It’s no secret that credit scores are an important part of your qualifications when you’re applying for a home loan. Lending guidelines are much tighter today than they used to be, so it’s more important than ever to keep your credit scores strong. If you have relatively low credit scores, you may have no problem qualifying for a home loan, but it will likely cost you significantly in the form of a higher rate and/or closing costs.

From the New York Times:

A majority of banks are less likely to offer loans to people with a FICO credit score of 620 and a 10 percent down payment than they were in 2006, according to the report. Lenders were also less likely to do so even for those with a score of 720.

Such stricter standards have drawn the attention of Ben S. Bernanke, the chairman of the Federal Reserve, who last week told a bankers group that “current standards may be limiting or preventing lending to many creditworthy borrowers.”

Of course, it’s important to keep in mind that 2006 was the tail-end of the subprime bubble in which just about anybody could get a loan. Some banks were offering 0% down with a 560 credit score. Others were offering no-income no-asset (NINA)  financing where borrowers didn’t have to document any income or assets in the bank at all.

Those days are ancient history; today, lending standards are much tighter. What used to be considered good credit 5 or 6 years ago won’t necessarily get you the best deal today. From the New York Times:

For those with lower credit scores, the math is stark: A borrower with a credit score of 720 can expect a rate of 3.70 percent on a 30-year, $300,000 fixed-rate mortgage, according to myfico.com, while someone with a score of 620 to 639 can expect a 5.07 percent rate — or an extra $242 per monthly payment.

“If you don’t have good credit, you’re not going to get that crazy low rate,” said Deborah MacKenzie, the director of counseling at the Housing Development Fund, a nonprofit group in Stamford, Conn. But she and other experts said there were tactics that consumers could use to raise their scores.

Actually, that’s not completely true; you can still get the lowest rates with a credit score of 620 to 639, you’ll just have to pay several points (1 point equals 1% of the loan amount) to get it. Lower scores will result in being charged Fannie Mae price adjustments (also known as LLPAs) – essentially charges for certain risk factors – that are particularly steep if you’re scores are plumbing the low 600s. It’s possible a borrower with a 620 credit score could pay 3 to 4 points to get the lowest 30-year fixed rates, depending on the scenario. It pays (or saves) to have a good credit score!

How Can I Improve My Credit Scores?

So what can you do to improve your credit scores? The New York Times article touches on a few things, including paying down credit card balances, correcting any errors on your credit report, and being sure to make all payments on time. However, I’d like to offer my own tips, which are based on my experience in the mortgage industry and knowledge of how credit scores work:

• Be punctual with your payments. The most important factor for keeping your credit scores up is being on time with all debt payments. If you’re in a situation where you know you’re going to be late on something, make sure to at least get your mortgage payment in on time. Mortgages carry a lot more weight for scoring than credit cards. Your mortgage payment history not only impacts your credit scores, it’s evaluated as a separate underwriting criteria when qualifying for a mortgage as well.

• Check your report on a regular basis and clear up any mistakes or inaccuracies promptly. If you do find errors on your credit report, contact the credit bureau that is reporting the offending account to get it cleared up as soon as possible. Links to the three major bureaus can be found at the end of this post.

• Clear up open derogatory items. If you have old unpaid accounts that are still open as collections or charge offs, get them cleared up as soon as possible. Even if the amount owed is relatively small and the charges are really old, they can still damage your scores. If you do owe on a collection, you may be able to negotiate the payoff balance with the collection agency. Just make sure you get any agreement in writing before sending a check!

• Always keep your credit card balances below 30% of the outstanding limit. The credit bureaus hit your scores hard if you over-utilize your available credit – even if you make your payments on time. If your balance-to-limit ratio is high on a few accounts, one trick to help resolve it quickly is to see if your bank will raise your limit. Of course, only do this if it won’t encourage you to spend more money!

• If you have a home equity line of credit, verify that all three of the credit bureaus are reporting it as a mortgage debt. If it shows up as a revolving debt, then it will be treated by the scoring algorithms like a credit card and could damage your scores if you’re carrying a balance higher than 30% of the limit. If you do see this kind of error on your credit report, be sure to contact the appropriate credit bureau to get it fixed.

• Keep older credit card accounts open. A lot of people (me included!) have made the mistake of closing out older, well-established credit card accounts because they think it will help their scores to reduce available credit. Big mistake! If you’re going to close out accounts, make sure to keep a few of your oldest ones open. Credit bureaus like to see long credit histories, so don’t chop your credit scores by chopping old accounts.

