannie or Freddie. Try to figure out what went wrong and fix it promptly. Try shopping at banks, savings and loans, and your credit union.

7. Having low cash reserves after closing

Certain lenders require you to have cash reserves and/or easily liquidated property or investments equal to six months’ carrying cost – up from two – after the purchase is closed, in case you suffer from future financial problems.

The solution: Lenders want easily liquidated assets and cash on hand. These include bank deposits and CDs, mutual funds, and the cash value of your current life insurance. Up to 70% of your retirement savings can count as well. Keep in mind that any type of loans from your plan count against lose assets.

Tags - Mortgage Rate, Interest Rate, Best Mortgage, Credit, Mortgage Program

How to get a Mortgage when you have Student Loans

Benjamin.Klar@usmortgage.com

www.KlarMortgage.com 

Direct # (207) 514-0753

How to get a Mortgage when you have Student Loans

For borrowers attempting to qualify for a home loan, debt matters. Student loans, however, may deserve special consideration.

For many recent graduates, student loans can be a major roadblock to the home purchase process. An August 2012 study, ‘’Denied? The Impact of Student Debt on the Ability to Buy A House’ was released by Young Invincibles, a policy research organization that focuses on young adults. The study found that student loans were a limiting factor for many would-be mortgage borrowers.

However, some lenders say student loans no different than any other type of debt and don’t raise any red flags on mortgage applications.

Student loans are “just another debt obligation that’s very common these days,” said Justin Lopatin, a private mortgage banker at PERL Mortgage in Chicago.

The facts about student loan debt aren’t pretty.

Student loan debt is growing at a rapid rate. Between 2007 and 2010, student loan debt increased almost all demographics and economic categories. In 2010, a record-breaking 40 percent of household heads age 35 or younger owed money on student loans. 

Meanwhile, credit bureau TransUnion reported that the average student debt per individual increased 30 percent, from $18,379 in 2007 to $23,829 in 2012.

Calculating your Debt-To-Income Ratio

When determining whether you qualify for a mortgage loan, lenders focus on your debt-to-income ratio (DTI), or total monthly debt payments relative to income.

Typically, a lender will examine a prospective borrower’s monthly housing expenses, student loan payments, minimum credit card payments, auto loan payments and other debts owed.

The threshold DTI is typically 43 percent; those who fall below this figure are considered qualified to borrow, while those above it are considered a default risk.

However, the FHA offers more lenient requirements for mortgage loans and may exclude student loan payments which are deferred until at least a year after the expected closing date when calculating DTI.

So what’s the solution for individuals who still owe money on student loans? Increase your income or pay down debt before you attempt to apply for a mortgage. Once you apply, any debt you pay down doesn’t count towards lowering your DTI.

Consider adding a co-signer, such as a parent, to improve your chances of being approved on a loan.

Watch out for CAIVRS

If your student loan is in default, avoid applying for an FHA, VA or USDA mortgage loan. As part of the approval process, your lender is required to check the status of the applicant’s other government-backed loans. The Credit Alert Verification Reporting System (CAIVRS) will alert the lender to any student loan defaults hiding in your past.

In addition, individuals who are still in school or going back to school should avoid shopping for a student loan during the mortgage application process. Before closing, the lender will review a copy of the applicant’s credit report; any new inquiries (such as those triggered by an application for more student loans) could seriously undermine the borrower’s chances of qualifying for a mortgage.

Why Buying a Home is Smarter Than Renting

Benjamin.Klar@usmortgage.com

www.KlarMortgage.com

Direct (207) 514-0753

1. Homeowners are their own landlord

Renters could become subjected to an unexpected eviction notice if their landlord decides to sell the home, rent the home to someone else, or otherwise end the lease. In contrast, homeowners are their own landlord; they decide what changes and repairs to make and who can live in the home.

In particular, home ownership is recommended for older people if they do not have a steady income or significant savings to draw on in the case of a sudden eviction. 

