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FAQ INDEX: 1) What "By Referral Only" Means to You 2) Loan Officer vs Loan Consultant 3) 100% Lower Rate Guarantee 4) What are your Rates today? 5) Should I Lock or Not? 6) Why is the APR higher than the Note Rate? 7) What's an ARM and why would I want one? 8) What about a "Bi-Weekly" payment? 9) What are "Pre-Paids and Reserves"? 10) What about Pre-Payment Penalties? 11) What's Mortgage Insurance? 12) What's a "Credit Score" and how do I change it? 13) What's a "Yield Spread Premium"? **************************** 1) What “By Referral Only” Means to You You may have heard me mention the phrase, or you’ve seen the gold sticker on my card that says, “By Referral Only”. Let me take a minute to explain exactly what that means. As opposed to the traditional "loan officer", I’m really more of a loan consultant. A traditional loan officer is like a taxicab driver that does business strictly on a transactional basis. You call a cab, you go for a ride, you pay the fare, get out, and then the cabbie drives off looking for another customer. Chances are, you’ll never see the guy again. You don’t remember his name and I guarantee he doesn’t remember yours. As a “By Referral Only” Loan Consultant, even though I charge the same fee as the cabbie, I really function more like a “limo service”. After 18 years in the industry, instead of spending the bulk of my time looking for new clients, I spend virtually 100% of my time working with the clients that have been referred to me by other previously delighted clients. So, my goal as your limo driver, is not just to “take you for a ride” so I can get my fee and go off looking for another customer like a taxi driver would do. My goal is to provide you with such a valuable, positive, low-stress experience that, not only will you always want to hire me in the future, but that you will gladly refer the people you respect and care about to me as well. In fact, my goal is to so far exceed your expectations that you can’t help but tell others about me! That way, I won’t have to spend my time looking for new clients . . . I’ll be counting on you to send them to me! Plus, the next time you need to go for a ride, I’ll be right there at your doorstep, ready and waiting to pick you up to take you the destination of your choice. As your limo driver, I’ll want you to enjoy the ride as much as you enjoy arriving at your destination. I want to provide such a positive, low- stress experience that you’ll be a loyal client and advocate of mine for life! And how do I expect to earn your loyalty and your referrals? Well, first of all, I can’t exceed your expectations if I don’t know what they are so I’m going to ask you some thought-provoking questions. As your loan consultant, it’s important that I know what your needs are, what kind of expectations you have and, most importantly, what your priorities are. I want you to know that I’m going to be listening very carefully and paying close attention to what you say. If I determine that I’m not the best person to meet your needs, I’ll let you know right away and I’ll gladly refer you to a colleague who can better serve you. Conversely, if you decide, during the course of our conversations, that I’m not the best person to work with you, please let me know. My objective is to best meet your needs, not mine. It’s important you know that I specialize in “Low Stress” Loans. I can’t promise that your experience with me will be “stress-free”, but I can promise that I’ll do my best to give you the smoothest, most enjoyable ride possible. I promise that I’ll keep my word. I promise that I’ll keep you informed. I promise that I’ll take responsibility for my mistakes. Most importantly, I promise I’ll do my best to ensure that your loan closes on time, with minimal stress on everyone involved and, most importantly, with NO LAST MINUTE SURPRISES (unless they’re good ones!). 2) Loan Officer vs Loan Consultant It’s important that you understand that I am a “By Referral Only” Loan Consultant, not a loan “officer”. What’s the difference? Quite a bit!! Please let me explain. *************************** 3) 100% Lower Rate Guarantee
