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Archive for the ‘Credit’ Category

One of the situations I see often is when a person has great credit but their spouse does not.   With FICO scores taking and even more important role in qualifying for a mortgage today than even just six months ago, this can be a very big issue for potential home buyers and folks looking to refinance.

Most people assume that lenders go off the breadwinner’s FICO score which IS NOT the case.  Lenders take the lowest middle FICO score between both borrowers.    So if Joe has FICO scores of 775, 780, 740 and his wife has FICO scores of 720, 710, and 680; theFICO score used for qualification purposes is Joe’s wife’s middle score of 710.

In this example, Joe is likely to pay a higher interest rate because his wife does not have a 740 FICO score which is needed to qualify for the most competitive rate these days.    In most cases, I would just drop Joe’s wife from the loan application and only use Joe for qualifying purposes.    Joe’s wife would still be on the title to the property, but would not be responsible for the mortgage.

However, what do you do if you need both incomes to qualify for the mortgage?  In short, you are your spouses credit!  If you need both incomes to qualify for the mortgage and your spouse has bad credit, it means YOU have bad credit to.

So the next time you are picking up potential mates at a bar, instead of asking for a phone number you may want to ask for a FICO score instead.

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One of the most frequent questions I get from borrowers when applying for mortgages is whose credit is used for the loan application.  In most cases, when you apply for a mortgage jointly with a spouse or other person, lenders will use the lowest credit score for qualifying.  So if you have a 720 FICO score that puts you in the highest credit tier and your spouse has a 620 which is border line subprime, lenders are going to go off the 620 FICO score.   You are your spouse’s credit.

If you don’t need your spouse’s income to qualify for a mortgage, then it is no big deal.  The loan officer/broker will just suggest leaving them off the loan application, but putting them on the title to the property which will give them ownership rights, but they are not responsible for the mortgage.

However, in today’s mortgage market, if your spouse has weak credit and you need their income to qualify, this can cause some serious problems as credit scores are extremely important and will have a major impact on the interest rates that you may be offered.  In fact, if your spouse’s credit is too bad it may prevent you from being able to buy a home.

So the next time you are at a bar, instead of asking someone what their sign is, you may want to ask if they know their FICO score.

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walletistock.jpgCapital One’s advertising campaign did ask a great question.  Using a Capital One credit card used to insure that there would be less money in your wallet.  After years of stalling and excuses, Capital One has finally agreed to start reporting their customers’ credit limits to the three major credit rating bureaus

This is an important development and could save many Capital One customers thousands of dollars in the future.  This development is more important than ever with credit tightening in the mortgage market and FICO scores are becoming even more important.  I also wonder if it is because Capital One is also aggressively hawking mortgages now too?

Capital One used to only report the highest credit balance carried to the credit reporting agencies which often times resulted in a negative affect on their customer’s credit rating.   One of the major factors that goes into your credit score is your utilization of revolving credit ratio.  For example, if you have a credit limit of $10,000 and carry a credit card balance of $1,000 you have a very low credit utilization ratio which is very positive for your credit score.  In other words, you have only used a small portion of the revolving credit available to you.   

On the other hand, Capital One would only report that you carried a $1,000 credit balance instead of informing the bureaus that your credit limit was actually $10,000.  So instead of the credit bureaus rating your credit history with you only utilizing 10% of your available credit, it would appear you are using 100% of your available credit giving the false impression that you are maxed out with revolving debt. 

This little technicality in reporting methods could cost Capital One clients 50-100 points on their FICO scores which ultimately translated into higher mortgage rates for Capital One card holders.   For example, if you really should have had a 720 FICO score, being a Capital One cardholder could have made your FICO score less than 680 which can make a huge difference in the mortgage rates that you would be offered. 

The credit bureaus sell credit ratings and other data to competiting credit card companies.  By hiding the credit limits, Capital One made it harder for their competitors to poach their best customers.  However, in doing so, they also penalized their best customers.