• Cosigners beware! If you plan to cosign for somebody, make sure they will pay their payments on time. If they don’t, your scores will suffer and the bank will come after you for the unpaid debt.

Pull Your Credit Before Shopping for a Loan

If you’re going to be shopping for a new loan in the new future, I highly recommend grabbing a copy of your credit report ahead of time for free at AnnualCreditReport.com. Getting your credit report before you apply for a loan will give you an opportunity to fix any errors before they could hinder your ability to get the best possible deal.

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Mortgage markets worsened slightly last week as positive U.S. economic news overshadowed growing concerns for the Eurozone’s future. Political and economic issues continue to weigh on Greece and Spain, and it’s still unknown how France’s new President will change that nation’s fiscal direction.

Conforming mortgage rates edged slightly higher on the week overall.

Last week was light on economic data, but the figures released were more positive for the U.S. economy.

Job Openings at Highest Level Since July 2008

The Bureau of Labor Statistics reported 3.7 million job openings nationwide this past March, marking the highest amount since July 2008. Voluntary separations (i.e. “quit jobs”) increased, too — also at levels not seen since 2008.

Voluntary separations may hint at labor market improvement because employees rarely leave a steady-paying job without the prospect of a new job ahead. Furthermore, the four-week moving average of first-time unemployment claims fell for the first time in a month.

The other is housing and, this week, there will be two key housing reports for Wall Street to review. The first is Tuesday’s homebuilder confidence survey from the National Association of Homebuilders. The second is Wednesday’s Housing Starts data for April.

Mortgage rates may also be affected by the Tuesday release of the Retail Sales report and Consumer Price Index report; and, by the Federal Reserve’s Wednesday release of the FOMC Minutes from its last meeting.

Greece Default Looms

The recent elections in Greece have thus far failed to result in a coalition government, so uncertainty is higher than ever about the debt-stricken nation’s ability to meet debt payments and requirements for EU bailout funds. It’s looking more likely than ever that Greece will soon default on its debt and exit the euro, which places the overall viability of the euro in question. This could be positive for interest rates in the United States because investors will likely shun the increased risk of the euro for the relative safety and stability of US assets. When demand for US debt increases, it tends to push down interest rates.

Having said that, if you already have a good mortgage deal in the works, I suggest locking it in.  There’s a lot of volatility in the markets and rates have more room to rise than fall at this point. Though events in Europe could be rate positive in the long-term, there’s still plenty of room for a rate spike in the near-term similar to what we saw in March after the release of the Federal Open Market Committee Minutes.

If rates drop in the future, you can always refinance again if you need to.

Mortgage Rates At All-Time Lows

For home buyers and mortgage rate shoppers, mortgage rates remain at all-time lows. According to Freddie Mac, the average 30-year fixed rate mortgage rate nationwide is 3.83% for borrowers willing to pay 0.7 discount points and a full set of closing costs — the lowest rate-and-fee combination in Freddie Mac’s recorded history.

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The following is from HousingWire:

Speaking on a conference call Friday, [HUD Secretary Shaun] Donovan heralded a bill introduced this week by Dianne Feinstein, D-Calif., that encourages homebuyers who don’t have a Fannie Mae, Freddie Mac or Federal Housing Administration-backed loans to refinance.

“There are about 3.5 million families who are doing the right thing by paying their bills, current on their mortgages, but because they’re underwater and have a private-label securities loan, they have been locked out of refinancing,” Donovan said. “We want to expand refinancing to those families.”

And in an attempt to accelerate the rebuilding of homeowner equity, Senator Jeff Merkley, D-Ore., advanced a bill in which Fannie and Freddie cover the closing costs for some homeowners who are current on their mortgage and seeking to refinance into a 20-year loan term or shorter through HARP. It will save homeowners an average of $3,000 a year.

A third bill would remove the current loan-to-value “floor” for HARP loans, making it possible for more borrowers that have an equity position to take advantage of what amounts to a “streamline” conventional refinance. HARP loans were originally designed to help upside down homeowners with good credit and qualifications take advantage of today’s lower interest rates – often without an appraisal.

This is an election year, so it remains to be seen if these bills will pass. Stay tuned.

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From CNN.com:

Mortgage interest rates hit new lows this week as both the 30-year and the 15-year fixed-rates fell, according to a weekly survey by Freddie Mac. It was the second consecutive week that rates broke records.

The 30-year, the most popular mortgage product, fell by 0.01 percentage points to 3.83%. Last year at this time, it stood at 4.63%. The new lows can save borrowers $46 a month for every $100,000 borrowed. Over a 30-year term that comes to more than $16,000.