After 18 years in the mortgage business, I’ve found that there are only a few things I can guarantee. One of things I can guarantee 100% of the time is that there will always be someone, somewhere who will somehow be willing to quote you a lower interest rate. The question is . . . can they deliver?? Just as in the stock market, the “fear and greed” factors also exist in the mortgage business and many people are tempted to try to get the “lowest rate in town”. Unfortunately, the “bait and switch” mentality is also alive and well this business and I’ve talked to far too many people that have succumbed to the temptation to “take the bait”, only to regret it later, when it was too late. In our industry it’s more like “rate and switch”! Here’s a quote from a customer service evaluation returned by one of my clients who decided to chase the “lowest rate in town”: “. . . with all this hindsight I now have, I dearly wish I had stayed with you and Harding Mortgage Associates at the good rate you said you could get me and just relaxed and let knowledgeable professionals handle this most important decision of our lives. Nothing was worth what my family has been through and we came as close to losing this house as it is possible to come. I wanted you to know what became of me after I “dropped out of sight” and to tell you that doing exactly what you have been doing is the best thing that could happen to your future clients. Your honesty serves you well.” William Banks, Another member of the “a little knowledge is a dangerous thing” club. Is it important to get a low interest rate?? You bet it is. But the lowest rate in the world won’t do you any good if your loan doesn’t close on time and the lock period expires because the loan officer didn’t do his job. Or, if you find out at the last minute that the rate’s good but it’s going to take an extra $2,000 in “points” that you don’t have. I’ll quote you a competitive rate that I can deliver . . . every time. When I lock your rate in, you’ll know exactly how long it’s good for and how much it’s going to cost. When I lock your loan it will be protected for a lock period that is more than sufficient to meet your needs. In the event that your lock period expires before your loan closes because of a delay on my end, I’ll pay for an extension. And I guarantee that I’ll do everything within my power to make sure your loan closes on time, with minimal stress on everyone involved and, most importantly, with no last minute surprises unless, of course, they’re good ones!!
******************************* 4) What Are Your Rates Today? Whenever I get a call from a customer that wasn’t referred to me, invariably their first question for me is “What are your rates today?” And my answer, invariably, is It Depends!! Many years ago, quoting rates was a relatively simple process. There were only a few loan programs available and the rates didn’t change all that often. Borrowers were either “Approved” or “Declined”; Credit was either “Good” or “Bad”; and there wasn’t a whole lot of variety in the “menu” of options available. Today, we live in a whole different world. These days, everyone has a Credit “Score” which is a numerical value that is determined by your credit history. The method for determining this score is still somewhat of a mystery, but there are about two dozen different variables that get factored into the equation. This score is the single most determining factor in what interest rate you qualify for. Without knowing your score, quoting you an accurate interest rate is next to impossible. Due to the advent of “high tech” over the last 10 years, there are now literally thousands of possible loan configurations available; rates can change several times a day; and there is no such thing as a “simple” loan approval. On one hand, with the advent of “Desktop Underwriting”, loan approvals that used to take 3 weeks can now be “downloaded” in 24 hours. That’s the good news! The bad news is that now, depending on an increasing number of variables, there are actually several levels of approval. Depending on things like the loan amount, your Credit Score, your “Loan-to-Value”, whether it’s “owner-occupied” or not, whether or not it’s a purchase or a “refi”, whether or not it’s “cash out” or “rate/term”, whether or not you “waive” reserves, whether or not it’s a fixed rate or an adjustable, etc. etc. etc., your loan is subject to a number of “bumps” in either rate or fee. Depending on all these variables, you can have 6 – 8 different bumps on one loan. So, quoting a rate off the top of your head, without knowing all these variables is a guess, at best . . . and misleading at worst! So, why do most lenders still quote rates at the drop of a hat?? Because that’s what people want to hear! Plus, it’s the only question that most people can think to ask!! The bottom line is, do you want to deal with someone who will quote you a rate assuming that they know all the different variables specific to your situation?? Or, would you rather deal with someone that will get to know the specifics of your situation by asking all the pertinent questions first, so that when they do quote you a rate, it will be accurate!? Personally, I prefer to do the latter. Id rather be accurate than assuming (because we know what happens to people that assume!). Plus, unless you’re ready to actually lock your loan, a lot of