Nevertheless, when it comes to credit cards, it is always best to scrutinize what is in your wallet.

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A $3.00 mistake

pennies-01_www.jpgEveryone makes mistakes.  Especially the credit bureaus.   Unfortunately, when the credit bureaus make mistakes it can be very costly for YOU, not the credit bureau.  This is why it is important that consumers really know what is on their credit reports and monitor it like a hawk.  Consumers should get a tri-merge copy of their credit report at least once per year.  A tri-merge report is a credit report that shows tradelines and FICO scores from all three credit bureaus:  Equifax, Transunion, and Experian.

 I had a very good client of mine ask me to start the process for an investment property he is looking to purchase.  Having worked on several transactions with this client, I know his credit is pretty flawless.  Nevertheless, when I pulled his credit he had a 50 point drop in FICO scores from the previous transaction.  Sure enough, I went through all the tradelines and Wells Fargo reported a 30 day late on a credit card last month.  I immediately called my client because this one little late payment could increase his rate by more than 1 point.  Sure enough, the client didn’t make a late payment.  He had a dispute with Wells Fargo over a $3.00 fee on a credit card.  They reported to the bureaus that he didn’t pay it after he closed the account.  Three Freaking Dollars!

To Wells Fargo credit, they corrected it after my client left a few nasty voicemails.  Fortunately, we were in the pre-approval stage, so we have time to get it fixed before too much damage was done.  Nevertheless, these types of errors are why it is important you get yourself pre-approved prior to entering into contracts on home purchases.  You want to ensure you have enough time to fix any issues before they wind up costing you money.

The mortgage business has become overly reliant on FICO scores when making judgments about borrower’s credit history.  While this has helped lower costs, it has also removed a lot of common sense and logic from the business as well.   Your FICO score can be off by one point due to a mistake and many lenders will not do the loan or use that as a reason to raise your interest rate.   

Consumers can get real time monitoring of their credit reports from the three major bureaus.  I receive emails from Equifax (www.equifax.com) monthly about any changes on my credit report.  The service is only a few bucks per month, but the savings and piece of mind from having an accurate credit report more than make it more than worth the cost.

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starwars.jpgIn a previous post I introduced you to a particularly disturbing money grab by the three major credit bureaus called trigger leads. Trigger leads are where the credit bureaus sell consumers’ information after their credit is checked by a mortgage lender. For example, you apply for a mortgage and because the lender had to pull your credit, the credit bureaus know that you are in the market for a home loan. This makes your information very valuable to some mortgage companies and loan officers who do not have the ability to generate their own business. So instead of earning their business through referrals from years of hard work like most reputable loan officers and companies, they leech off of our efforts in an attempt to hard sell you on a mortgage by purchasing your information from the credit bureaus. Mortgage applicants could receive calls as soon as 12 hours later.

Supporters of trigger leads try to hide behind the mantra of providing consumers with more competition. I simply want to know when was the last time anyone really got something other than an interrupted dinner from a telemarketer? Check out the good deal this consumer got from being a trigger lead. I am also sure you don’t want the mortgage gangsters calling you either.

Naturally, many consumers are not very happy about this practice and the bombarding phone calls and junk mail they receive from boiler room mortgage companies. Applying for a home loan is a personal matter and the credit bureaus do not explicitly ask for permission to share your information with every Tom, Dick, and Harry loan officer.

Well, the Federal Trade Commission finally responded to the growing criticism this month and is showing itself to be the lap dog of the credit bureaus. In their ruling, the FTC basically said they don’t have the legal authority to prevent the credit bureaus from selling trigger leads. Maybe the FTC really stands for Screw The Consumer?

What I find particularly interesting is that with the mortgage business coming under scrutiny, politicians are tripping over themselves (Hillary, Dodd, Obama) to issue opinions and make up new laws regarding sub-prime mortgages and predatory lending. Yet, the government won’t act when presented with the opportunity to actually do some good by eliminating trigger leads. Even the mortgage business is staunchly opposed to trigger leads as we all know the companies that rely on this method of “marketing” are usually the bottom feeders of the business who engage in deceptive bait & switch tactics and tend to push inappropriate loan products. So why not eliminate one the tools of the trade for these leeches everyone is so up in arms about?