The 15-year fixed dropped by 0.02 percentage points to 3.03%, lowering borrowing costs to $692 a month for every $100,000 borrowed, a $38 savings compared with a year earlier. Borrowers would pay out only $24,565 in interest over the life of the loan.

Is it possible rates could go lower from here? Sure, anything’s possible! But rates have far more room to go up than down at this point. If you refinance now and rates drop lower in the months and years ahead, you can always refinance again if you need to.

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What is a Reverse Mortgage?

A reverse mortgage is exactly like it sounds – a mortgage in reverse. Rather than borrow a fixed amount of money and pay the loan balance off as with a traditional “forward” mortgage, reverse mortgages start at a beginning loan balance and work their way up as scheduled payments are added to the existing loan balance.

Reverse mortgages essentially allow seniors to convert home equity into cash without having to make payments to supplement retirement income and cover living expenses.

Pros and Cons of Reverse Mortgages

The 4-minute piece below from NBC’s The Today Show highlights a few pros and cons of reverse mortgages and the reasons why you may want to consider one, including:

• There are no mortgage payments
• There is no credit check
• There are no income qualifications
• You remain the legal owner of the home

You have several options for how your home equity is distributed to you. You can receive a lump-sum payment, elect for monthly installments over time, create a line of credit, or do a combination of all three.

The one major downside of the reverse mortgage is the fees; they tend to run higher than the costs on a traditional conventional mortgage.

Reverse Mortgage Requirements

To be eligible, you must be 62 years of age or older and the subject property must be your primary residence. You are not required to repay the loan as long as you:

• Maintain the property
• Pay the property taxes
• Pay the homeowners insurance
• Keep the property as your primary residence

You’ll also be required to attend a government-mandated counseling session as part of the application process so that you fully understand reverse mortgages.

Find Out More

Want to find out more about a reverse mortgage? Let me know! I’m happy to connect you up to a loan agent that can help you understand your reverse mortgage options.

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After two weeks of little change, mortgage rates improved slightly last week.

According to Freddie Mac, conforming 30-year fixed mortgage rates fell to an average of 3.84% nationwide for borrowers willing to pay 0.8 discount points at closing plus full closing costs  (1 discount point is equal to 1% of the loan amount).  This is the lowest Freddie Mac 30-year fixed rate ever recorded.

The 15-year fixed average mortgage rate is also at its lowest point in history. According to Freddie Mac’s survey, the 15-year fixed averaged 3.07% with 0.7 discount points last week. One year ago, the rate was 3.89%.

Much of the decline last week could be traced to the less-than-stellar job numbers released on Friday.  Bad economic news tends to be mortgage rate positive.

This week, with a sparse economic calendar, mortgage markets will likely take cues from events in Europe. Notably, France has elected a new leader that prefers government spending over austerity, and voters in Greece have “punished” leaders that supported the eurozone bailout of the financially beleaguered country.

Events such as these add uncertainty to an already shaky fiscal situation in Europe and could result in a flight to the relative safety of US assets. Fear spurs investors to seek “safe” assets such as U.S. government-backed bonds and mortgage debt. As demand for mortgage bonds rises, mortgage rates tend to fall.

This week, rates are starting the week improved. Whether it’s a knee-jerk reaction to Eurozone news from the weekend, or low rates are here to stay is tough to know. Therefore, if today’s mortgage rates look good to you, consider locking it in. There’s far more room for rates to rise than fall.

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The job market is improving at a pathetically slow pace – just 115,000 new jobs were created in April. The reason the unemployment rate is falling is not because the economy is creating jobs at a healthy clip, but because people are dropping out of the labor force. From CNN:

There are far more jobless people in the United States than you might think.

While it’s true that the unemployment rate is falling, that doesn’t include the millions of nonworking adults who aren’t even looking for a job anymore. And hiring isn’t strong enough to keep up with population growth.

As a result, the labor force is now at its smallest size since the 1980s when compared to the broader working age population.

…

A person is counted as part of the labor force if they have a job or have looked for one in the last four weeks. As of April, only 63.6% of Americans over the age of 16 fell into that category, according to the Labor Department. That’s the lowest labor force participation rate since 1981. (emphasis mine)

The unemployment rate is falling largely because increasing numbers of the working-age population are no longer being counted as participants in the labor force. If you’re unemployed and actively looking for a job, you’re counted as part of the labor force. If you’ve long since given up looking for a job because you can’t find one, you’re no longer part of the labor force and aren’t counted in the official unemployment statistics.