lenders will quote you whatever you want to hear anyway (please see my 100% Lower Rate Guarantee). I’ll quote you a competitive rate that is accurate because it’s specific to your situation and one that I can deliver in a time frame that is applicable to your needs. So . . . what are my rates today??? IT DEPENDS!!! *************************** 5) Should I Lock or Not? Well, you’ve had your offer accepted, your home inspection has been done and you’re ready to proceed with the purchase (or, you’re ready to refinance). Now you have to answer the following question . . . should I “lock” the interest rate or “float” the rate in hopes it might improve? What does it mean to “lock-in” a rate? To lock-in an interest rate, means that both you and the investor that’s loaning you money are committed to a specific interest rate for a specific time period. If you lock for 45 days, for example, that means that no matter what happens to interest rates, whether they go up or down, you are virtually guaranteed the locked-in rate for that time period. If the lock period expires, no matter who’s fault it is, if the rates have moved up, then the loan is subject to whatever the current rates are. If the rates have moved down, then you still get the same rate you locked in originally, because the lender is still committed to delivering your loan at the original rate. If they don’t, they lose money. So it’s never to your advantage to let the lock period expire because it will not improve the rate you originally locked-in. What does it mean to “float” my rate? Interest rates are subject to daily fluctuations in the market. If you think the market may improve between now and closing, you can hold off on locking by “floating” your rate. That simply means that your interest rate is subject to market fluctuations. If the rates improve, it will lower your monthly payment and mean that you’re paying less interest over time. If rates go up while you’re floating, it means you’ll pay more and, if they go up too much, may affect your ability to qualify. Should I lock or float? It’s been my experience that, psychologically, no matter where the rates have been prior to the day of your loan application, your “frame of reference” is where they are the day you apply. Even if rates just dropped a full half a point the day before you signed the application, you’re going to use the initial rate quote as a point of comparison for the future. If rates continue to improve, you’re going to feel good. If they go up, you’re going to feel bad, even though they might still be lower than they have been for the last few weeks or even months. In considering whether to lock or not, it might be helpful to ask yourself the following questions: 1) What’s Your Risk Tolerance? – If you’re the type of person who is going to lay awake at night and lose sleep worrying about what the rates are going to do; if you’re going to be totally stressed out over the decision and won’t have any peace of mind until it’s been made, you should probably decide to lock soon. Floating your rate is definitely a gamble so if you’re not a gambler, you should play it safe and lock, if only for your own peace of mind. If you feel lucky, and you can sleep at night, you might want to float. 2) What’s the Trend? – People who play the stock market learn to recognize that stock prices tend to “trend” in different directions. Despite the day-to-day ups and downs, if the trend is up, they’ll hold onto the stock.. If the trend is down, they’ll sell if they already own the stock or hold off on buying if they don’t. The same holds true for the bond market. Looking at a chart of the yield on the 10 yr Treasury Bond will give you an idea of the recent trend in mortgage interest rates (I can show you). If the trend is down, you may want to float. If it’s up, you may want to lock. The point is that no one really knows what rates are going to do but sometime it helps to know what they’ve been doing. If they’ve stayed in the same range for awhile (a sideways trend), there may not be any pressure to either lock or float. But, whatever the trend has been, just keep in mind that it can change at any time. 3) What’s the “worst-case” scenario? – On a $150,000 loan, for each 1/8 point (.125%) in rate, your monthly principal and interest payment will change by $12.39. If the rate goes up while you’re floating, is $12.39/mo going to make a huge difference in your budget? If you know you’re going to be in the house for 30 years, it will definitely add up, but if you’re only going to be in the house for just a few years, will an extra $148 a year have a drastic effect on your lifestyle? Only you can answer these questions. If that extra $12.39 will make a significant difference, either in your budget or in your ability to