2. Homeowners can customize their own space

Whether you would like to install wood floors or remodel your kitchen, owning the space you live in means you have the freedom to do so, without worrying about losing your security deposit. Whether customizing your home is as simple as painting the walls in cheerful colors or as major as adding on a second story, the design choices are yours to make.

3. Owning a home forces you to save money

Since homeowners must pay their mortgage each month, they are required to make periodic payments that build equity in the home. Paying a mortgage is a long term investment that can take the place of spending money on luxuries such as expensive meals or shopping trips. Even if the homeowner decides to sell the home after the mortgage is paid off, there is a good chance they will walk away with a payoff, even after subtracting the costs of ownership.

4.  A fixed mortgage can't go up, unlike rent

Fixed mortgage rates cannot go up, even if the cost of everything else goes up. Homeowners who wish to protect themselves from market fluctuation or rising housing costs should protect their future by  taking out a 30-year fixed rate mortgage loan to lock in today's low rates.

5. Buying a home now equals low interest rates and home prices

Interest rates are at their lowest at the moment, and at the same time, home prices in many areas have stayed the same. In suburban areas, deals on homes are plentiful compared with the high cost of living in many cities.  Asking prices on homes went down by 0.7 percent over the last year, whereas rents went up by 5 percent (Capital Economics). Take advantage of favorable market conditions and take the plunge into home ownership.

6. Homeowners can save on monthly energy bills by making energy efficient improvements

Making energy-efficient improvements to a home such as adding insulation or upgrading an air conditioning unit can greatly reduce the monthly utility bills. Renters can still make energy-conscious choices of their own (such as turning unused lights off), but homeowners have the advantage of being able to make major structural changes, such as adding solar panels or even installing a roof made from energy efficient materials such as foam, metal or tile.

Need to Improve Your Credit? Here are 9 FAST FIXES!

Benjamin.Klar@usmortgage.com

www.KlarMortgage.com

Direct (207) 514-0753

If your scores are below 760, you may not be getting the best rates for loans or insurance

so doing some credit repair can save you money.

1. Get a credit card if you don't have one
Don't fall for the myth that you have to carry a balance to have good scores. You don't, and you shouldn't. But having and using a credit card or two can really build your scores.  If you can't qualify for a regular credit card, consider a secured credit card, where the issuing bank gives you a credit line equal to the deposit you make. Look for a card that reports to all three credit bureaus.


2. Add an installment loan to the mix
You'll get the fastest improvement in your scores if you show you're responsible with both major kinds of credit: revolving (credit cards) and installment (personal loans, auto, mortgages and student loans). If you don't already have an installment loan on your credit reports, consider adding a small personal loan that you can pay back over time. Again, you

'll want the loan to be reported to all three bureaus, and you'll probably get the best deal from a community bank or credit union


3. Pay down your credit cards
Paying off your installment loans (mortgage, auto, student, etc.) can help your scores but typically not as dramatically as paying down -- or paying off -- revolving accounts such as credit cards.

Lenders like to see a big gap between the amount of credit you're using and your available credit limits. Getting your balances below 30% of the credit limit on each card can really help; getting balances below 10% is even better.  Though most debt gurus recommend paying off the highest-rate card first, a better strategy here is to pay down the cards that are closest to their limits.


4. Use your cards lightly
Racking up big balances can hurt your scores, regardless of whether you pay your bills in full each month. What's typically reported to the credit bureaus, and thus calculated into your scores, are the balances reported on your last statements.

You often can increase your scores by limiting your charges to 30% or less of a card's limit; 10% is even better. If you're having trouble keeping track, you can set up email or text alerts with your credit card companies to let you know when you're approaching a limit you've set. If you regularly use more than half your limit on a card, consider using other cards to ease the load or try making a payment before the statement closing date to reduce the balance that's reported to the bureaus. Just be sure to make a second payment between the closing date and the due date, so you don't get reported as late.


5. Check your limits
Your scores might be artificially depressed if your lender is showing a lower limit than you actually have. Most credit card issuers will quickly update this information if you ask.

