Residential Appraisal Costs and Regulations

Sticker shock is not uncommon for those who have not purchased or refinanced a home loan in the last 4-5 years. This post is to update the reader on the current market.

As background, the cost of an appraisal in the Denver-Metro area historically ranged from $300-$350. Typically, the appraisal was performed by a sole-practitioner, state licensed appraiser. That business model has all but disappeared for residential appraisals for lending purposes.

Given the myriad of new regulations throughout the mortgage industry, $450 $475 is now the going price for an appraisal in the Denver-Metro market.

A combination of market conditions, along with a shortage of approved appraisers, coupled with how soon one needs an appraisal, translates to a rush appraisal. A rush appraisal is defined as an appraisal report completed in less than three weeks. The cost of a rush appraisal may jump to $650.

If one lives in the mountains, let’s say Evergreen or Black Hawk, and needs a rush appraisal, expect to pay even more.

As a matter of practice, in this market, the Appraisal Management Company (AMC) gets a sizeable portion of the fee you must pay for an appraisal. In fact, the appraiser may now be paid less per appraisal than prior to the regulatory reforms. In fairness, the appraiser now gets paid for every transaction, which was not always the case prior to the enactment of Dodd-Frank and the boom of the AMCs.

The market has fewer sole-practitioner appraisers as most now work for an AMC. The AMC model has been around for decades, but due to the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, commonly referenced as the Dodd-Frank Act, the AMC is more the norm than the exception.

There are those, whose sentiment is expressed by Sam Heskel from a recent post in the Origination News, who believe consumers would be well served by seeing a breakdown of the fees, for the appraiser and the AMC, as separate line items on the closing document.

Regarding the sticker shock, this is an entirely new mortgage lending environment. You may notice many changes, some of them very good, as you go through the process of obtaining your new mortgage.

For suggestions on what to do to prepare for an appraisal, see: Preparing for The Appraisal – Selling or Refinancing.

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Financially Speaking™ James Spray RMLO, CNE, FICO Pro | CO LMO 100008715 | NMLS 257365 | September 27, 2015 | Update 8/28/16

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

The NEW Reverse Mortgage

It is my pleasure to specialize in the origination of Home Equity Conversion Mortgages (HECM) for the benefit of our clients. These are best known as Reverse Mortgages. The type of Reverse Mortgage we offer, and the most utilized product available in Colorado, is the one insured by the Federal Housing Administration (FHA) of the US Department of Housing and Urban Development (HUD) as further discussed by the Federal Deposit Insurance Corporation (FDIC) and as discussed by the Consumer Financial Protection Bureau (CFPB).

• The minimum age for a borrower is 62.
• A non-borrowing spouse under age 62 gets to be on the deed.
• Reverse mortgages are extremely well protected. Guaranteed by HUD; Insured by FHA.
• One of the protections is the requirement that borrowers receive counseling from a third-party HUD Certified Housing Counselor – often at no cost to the prospective borrower.
• No monthly out-of-pocket mortgage payments required.
• The reverse mortgage is due once the home is no longer the primary residence of the borrower(s) or the non-borrowing spouse.
• Out of pocket expenses are limited to property taxes, insurance and HOA fees (when applicable).
• The property is to be kept in good condition.
• The interest rate is not determined by income or credit score.
• The interest rate is based on the program chosen (Fixed Rate or Monthly/Annual Adjustable Rate
  • Flexibility on how funds are received (traditional):
  • In an interest-bearing line of credit and/or,
  • As monthly payments and/or,
  • In a lump sum payment and/or,
  • In any combination of the above methods.
• There are no restrictions on how the funds may be used.
• The title remains in the borrower’s name. The bank does not own your home. You may sell at any time.
• There is no equity sharing. Your equity is your equity.
• Credit review – The credit review is minimal providing there have been no serious derogatory credit issues, such as too much debt or unresolved credit obligations in the past two years.
• There is no minimum credit score requirement.
• Financial Assessment (FA) – The financial underwriting is minimal. The lender must be assured the borrower has both the ability and the will to pay the property charges. Property charges are real estate taxes, property insurance and home-owners associations, when applicable.
• Under FA, a full or partial set aside account may be required to pay taxes and insurance.
• Closing costs are comparable to other FHA insured home loans.
• There are no mark-up or “junk” fees allowed.
• One may still receive Social Security and Medicare benefits with a reverse mortgage.
• The reverse mortgage is a loan; the proceeds are not treated as income.
• There is no prepayment penalty; the borrower may pay-off the reverse mortgage at any time with no penalty.
  • Reverse mortgages are non-recoursable; if more is owed than the value of the property, the lender may not collect the deficient amount from either the borrower or the estate.
  • Heirs may sell the property and pay off the mortgage. In the event more is owed on the property than the value of the property, the heirs may purchase the property for 95% of the market value as opposed to paying the full amount of the mortgage.
• Reverses Mortgages are also used for Purchase Money. Click here to learn more.
• Security is provided for the underage 62 spouse. Click here for more information.