qualify, then you should probably lock. I just think it’s important to keep the “big picture” in mind in making your decision. I can’t tell you when to lock because it’s your decision. I can give you my opinion. I can help you sort out the “pros and cons”. I can help you determine your risk tolerance and show you the recent trend, but the final decision is yours. Locking your loan does not cost you anything extra, although, depending on which way the market had moved, you may decide to pay additional discount points to buy the rate down when you do. My final advice is this. Once you’ve made your decision and the loan is locked. FORGET ABOUT IT!! You can drive yourself nuts worrying about whether you’ve made the right decision or not – after the fact. Once it’s locked, there’s nothing you can do about it so there’s no point in beating yourself up if the rates go down after you do. If the rates go up, you can congratulate yourself on being such an astute business person. Either way, whether they go up or down, after all is said or done, I think it has more to do with pure luck than anything else!! GOOD LUCK!! **************************** 6) Why is the APR higher than the "Note" rate? Per Federal Disclosure laws, every time a “Good Faith Estimate” is presented to a customer, it is supposed to be accompanied by a “Truth-in-Lending” statement. The “TIL” (as it’s known in the industry), is the source of more confusion than any other document in the loan approval process. The TIL has four boxes across the top of the page. In plain English, here’s an explanation of what those four boxes contain and why they’re so confusing: 1) ANNUAL PERCENTAGE RATE. First of all, THE “APR” IS NOT THE NOTE RATE!! The “APR” is the rate as a function of the cost of the financing. In other words, if you compare the same loan from two different lenders that are quoting the exact same loan amount and interest rate, the APR (and thus, the cost) of the more expensive loan will be higher. In its infinite wisdom, our Federal Government requires lenders to disclose the APR so it’s easier for consumers to compare loans from different lenders. On paper, it’s a great concept. But, in fact, there is no exact formula for how the APR is calculated, so there’s a lot of room for “human error”. The main thing to know is that the “note rate” that you lock in is the rate your payments are based on. 2) FINANCE CHARGE This number is the amount of interest you will pay if you make the minimum “principal and interest” payment over the entire term of the loan. Yes, it’s a lot of money! 3) AMOUNT FINANCED This number is also confusing. The “Amount Financed” is NOT your loan amount. It is your loan amount MINUS some of the closing costs (the one’s used to compute the APR). The amount you are actually financing is the loan amount on the application, not the “Amount Financed” on the TIL. Go figure! 4) TOTAL OF PAYMENTS This number is always an eye-opener!! This represents the total amount of money your house will really cost if you make the minimum P&I payments for the entire term of the loan. This number should be your motivation to add some additional principal to your payment every month. By just adding 1/12 of your monthly payment to your principal balance every month, you’ll cut about 9 years off of a 30-year mortgage and reduce this number by tens of thousands of dollars!! This can also be done with a “bi-weekly” payment. Call me for details. If you have any other questions about the “Truth-in-Lending” statement, please don’t hesitate to call. If it’s totally confusing, don’t feel bad . . . join the club!! ******************************* 7) What's an "ARM" and why would I want one? In “mortgagese”, an ARM stands for an Adjustable Rate Mortgage. In contrast to Fixed rate mortgages where the interest rate doesn’t change for the life of the loan, ARMs are only fixed for a specific time frame and then they adjust on a periodic basis according to current market conditions. There are a number of advantages to an adjustable rate mortgage: 1) ARMs typically offer lower initial interest rates which give you a lower payment and allow you to qualify for a higher purchase price. 2) When they adjust, they re-amortize so a lower balance results in a lower payment as opposed to a fixed rate where the payment stays the same, regardless of the balance. 