It makes no sense to me that the government would calculate the numbers like this – unless, of course, it’s trying to make the unemployment situation look a lot better than it really is. Despite what incumbent politicians may claim in an election year, I don’t see how the economy is really getting that much better.

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There are two types of mortgage financing predominant in today’s mortgage lending marketplace: Fannie Mae conventional and FHA-insured financing. Fannie Mae is the stricter of the two and requires that any open judgments be paid off and closed before the loan is completed.

FHA guidelines are a little more lenient; the judgment can remain open after the loan is completed, but only if you have an agreement with the creditor to make regular and timely payments and can document you’ve made your payments as agreed. Judgments without a payment agreement must be paid and closed before the loan is complete under FHA guidelines.

Though FHA guidelines allow for judgments to remain with an installment plan, banks who fund FHA loans may add their own more restrictive guideline overlays.

If you know you have a judgment in your credit file, I highly recommend getting it cleared up before applying for a mortgage. In today’s tougher lending climate, you want to put your best foot forward so you can get the best mortgage deal you can.

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Mortgage markets were mostly unchanged last week for the second straight week. Heavily indebted Spain made few moves to allay concerns from its investors, the Federal Reserve did little to change its message on the U.S. economy, and newly-released economic data was in line with expectations.

Conforming mortgage rates idled last week, remaining near all-time lows for the 30-year fixed, 15-year fixed, and 5-year ARM mortgages.

Mortgage Rates Largely Unchanged Last Week

According to Freddie Mac’s weekly mortgage rate survey, last week’s average mortgage rates for 125 banks were the following:

• 30-year fixed rate mortgage : 3.88% with 0.7 discount points
• 15-year fixed rate mortgage : 3.12% with 0.6 discount points
• 5-year adjustable rate mortgage : 2.85% with 0.6 discount points

A discount point (known also simply as a “point”) is a one-time closing cost and is equal to one percent of the loan amount. A mortgage applicant taking out a $100,000 mortgage with a 0.7% discount points would pay an upfront charge of $700 at the time of closing.

Unemployment Numbers On Deck This Week

The ongoing debt crisis in Europe will continue to weigh on markets this week, but the big economic news will be the non-farm payrolls report on Friday. Analysts expect the economy to add 165,000 net new jobs for April and the official unemployment rate to stay unchanged at 8.2% (though actual unemployment is higher, if you take into account so-called “discouraged” workers who have dropped out of the labor force).

Better than expected unemployment news could push mortgage rates higher. If the unemployment report falls short of expectations, the result could be lower mortgage rates.

Get Your Rate Locked In

If you’re in process with a loan application and you have a deal you like, I highly recommend locking in your rate before the unemployment report on Friday. The markets are looking for reasons to be optimistic, and a better-than-expected unemployment report on Friday could push up rates – which means you could miss the boat on a great mortgage deal.

Mortgage rates have more room to rise than fall; even if the unemployment report is terrible, it’s not likely we’ll see rates that much lower than we already have.

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The Pending Home Sales Index posted 101.4 in March, a four percent gain from the month prior and the index’s highest reading since April 2010, when the home buyer tax credit expired.

A “pending home” is a home under contract to sell, but not yet closed. The Pending Home Sales Index is tracked and published by the National Association of REALTORS® every month.

The March report marks the index’s first 100-plus reading in nearly two years. To home buyers and sellers , this is statistically significant because the Pending Home Sales Index is normalized to 100, a value corresponding to the average home contract activity in 2001, the year the index was first published and an historically strong year for the housing market. Market activity for March is essentially on par with market activity in 2001.

Unlike most indices, which tell us how the things performed in the past, the Pending Home Sales Index gives us an idea how the housing market will perform in the future. Typically, 80% of homes under contract close within 2 months and many more close within 3 to 4 months. Therefore, based on the strength of the March Pending Home Sales Index, we could see a strong April and May in the housing market nationwide.

If you’re shopping for homes right now, consider taking advantage of the somewhat soft market to get yourself a great deal. Between low mortgage rates and home prices, it could be a great time to purchase a home. However, work with a great real estate who knows your market and do your homework. Many markets, such as Las Vegas and Phoenix, have limited inventory and a highly competitive environment.

A FHA loan offers great rates and a minimum of 3.5% down with reasonably decent credit. Fannie Mae conventional loans also offer great rates with a 3% down payment (for superior credit) or 5% down for good credit. Feel free to give me a call if you’d like me to crunch the numbers on a new home purchase loan.

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