If your issuer makes it a policy not to report consumers' limits, however -- as is sometimes the case with "no preset spending limit" cards -- the bureaus may use your highest balance as a proxy for your credit limit.

You may see the problem here: If you consistently charge the same amount each month -- say, $2,000 to $2,500 -- it may look to the credit-scoring formula like you're regularly maxing out that card.

If you have an American Express charge card -- the kind that must be paid in full every month, rather than the kind on which you carry a balance -- you probably don't have to worry, because charge cards typically aren't included in the credit utilization portion of the FICO formula.


6. Dust off an old card
The older your credit history, the better. But if you stop using your oldest cards, the issuers may decide to close the accounts or stop updating them to the credit bureaus. The accounts may still appear, but they won't be given as much weight in the credit-scoring formula as your active accounts, said Craig Watts, an executive at Fair Isaac, the company that created the FICO score.

So you might want to charge a recurring bill to one of those little-used accounts or take them out for dinner and a movie occasionally -- always, of course, paying off the balance in full.

7. Get some goodwill
If you've been a good customer, a lender might agree to simply erase that one late payment from your credit history. You usually have to make the request in writing, and your chances for a "goodwill adjustment" improve the better your record with the company (and the better your credit in general). But it can't hurt to ask.


8. Dispute old negatives
Say that fight with your phone company over an unfair bill a few years ago resulted in a collections account. You can continue protesting that the charge was unjust, or you can try disputing the account with the credit bureaus as "not mine." The older and smaller a collection account, the more likely the collection agency won't bother to verify it when the credit bureau investigates your dispute.


9. Blitz significant errors
Your credit scores are calculated based on the information in your credit reports, so certain errors there can really cost you. But not everything that's reported in your files matters to your scores.

Here's the stuff that's usually worth the effort of correcting with the bureaus:

• Late payments, charge-offs, collections or other negative items that aren't yours.
• Credit limits reported as lower than they actually are.
• Accounts listed as "settled," "paid derogatory," "paid charge-off" or anything other than "current" or "paid as agreed" if you paid on time and in full.
• Accounts that are still listed as unpaid that were included in a bankruptcy.
• Negative items older than seven years (10 in the case of bankruptcy) that should have automatically fallen off your reports.

You actually have to be a bit careful with this last one, because sometimes scores actually go down when bad items fall off your reports. It's a quirk in the FICO credit-scoring software, and the potential effect of eliminating old negative items is difficult to predict.

Why You Should Consider Refinancing

www.KlarMortgage.com

Benjamin.Klar@usmortgage.com

Direct (207) 514-0753

You'd trade-up your mortgage for the same reason that you'd trade-up your job, car, or living arrangement-because circumstances change. What you need out of a mortgage today may be different from what you needed five years ago. Refinancing can achieve one or more of the following objectives: 

1. Lower your monthly payment. You can reduce your monthly payment by refinancing to a lower interest rate. Have market rates dropped since your old mortgage was funded? Has your credit improved? Has your home increased in value? Any one of these happenings could mean that you'd qualify for a lower rate. 

2. Shorten your pay-off term. Paying off your mortgage loan in 15 years rather than in 25 can save you tens of thousands of dollars in interest over the life of the loan. If you can afford the higher monthly payment and plan to stay in the home indefinitely, it's well worth it. 

3. Optimize your loan structure. Your current loan structure may no longer be suitable for you in the future. Maybe you bought your home with an adjustable-rate mortgage (ARM) and your initial fixed-interest period is about to expire. Perhaps you have a fixed-rate mortgage, but you'd like to take advantage of the more flexible option ARM. Discuss your objectives with your lender to determine the most appropriate loan structure for you. 

4. Consolidate your debt. If you're carrying a lot of credit card debt, you can lower your monthly repayments through consolidation. To do this, you'd take out a mortgage loan large enough to pay off all the debts on your cards plus the balance on your old mortgage. 

5. Fund large, one-time expenses. You can raise the funds you need by doing what's called a cash-out refinance, where you'd take out a loan that's larger than your current one. As soon as you pay off the old loan, the excess funds can be used to pay for home improvement projects, college tuition, your daughter's wedding, long-term care expenses, etc. 