DISCLAIMER: This publication does not represent that any of the information provided is approved by HUD or FHA or any US Government Agency.

DISCLOSURE: The information provided herein is not intended to be an indication of loan approval or a commitment to lend. Additional program guidelines may apply. Information is subject to change without notice.

Financially Speaking™ James Spray MLO, | CO LMO 100008715 | NMLS 257365 | Updated May 8, 2022

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct for your situation. This information is not legal advice and is for guidance only. You may reproduce this information in whole and not in part, providing you give full attribution to James Spray.

The Basics of Mortgage Lending and Mortgage Servicing

The following is not written as an extensive discussion about the roles of mortgage lenders or mortgage servicers. Rather it is written to provide a brief and very general overview of these two different and separate functions within the residential mortgage industry.

Quoting from the CFPB, “Your mortgage lender is the financial institution that loaned you the money. Your mortgage servicer handles the day-to-day tasks of managing your loan. Your loan servicer typically processes your loan payments, responds to borrower inquiries, keeps track of principal and interest paid, manages your escrow account, and may initiate foreclosure if you miss too many loan payments. Your servicer may or may not be the same company that gave you your loan.” In other words, the mortgage lender may also be the mortgage servicer.

How does the mortgage lender get paid? The mortgage lender may get paid with a combination of an origination fee and the spread between the interest rate paid for the funds it lends and the interest rate charged to the borrower for those funds. Or the mortgage lender may just get paid on the spread between the interest rate paid for the funds and the interest charged to the borrower for those funds.

How does the mortgage servicer get paid? Generally speaking, there are four streams of income for the servicing function.

First, the servicer gets a servicing fee.  The servicing fee is typically calculated as a percentage of the outstanding principal balance of the loans serviced. Generally speaking, it is interest on the principal which ranges between one-eighth (0.125) and one-half (0.50) percent and which is retained by the servicer.

Second, the servicer is entitled to keep the “float” on the mortgage payments received. To illustrate: the borrowers remit payments to the servicer on the first of the month, however the servicer is not be required to remit the funds to the lender/mortgagee until the end of the month.  The result is that the servicer gets use of the funds for the most of the year with the exception of the few days each month when the servicer must remit to the lender/mortgagee.

Third, the servicer retains any supplementary fees it collects. The promissory note of the mortgage specifies the amount and payment of late fees as well as any other fees or costs related to the collection of late fees.

Finally, the servicer earns revenue from the fees and interest generated by funding mortgage servicing advances.

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Financially Speaking™ James Spray, RMLO, CNE, FICO Pro | CO LMO 100008715 | NMLS 257365

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct for your situation. This information is not legal advice and is for guidance only. You may reproduce this information in whole and not in part, providing you give full attribution to James Spray.

Purchase or Refinance During a Chapter 13 Bankruptcy

Chapter 13 Plan

This post is written for folks currently in a Chapter 13 Plan. It is also helpful for those contemplating filing a Chapter 13 Bankruptcy Reorganization Plan. This post is also helpful for those recently Discharged from Chapter 13. A mortgage refinance or a home purchase, while still in a Chapter 13 bankruptcy, is possible; it is also a complicated financial and, legal transaction. To do this requires a highly specialized mortgage professional experienced with both FHA lending rules and Chapter 13 bankruptcy as well as local court rules.

The Chapter 13 Payment

One of the most important things to understand is the importance of on-time Chapter 13 Payments to the mortgage underwriting process. I strongly encourage you to read this: The Chapter 13 Payment. Your Chapter 13 Trustee payment is given the exact consideration as your housing (mortgage/rent) payment in underwriting. From the underwriting perspective, one thirty-day late payment of either the mortgage or Chapter 13 Trustee payment will sink your prospects of getting mortgage loan approval for at least a year. Mail your payment early or set your on-line bill pay or direct payment to the Trustee so that you always know your payment has had time to get to the Trustee’s office and be posted by the staff at that office. Too many times, on review of the Chapter 13 Payment history, we find a payment was posted on the 2nd day of the month. One day counts as a late payment. An experienced mortgage lender can help you check your Chapter 13 payment history in real time.