Just to reiterate, consumers can have their names removed by going to www.optoutprescreen.com, calling (888)-5-OPTOUT. It may take up to sixty days to be completely removed from the system though. Finally, you can also sign up for the Do Not Call Registry at www.donotcall.gov or (888)382-1222.

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statedincome.jpgI received yet another email from a lender announcing that they are making changes to their stated income guidelines.  What makes this interesting is that a lot of the changes I am seeing are coming from A paper lenders.  Most of the guideline tightening has been in the sub-prime mortgage market as of late, but now it seems the good credit guys are also getting in the game too.  I don’t know if the sub-prime implosion is starting to creep over to A paper lending, but my guess is that lenders are just starting to take a look at their guidelines and eliminate some of their more riskier borrowers.

Over the past five or so years, the mortgage market has experienced a boom unlike anything previously seen before in residential mortgage lending.  This boom also brought a wealth of new loan products and ultimately a loosening of credit guidelines.  Loosening of credit guidelines is how banks are able to increase the pool of borrowers and ultimately expand their share in the market place by making it possible for more borrowers to qualify.  One of the most controversial areas is stated income loans.

Stated income loans are where the borrower just “states” how much income they make and based on the credit and other aspects of the file, the lender just takes their word for it.  As long as the income source can be verified the loan gets approved.  First, stated income loans have a place and are quite useful in many circumstances.  For instance, self-employed borrowers often have very good accountants and are very adept at hiding their true income.  In other cases, we know the income is there, but we can’t verify or use it on the loan application for a number of reasons.  Other cases, stated loans are used to lighten up the paperwork requirements.  These are the situations these loans were designed for. 

Unfortunately, stated income loans have been abused by a number of unscrupulous loan officers and lenders and is a major cause of the sub-prime lending implosion.  Instead of using the loans sparingly for those special situations as intended, the loans have been used to qualify people for houses in which they do not qualify to own under any circumstances. 

In nearly every article you read in the press about subprime mortgages or rising foreclosures there is almost always an example of some poor schmuck who was a fry cook at the local fast food joint buying a $500k house.  I say schmuck because I don’t understand how someone innocently buys a $500k house on a $8.00/hour salary.  Are people really this stupid?  First, the borrower is stupid.  Second, the lender is stupid.  No underwriter with two brain cells, even if they are fighting each other, should be approving stated income loans when the income clearly is inflated for the borrower’s profession.  Third, the loan officer is stupid.  No commission is worth putting borrowers in a loan you know they can’t afford, even if the lender is offering the loan product and willing to approve the loan.  How do some of these jokers sleep at night?

Nevertheless, with all the noise in the market place, stated income loans are being scrutinized more than ever and even being eliminated.   Before lenders lost their minds, they used to have some safe guards in place to prevent stated income fraud, but during the boom it seemed like every lender just wanted to fund loans and not worry about quality.  Now there seems to be a mad rush to quality. 

The first thing lenders are doing is requiring 4506-T’s.  The 4506 is a form that a lender requires the borrower to fill out that gives the lender permission to request a tax return transcript up to sixty days after the form is signed from the IRS.  If you state you make $100k and the lender does a random audit of a file or the underwriter chooses to execute the 4506 and the income reported is no where near what you are putting on the loan application then your loan will be denied.  In some cases, you charges of loan fraud could be brought up.  It used to be that it tooks weeks to get a response from the IRS when the 4506 was executed, so most lenders didn’t bother.  Now the lenders can get the tax return transcript in as little as two days.