Essentially, your mortgage is a financial tool that might need occasional sharpening. As life throws you new circumstances, trading up that mortgage may be one way to manage change.

Buy a Fixer Upper With a Rehab Mortgage

The 203(k) loan is an all-in-one home loan endorsed by the FHA (Federal Housing Administration) under the Department of HUD (Housing and Urban Development). If you wish to buy a home that needs a lot of repairs, you can fund both the purchase and remodeling costs using the 203(k) loan. This loan program was initiated by the FHA to drive up the sales of broken houses and help moderate or low-income families buy their own homes.

 

Generally you will not be approved for a traditional loan on a property that needs a lot of repairs. Because most lenders refuse loans for purchase of broken homes, the FHA initiated the 203(k) program.

 

The loan includes purchase costs, refinancing, repair expenses, and home improvement costs. You need to make a low down payment of a 3.5 percent on the principal amount. The total cost covered by the loan sums up to nearly 110 percent of the property including the improvements.

 

The main aim of this loan is to increase property ownership opportunities for families with low incomes. It focuses on those homes that require repairs and rehabilitation.

 

It is a great solution for first-time buyers who wish to buy foreclosed properties or government-owned properties. These loans are available at low interest rates and flexible terms of payment. They do not have rigid eligibility criteria, which makes it appealing to buyers from all classes of the society, who have varying credit scores.

Typically, most mortgage loans are provided only if the property is in good shape and has an adequately good market value. If you wish to purchase a home that requires repairs, the lender would insist that you fix up the home before providing the mortgage loan.

 

Repair costs for heavily damaged houses can be quite expensive. You cannot proceed with the rehabilitation before you purchase the house. Initially, a buyer had to acquire a housing loan to purchase a property, another loan to cover rehabilitation costs, and a new mortgage to refinance the existing loans if required. This entire process could deplete a buyer’s savings for long periods of time.

 

The FHA 203(k) program was initiated to aid this problem and combine all the costs in a single loan. The interest rates can be fixed or adjustable and exist for a long term when you can make monthly payments to clear the debt. The loan is provided on the basis of all the costs of purchase and rehabilitation including manual labor and materials.

 

The loan can be used for property purchase. After the seller is paid, the rest of the funds are added to an escrow account from which you can pay the contractor for the improvements. 

You cannot buy just any property and expect to be approved for an FHA 203(k) loan. There are certain factors that count for the loan approval process that may prove useful to you on your property search. Ideally, FHA 203(k) loans are provided for one-four unit homes that are at least a year old. When you use the rehabilitation loan, you can convert your single unit homes into two-, three- or four- unit homes. Similarly, you can also reduce the number of units in your home.

 

The eligibility criteria for the 203(k) loan are given below.

• The loan must only be used to rehabilitate residential property.
• The property should not have more than a quarter of its total floor area involved for commercial use.
• Commercial use of the property must not be a hazard to the health of the residents.

 

Depending on your necessities, you can use the loan in three ways. The obvious choice would be to finance the purchase and rehabilitation costs of a broken property. You could choose to purchase a home at a different site and move it to a new foundation. Then you could use the remaining loan amount to rehabilitate the unit. You could use this loan to refinance an existing mortgage loan and also rehabilitate your home.

www.KlarMortgage.com 

Financing for a Home Foreclosure Purchase

With so many foreclosed properties on the market these days, there are some real opportunities for careful buyers looking for a home or an investment property. But how can you arrange the financing?
When buying a foreclosed property, you can often finance it with a mortgage, the same as a conventional transaction. But that isn't always the case.  The best deals usually go to buyers who can put up cash. If you are planning to finance, there are some special programs for both investors and buyers seeking a home for their own use that are worth knowing about.

Distressed properties make up a big chunk of the residential real estate market these days. According to the National Association of Realtors, 29 percent of all previously owned homes sold in February of this year were either foreclosures or short sales, mostly the former. Nearly one-third of all home sales were cash, suggesting that a big chunk of the market is getting snapped up by investors.