3) When they adjust, they can go down as well as up so, depending on the market trend, you may pay less over time than if you had a fixed rate. 4) Some ARMs have fixed rates for 1, 3, 5, 7 or 10 years so they can give you the “best of both worlds”, a fixed rate that’s much lower than the going 30 or 15 year fixed rate. 5) If you’re planning on being in your property on a short-term basis (less than 10 years), then an ARM may be more appropriate for your situation than a loan that lasts 15 or 30. Once the ARM starts adjusting (usually on a 6 month or annual basis) there is the potential for your rate to go up. There are periodic and lifetime “caps” on ARMs that keep them from adjusting too much at one time but, the bottom line is that you have to be prepared to pay more, once your loan starts adjusting. Historically, people with ARMS have paid less, on average, than people with fixed rates but no one knows what rates are going to do in the future so there is some risk involved in having an ARM if you’re going to keep the property longer than the fixed rate period. An ARM is made up of two factors: an index and a margin. The index is the variable part and the margin is fixed. There are a number of different indices but the most common ones are the 1yr Treasury Bill and the 6 month LIBOR (London InterBank Offered Rate). When your loan adjusts, the lender takes the value of the current index that your loan is based on, adds the (profit) margin and sends you a letter telling you that your rate is now whatever the total of those two numbers are (usually rounded up to the next .125%). Be sure you understand the terms of the loan before you sign. Make sure you know how long it’s fixed, the index it’s based on and the margin. Also, make sure there’s no “negative amortization” or PrePayment penalty. Ask me about the details ************************** 8) What About "Bi-Weekly" payments? For those interested in Pre-Paying their mortgage, rather than make a regular payment once a month, according to the terms of your mortgage, many people elect to make a “bi-weekly” payment. This is done for a number of reasons. First of all, most people get paid every two weeks and it’s more convenient for them to have their mortgage payment automatically deducted from their checking account much like their insurance payments and 401K contributions are deducted from their paycheck. This insures that their payments will always be made on time and eliminates the possibility that they’ll “forget” to send the check. Now, there are a few banks and mortgage companies that will charge you around $400 to set you up on a bi-weekly payment plan. But, here’s the “dirty little secret” . . . You can do it yourself for free!! If you just add 1/12th of your principal and interest payment to your regular monthly payment, you’ll accomplish the same result . . . 13 payments a year. Just make sure you designate that the extra 1/12 goes to principal and not interest. 9) What are "Pre-Paids and Reserves"? Every month, when you make your mortgage payment, a portion of that payment goes into a separate escrow account held by the lender to pay for future taxes, homeowners insurance and, if applicable, mortgage insurance. In addition to your down payment and closing costs, to insure that there will be enough money in that account to pay those items when they’re due, the lender will collect “pre-paid” taxes and insurance at closing, Property Taxes: Property taxes are due in April and October. Consequently, the lender will collect enough taxes on a pro-rated basis to insure that there will be plenty of money in your account to cover the check they write to the county treasurer where you live. Usually, they actually collect for an extra month or two to account for any increases in property taxes in the interim. For example, if your loan closes in May, your first mortgage payment will be in July. Since taxes are due in October, the lender will collect 4 months of taxes “in reserve”. This insures that, come October, the lender will have 7 months of taxes in your account when they’re due October 1st. This covers the lender’s needs, however, keep in mind that in addition to collecting reserves for the lender, the escrow company will also collect enough taxes to reimburse the seller of the property for any up front taxes he’s paid for. For instance, if the seller paid the “first-half” taxes in April (which covers Jan - June), and you move into the house on May first, then you will need to reimburse the seller for the months of May and June. Consequently, you should always plan on paying at least 6 months of taxes at closing on a purchase. Homeowners Insurance: Homeowners insurance is required to cover your loss in the event that your house is damaged or destroyed by fire, theft, vandalism, etc. Lenders require the first years premium to be paid in advance and, in addition, they will collect 2-3 months “in reserve”. Again, this is to insure that there will be enough in your account to pay the premiums when they’re due. It’s your option who you choose to provide the insurance. Mortgage Insurance: On a conventional loan, Mortgage Insurance is paid by the borrower anytime you put less than 20% down. Mortgage