Mortgage Choices for Chapter 13 Debtors (purchase or refinance)

The only mortgages available, either for refinance or purchase, for those in a Chapter 13 Plan are those insured or guaranteed by the Federal government. These mortgages are either: insured by FHA,  guaranteed by VA or the USDA. Each

Any mortgage so long as it’s FHA, VA or USDA.

of these home loans are underwritten with the same guidelines as set forth in the FHA Handbook. How does a bankruptcy affect a borrower’s eligibility for an FHA mortgage? From the FHA Handbook:  “A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA mortgage provided the lender documents that one year of the payout period under the bankruptcy has elapsed and the borrower’s payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive permission from the court to enter into the mortgage transaction.*”  Most underwriters will consider the Chapter 13 Trustee’s approval as permission from the court.

Application to Incur New Debt

To get underwriting approval for a Chapter 13 Debtor to refinance the Chapter 13 Trustee (in Colorado) or the Judge must approve your application to incur new debt. Contact your attorney to determine how and when to best proceed, or not. There are situations when it may not be in your best interest to purchase or refinance while in Chapter 13. This is a process which you can only do with the advise and assistance of your attorney. Your attorney must prepare the financial statements to submit to the Trustee in order for authority to be granted for a lender to offer new credit. Your mortgage loan originator should be able to assist your attorney in completing the Application to Incur New Debt.

Mortgage Refinance After Chapter 13 Discharge?

Yes. One may refinance or purchase within 2 years following the Discharge. BUT, it is easier to get approved for a mortgage while still in Chapter 13. This is because, following Discharge, a manual underwrite is mandated. Few lenders are willing to take the risk of not having the safe harbor provided by Automated Underwriting. Begin reestablishing good credit as soon as your Chapter 13 Plan is confirmed and continue this discipline while your case is still open so by the time your Discharge enters, you have solidly reestablished good credit.

Two years following Discharge, with reestablished credit, one may qualify for a conventional or Qualified Residential Mortgages (QRM) to purchase or refinance a home loan.

Preliminary Requirements for Purchase or Refinance While in Chapter 13

• Twenty-four months of current housing payments with no 30-day late payments and, the likelihood of the income continuing for at least three years.
•  Two years IRS Returns showing your income is sufficient to pay the mortgage as well as your Chapter 13 payment and any debt not included in the bankruptcy payment.
• Minimum middle FICO Score of 620 . Most will need to practice what I’ve previously posted as FICO  101a, 101b and 101c for several months prior to making a successful application for mortgage credit.
• For anyone with a fear of having credit make time to read both Credit: Use It to Build It (Part 1) and Credit: Use It to Build It (Part 2).
• Begin rebuilding your credit as soon as your Chapter 13 Plan is Confirmed/Court Approved; this is when your property has been revested to you.
• The maximum limited-cash out loan to value on an FHA appraisal is presently 95% – Refinance.
• The minimum down payment is 3.5% of the purchase contract or appraised value whichever is less. – Purchase
• The maximum Debt to Income Ratio is 45%. This is pushing the envelope. While in Chapter 13, it is mandatory to have Court approval (in Colorado, the Trustee approval suffices) to obtain a mortgage.

There is more detail to this process than can reasonably be discussed herein but this is the essence of purchasing or refinancing while in Chapter 13.

*Reference: FHA Handbook 4000.1 II.A. 5.a.iii (H)(2)(3).

Disclaimer: This article does not represent that any of the information provided is approved by HUD or FHA or any US Government Agency.

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Financially Speaking™ James Spray, RMLO, CNE, FICO Pro |  CO LMO 100008715 | NMLS 257365 | November 1, 2010 – Revised May 2, 2018 | Copyright 2010-2018

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

Preparing for The Appraisal – Selling or Refinancing

Make a good first impression, it helps.

 

 

 

 

 

This post is written primarily for the benefit of the seller and the listing agent as well as the refinance applicant.