The best deals on foreclosed properties are at a sheriff’s auction, which is the first opportunity to buy them once they've been repossessed. However, sheriff’s auctions don’t offer opportunities to arrange financing – you have to pay cash up front. Sheriff’s auctions can also be risky for inexperienced buyers – for example, there’s little opportunity to inspect the property beforehand, so you can’t be sure what you’re getting. You may also find there are issues with liens on the property as well.

There are some investors who will offer private loans, known as hard money loans, for the purpose of purchasing foreclosures at a sheriff's auction, but they will typically look for borrowers who have some experience at this sort of thing.

That being said, there are other opportunities to buy distressed properties that allow you to arrange financing. The main one is on real estate owned properties (REOs), which are homes the bank retained after the sheriff’s sale. These are put on the market much the same as other homes, and you can obtain a standard mortgage for them. You also have the opportunity to inspect the property before purchasing.

There are some special types of financing available for foreclosed homes offered as REOs. Fannie Mae’s HomePath program offers financing on Fannie Mae-held REOs with down payments of as little as 3 percent, no mortgage insurance and no lender-required appraisal. In addition, you can borrow up to $35,000 for repairs and renovations as part of the purchase mortgage. The HomePath program is available to both investors and persons seeking to buy a home for use as a residence.

Freddie Mac's REO program, called HomeSteps, lists foreclosed properties that are available for purchase but does not provide special financing for them.

A similar program is offered by the VA for foreclosed properties it has acquired. VA Vendee Financing is available to both veterans and non-veterans and, like a standard VA mortgage, allows purchases with no down payment required for owner-occupants. Investors can put down as little as 5 percent and multiple investment purchases are allowed.

VA mortgages are also assumable, meaning a new buyer can take over a mortgage held by the previous owner. This can offer a way to get a good deal on a home that is in foreclosure, but has not yet been repossessed, by taking over the current owner's remaining mortgage debt.

The FHA does not have any special financing for its REO properties, called HUD Homes (HUD stands for the Department of Housing and Urban Development, which the FHA is part of). However, you can use a regular FHA mortgage, which allows down payments of as little as 3.5 percent, to buy a HUD home. For fixer-uppers, the FHA’s 203(k) loan program allows you to borrow additional money for renovations and repairs, up to 110 percent of the property’s projected post-improvement value.

FHA mortgages are limited to owner-occupants, but there is an opportunity for investors to purchase and rehabilitate multiunit properties of up to four units, provided that one unit is used as the borrower’s primary residence.

One other opportunity for financing the purchase of a home in foreclosure is to contact the current property owner and try to arrange a sale before the foreclosure is finalized. Called a short sale, this allows the owner to walk away from the property with no further damage to their credit and lets the bank avoid the costs associated with repossessing the property.

You can often get a better price than on an REO, although negotiating a price the bank will accept can be a drawn-out process. Even so, short sales are increasingly common and currently account for over one-third of all distressed property sales.

A short sale purchase can be financed with a regular mortgage, the same as other home purchases. However, realize that with the length of time it can take to close a short sale – often several months – you probably won’t be able to lock in an interest rate for the whole time. Also, remember that you don’t have to get your financing from the same lender that holds the current mortgage on the property – in fact, you may find it advantageous to go with a lender who is not involved in the sale itself.

Preapproved or Prequalified KNOW the Difference

• Are you thinking about buying a new home?

• Get preapproved or prequalified AND make sure you know the difference.

• Prequalified - This means your loan officer pulled your credit, asked how much income you can show and gives you an amount he thinks you can afford "up to" This is a great way to start the process, however there is NO guarantee the loan will be approved.

• Preapproved - This means the loan officer has pulled your credit AND gathered documentation from you to make sure the loan's likelihood of being approved is as HIGH as possible.

• To see if I can provide you a prequalification or preapproval contact me today!

• Benjamin.Klar@usmortgage.com

• Direct Phone 207-514-0753

• www.KlarMortgage.com