Insurance does not cover you!!! It covers the losses of the lender in the event of a default on the part of the borrower. It can be removed after a certain time period, once you can prove, with an appraisal, that there is at least 20% equity in the property. On FHA loans, it is collected regardless of the size of the down payment and it can’t be removed until you refinance into a conventional loan. Fortunately, you’ll get a refund of the “unearned premium” when you do. Interim Interest: Typically, most loans close in the latter half of the month because of the pro-rated interest charged on the new loan. For example, if your loan closes March 20th, the interest on your loan would start accruing on that date. However, the first payment on your new loan will not be due until May 1st. This is because mortgage payments are made in “arrears”, as opposed to rent, which is paid in advance. Your May 1st payment actually covers the interest for the previous month of April. Consequently, the escrow company will collect enough interest at closing to cover the last 11 days of March (the 20th through the 31st. If you close on the last day of the month, they would only collect for one day. Unfortunately, that’s when everyone else wants to close their loan, so it’s better to give yourself a little grace period and schedule the closing a few days before the end of the month. *************************** 10) What about Pre-Payment Penalties? These days it’s fairly common for lenders to offer loans with an optional pre-payment penalty. Most of the time, you may pay down the principal balance on your loan in any amount and at any time without a penalty. However, there are certain loan programs on the market today that allow you to carry a Pre-Payment Penalty that also gives you a better rate. If your loan does have a Pre-Payment Penalty, it’s important that you understand the terms of that penalty. The “Truth-in-Lending” statement that you receive in the mail after you’ve made loan application will state whether or not your loan “may” or “may not” have a pre-payment penalty. If it says “may”, be sure to get a description in writing of the specific penalty. *** IMPORTANT *** There is a difference between a “Soft” PrePay and a “Hard” PrePay. A soft prepay will allow you to sell your home without a penalty but you won’t be able to refinance it or pay the principal balance down by more than 20% in any one of a specified number of years (less than 5). A Hard PrePay, says that you can neither sell nor refinance (or pay down the balance by more than 20%) in any one of the specified number of years without a penalty. Hard PrePays are usually applied in “Sub-Prime” loans. 11) "Mortgage Insurance": What is it, when do I have to pay it and how can I get rid of it? On a conventional loan, if you put less than 20% down, you may have to pay mortgage insurance. MORTGAGE INSURANCE IS NOT INSURANCE THAT COVERS YOU!! It covers the LENDER in the event that you default on their loan. 3% down (97% LTV) = 1.04% 5% down (95% LTV) = .78% 10% down (90% LTV) = .52% 15% down (85% LTV) = .39% If your loan amount is $300,000 and you put 5% down, your loan-to-value is 95%. Your mortgage insurance fee would be $ 1,560 per year or $130.00 per month. This would be in addition to the property taxes and hazard insurance that you would normally pay. A. If the lender requires mortgage insurance when you purchase your house, it’s because you put less than 20% down. Typically, most mortgage insurance companies require that extra payment for at least 2 years. But, as soon as the minimum time period is up, if you can prove that you have at least 20% equity, you may request that the mortgage insurance be removed. Typically, the only cost to you will be a fair market appraisal by an approved appraiser. This fee will usually be around $450.00. A. YES (for the time being) We used to try to avoid mortgage insurance at all costs because it wasn’t deductible, like mortgage interest is, until just recently. But, as of January 2007, mortgage insurance is now a deductible expense so there’s no reason to avoid it. With mortgage insurance, if you only do one loan instead of two (see below), your payment will typically be slightly higher but your closing costs will be lower. With a “piggy back” 2nd mortgage, your payment will be slightly lower but your closing costs will be higher. A. YES, if you do an 80% 1st mortgage and a “piggyback” 2nd mortgage for the other 20%. This is most common way to avoid mortgage insurance. Ask me about the details. ****************************** 12) What's a "Credit Score" and how do I change it? What is a Credit Score? Credit Scoring has been around since the 1950’s. Credit scores are based on data derived from an applicant’s credit history and payment patterns. This