Lenders are also putting more emphasis on common sense underwriting with stated income loans.  No more fry cooks claiming $10k per month.  Many lenders routinely use salary.com to see if the income being stated is reasonable for the profession.  In addition, the assets verified also need to make sense for the income stated.  If you state you make $100k per year, but only have $3,000 in savings a red flag should immediately be raised by the underwriter.  In some cases, lenders are only offering stated income products for people who are self-employed and eliminating stated income options for wage earners or employees who receive w-2s.  Think about it, if you receive a base salary there are very few instances where you absolutely need to go stated other than you need to inflate your income to qualify.

The bottomline is that the chicken is coming home to roost and lenders are now looking for ways to eliminate risky borrowers.  If you cannot verify your income, it will be come even more difficult for you to get a mortgage, especially if your credit is sub par or you do not have larger down payments.

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Post Update: Consumers can go to www.optoutprescreen.com to have their names blocked from being sold as a trigger lead. I also posted a letter a borrower received from a company after their credit was pulled. Notice that the lender is pimping an option ARM product.

The three major credit bureaus, Equifax, Transunion, and Experian, have found a new way to make money off of people’s personal information. This new way is called trigger leads. What they are basically doing is selling your personal information to competing lenders anytime a lender checks your credit for the purposes of obtaining a mortgage. In other words, the act of applying for a mortgage triggers them to offer your name and contact information to competing lenders as a “fresh lead.” As a result, soon after you apply for a mortgage, you are likely to receive a call from another mortgage lender attempting to gain your favor. This may help competition, but I believe as a whole it is bad for consumers.

For those of you that don’t know, one of the hardest things about being in the mortgage business is obtaining new clients. It takes years of good work and results to build a solid referral base. For loan officers who do not have an established client base or worse, boiler room mortgage hack shops, buying “leads” is the only way they have a shot at making a living. In sales, a lead is contact information on someone who might be interested in buying your product. The more you have, the better your chances. The credit bureaus have realized that they posses the most valuable information in the mortgage business – qualified, ready to purchase or refinance leads.

When someone is applying for a mortgage, the bureaus track these “inquiries” as part of generating the consumer’s FICO score. By compiling the data of borrowers who have recently applied for a mortgage, in combination with their FICO scores, the bureaus can now sell your information to other lenders as mortgage leads. There are a number of problems with this practice. Primarily, the bureaus are sharing your personal information with third parties without your expressed permission. Given that so much in our society is based on credit scores and the prevalence of identity theft, I do not believe the bureaus should be engaged in these types of activities. The bureaus essentially have a monopoly on something that is almost as important as a social security number and they are using it to generate further profits. Credit reporting should be about reporting credit factually and accurately (something the bureaus sorely need to improve on), not generating obscene profits from selling the information of their subjects (the American public) unwillingly. In addition, applying for a mortgage is a personal matter. It is no one else’s business that you applied for a mortgage!

Second, as a lender, I certainly don’t appreciate the bureaus sharing my client’s information with the competition. Don’t get me wrong, I am as competitive as anyone, but they are piggybacking on my efforts to obtain clients. Additionally, I am the one paying for the credit reporting services from the bureau. They are basically charging me to get my client’s credit report, then selling the fact that I paid for your credit report to competing lenders.

Finally, I do not think it is in the best interest of the consumer. As mentioned before, the companies that are likely to buy these leads from the bureaus are generally not companies smart consumers would want to deal with. They are likely to be boiler room telemarketing companies with inexperienced employees who are trained to hard sell the unsuspecting lead. I cannot emphasize enough that the most reputable loan officers in this business do not need to engage in lead buying to obtain business. Our business is obtained from direct client referrals from previously satisfied clients. Fortunately, the media has picked up on this practice and written some fairly good articles about it. I would advise you to read these and contact your congressman or senator to make this practice illegal. The Washington Post writes a good article about this practice.

Because the bureaus have permeated so much of our daily lives, I doubt they are going to listen to consumers. It is already nearly impossible to get errors corrected in a timely manner, so I doubt this will be any different. Nevertheless, I thought you should know and this is my two cents.

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