information is maintained on file with the credit bureaus. The three major credit repositories are Equifax, Experian and TransUnion. Statistical models that assign points to factors indicative of repayment calculate credit scores. Each model weighs and measures hundreds of factors to arrive at a number indicating the likelihood of repayment. The resulting score is a snapshot that sums up the applicant’s past payment performance and current usage. Because a score is a composite of all the applicant information, no single factor – like a bankruptcy or late payment – will be the sole cause of an unacceptable score. How are Scoring Models developed? When developing a bureau score, the repository analyzes credit data on millions of consumers to determine credit patterns that forecast risk. To develop scoring models, analysts collect two categories of data: 1) Application and credit bureau information about the applicant at the time he/she first applies for credit; and 2) Performance records of the individual. Predictive factors are identified, and weighted values are assigned to each. The result of this analysis is the creation of scoring models. Models are constantly re-evaluated and modified as social and economic factors change. How to Read Credit Scores? When an applicant’s information is run through a scoring model, a number or score is returned. Typically, scores range from 500 – 800. The higher the score, the greater the likelihood of repayment. What Data is analyzed? Scoring models do not consider race, gender, religion, marital status, income, nationality, address, employment, position or title, length of employment, sexual preference or interest rate being charged on a particular credit card. Scoring models do analyze all the credit information stored in the bureaus credit file such as: Past Performance (35% of the scores weight); the fewer the late payments, judgments, etc., the higher the score. Recent late payments occurring within the past 24 months are more indicative of future default. A “30-day late” today will have a greater impact on the score than a bankruptcy 5 years ago with clean credit since. Credit Utilization (30% of the scores weight); low balances on several cards are better than high balances on a few cards. Balances higher than 30% of the credit card’s limit will have a significant impact on the score. Too many revolving accounts can also be detrimental. Credit history (15% of the scores weight); Other factors that influence a credit score relate to the age of the accounts listed. For example, the longer accounts are open, the better the score. Opening new accounts and closing seasoned accounts will negatively impact the credit score. Types of Credit (10% of scores weight); Finance company accounts score lower than bank loans or department store lines Inquiries (10% of scores weight); Looking for new credit can mean a higher risk if, for example, several credit cards are applied for within a short period of time and other existing accounts are “maxed out” (outstanding balances are at their limit). Multiple inquiries for mortgages or auto loans within a 30 day period are counted as only one inquiry. Promotional or employer inquiries do not adversely impact the applicant’s score Only authorized inquiries by the applicant for the granting of credit can impact the credit score How to Analyze Credit Scores Each repository uses a similar “score factor” code to describe the factors that affect a credit score, although the methodology they use to arrive at the same code may differ. In order to understand what factors are impacting the credit score, you must review the reason codes. Generally the repositories use the same number code to describe a similar reason, but there are exceptions. Please refer to the attached chart for clarification. When analyzing a credit score it is imperative that the reason codes accurately reflect your credit profile. If the reason codes do not align with the credit history presented, this should be perceived as a red flag and the credit report should be investigated further. Once the credit scores have been validated, the lender uses the middle score for qualification purposes. For example, if the borrower presents scores of 685, 700 and 713, the indicator score would be 700. In general, underwriters view the scoring range from the following perspective: 700 and above - Excellent 660 – 699 – Good 620 – 659 – Fair below 619 - Poor What improves an applicants score? There is no magic formula to improve a credit score. Scores will improve automatically as the applicant’s overall credit picture improves. This will take time; however, there are a few things to remember: · Borrowers should be encouraged to pay down balances on revolving accounts to less than 30% of the available credit line · Borrowers should NOT be encouraged to close accounts unless the reason codes indicate that there are too many revolving accounts and they have little or no balance. · Borrowers should NOT be encouraged to consolidate debt (close existing credit cards) into one or two revolving accounts with high debt-to-balance ratios. · If there are errors on the credit report, the applicant should write the repository advising them of the misinformation. The Fair Credit Reporting Act gives the repository five days to notify the creditor of a dispute and request an investigation. Within 30-days, the creditor must report back to the repository regarding whether the disputed entry should be modified, deleted, or remain. If there is no response from the creditor within the 30-days, then the repository must remove the item from the credit file. If there is any change to the applicant’s credit file, the repository must notify the applicant within 5 days of the change. How Credit Scores Help Consumers Credit scores are based on data rather than human assessment and judgment. Credit scores help lenders make more informed decisions and offer real benefits to consumers. · Credit scores evaluate all applicants using the same criteria. Opinions do not enter into the scoring equation. Empirically derived facts replace myths and personal prejudices. · Changes in a consumer’s credit performance will change a credit score. The key is that as individual credit patterns change, scores are likely to change. While a scoring scale remains constant, an applicant’s place on that scale may change. · Scoring speeds up loan decisions · By helping lender’s control losses and costs, scoring helps make more capital available to consumers. How to Permanently Change Your Credit Report To permanently change your credit report, it’s important to communicate with all three credit bureaus simultaneously because they don’t communicate with each other. If you can prove that an account balance or account status is reported inaccurately on your credit report, you must write, call or fax the three major bureaus independently of each other. Their addresses and phone numbers are listed below. TransUnion Consumer Relations P.O. Box 1000 Chester, PA 19022 800-888-4213 ******************* Equifax Consumer Relations P.O. Box 105873 Atlanta, GA 30348 888-841-7335 www.equifax.com ****************** Experian Consumer Relations P.O. Box 2002 Allen, TX 75013 888-397-3742 www.experian.com ***************************** 13) What’s a “Yield Spread Premium”? Most borrowers don’t realize that on any given loan program, there is a range of interest rates available. Each rate is accompanied by a corresponding percentage of “points”. A “Par” rate is the interest rate with zero points. (One point is 1% of the loan amount). Here’s an example from a typical rate sheet: 30 yr Fixed Rate Points 6.50% (1.25%) 6.375% (.50%) 6.25% (.25%) 6.125% 0.00% 6.00% .25% 5.875% .50% 5.75% 1.25% In this example, the positive numbers represent “discount points”. The negative numbers are known as “Yield Spread Premium” or YSP. You can see that a “par” rate would be 6.125%. If you wanted to get a lower rate, you would have to PAY the discount points corresponding to the rate you wanted. This means that you would pay extra closing costs to have a lower rate for the life of the loan. However, if you wanted to reduce your closing costs, you could take advantage of the “yield spread” and choose a rate that’s higher than Par to get a credit or rebate from the lender. This is how lenders can offer “No Fee” or even “No Cost” home loans. The borrower gets a credit from the lender for voluntarily taking a rate higher than the Par rate for the life of the loan. Unfortunately, many loan officers will take advantage of unsuspecting borrowers by quoting a rate as Par when it’s not. Then, they’ll keep the extra credit from the lender and treat it as profit, rather than crediting it to the borrower’s closing costs. So . . . the most important question you can ask when you’re quoted an interest rate is . . . “does that rate have a YSP and, if so, will the YSP be credited to my closing costs?” For whatever reason, banks don’t have to disclose the “YSP”, but mortgage brokers (like me) do. On the final settlement statement, the premium is usually referred to as “Mortgage Broker Compensation” or something similar and it’s paid “POC” (Paid Outside of Closing), but the important thing to know is that it’s not a fee the borrower is charged. It’s a fee that the lender pays to the mortgage broker that originates the loan and that fee should be credited to the borrowers closing costs, not kept by the loan officer as extra profit. Caveat emptor!! (Buyer beware!)
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