• For most homeowners, the real estate appraisal is a key component to selling a home. It allows the business transaction to occur between the seller and buyer, as well as the Realtor or real estate agent and the mortgage lender.
• A state licensed appraiser is responsible for preparing the appraisal for a mortgage loan. The appraiser works for or is contracted by an Appraisal Management Company (AMC) which must also be state licensed.
• To facilitate the appraisal process, it’s beneficial to have the following documents, as applicable and if available, ready for the appraiser:
  • Prepare a list major home improvements (for example, the addition of central air conditioning or updated kitchen) and upgrades including the date and cost of installation as well as permit confirmation where permitting is required by the local government.
  • List any recent property maintenance items such as roof repair/replacement, a new hot water heater, new paint, carpeting, etc. As well as obtain and provide permit documentation when and where a permit is required.
  • Have a copy of a survey or Improvement Location Certificate of the house and land. Again if applicable and readily available. Such may only be required on rural properties.
  • Provide any written property agreements, such as a maintenance agreement for a shared driveway or a common wall agreement(s), etc.
  • List personal property which is to be sold with the home.
  • Provide a copy of the Purchase Agreement on a pending sale.
  • Your Realtor should offer to provide a Comparable Market Analysis (CMA) so you may provide the appraiser with comparable properties and values. Most appraisers value this help. Offer the CMA, do not try to force it on the appraiser.
  • There is nothing in law prohibiting you or your Realtor from presenting a CMA for the appraiser.
• Once the appraiser arrives at the property, there is no need to accompany s/he on the entire site inspection; it is appropriate to be available to answer questions. Feel free to point out any home improvements and provide the supporting documentation of the cost.
• On pets, not everyone loves our furry family members as we do.
  • Four-legged friends should be unobtrusive and well-mannered. Dog bites are to be avoided.
  • Feline friends should have recently cleaned litter boxes as well as neatened dining areas.
  • Spray the carpets, bed coverings and cloth furniture with Fabreze an hour before the appraiser arrives.

Other Considerations

• Accessibility: Make sure that all areas of the home are accessible. Especially make sure access to the attic and crawl space are readily entered. With a locked room, you’ll wish to be certain to provide access for the appraiser so as not to create doubt. Doubt is not helpful for an appraisal.
• Housekeeping: Appraisers see scores of homes a year and will look past most clutter, but they’re human beings too! A good impression can translate into a higher home value. Make up the beds; clean up the kitchen, etc. We found this article to be most helpful in preparing for showings as well as the appraisal. 24 THINGS YOU CAN DO IN 10 MINUTES OR LESS TO MAKE YOUR HOUSE MORE SALEABLE
• Pre-Appraisal/PreListing Infographic
• FHA Financing Eligibility: In the event you wish to have your property eligible for FHA financing, you may wish to: Install smoke detectors on all levels (especially near bedrooms); install handrails on all stairways; remove peeling paint and repaint the affected area.
• Maintenance: Repair minor things like leaky faucets, missing door handles and trim.
• Regulations: Some states, Colorado among them, require that carbon monoxide detectors are installed as a matter of law.
• Sensitivity: Remove sensitive pictures or religious symbols that could prevent an appraiser from taking the required photographs for the report due to privacy concerns.

“Having your house clean does make a difference, even though in theory it should not,” says Mark Ferguson, a real estate professional and property investor in Greeley, Colo. “Appraisers are people, and they are swayed by smells and how a house feels, even if they aren’t conscious of it.” For the complete article, read Do Ultra-Clean Homes Appraise Higher?

Related Information – From a Realtor’s perspective on preparing for a Buyer’s Inspection.

A Division of Real Estate Consumer Advisory: Understanding Appraisals and Appraisers

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Financially Speaking™  James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 |October 11, 2014| March 10, 2018

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

The QRM Rule: Residential Mortgage Rules

Official Device To Prove Future Income

2014 > Qualified Mortgage (QM) or Qualified Residential Mortgage (QRM) Lending Documentation Requirements and,

Ability To Repay (ATR) Documentation Requirements:

Verified minimum of previous 24 months wage earner employment or,

Confirmed previous 24 months self-employed (no blending of self-employed with wage earner); we’ll call this the Bernake syndrome. The former Federal Reserve chairman, speaking in Chicago told the moderator: “just between the two of us, I recently tried to refinance my mortgage and I was unsuccessful in doing so.”The lender must establish the likelihood of continued employment/income for the next 36 months.

The QM/QRM rule became effective on January 10, 2014. Residential mortgages subject to Reg. Z (1-4 unit owner-occupied homes) require the borrower’s income/assets are to be fully documented and verified.

• Two months  of the most recent year to date (YTD) pay advice.
• Wage-earner income must be verified with Federal and State filed 1040’s + all schedules + W-2(s) + 1098(s) + 1099(s).
• Self-employed: Copies of last two years Personal and Business returns including all Schedules, 1099’s, Form 1065 plus K-1, Limited Partner K-1 Forms, sub-chapter S Corporation 1120S plus K-1 Forms, Corporation form 1120 and year to date P&L Statement plus Balance Sheet.
• If income taxes are e-Filed, the entire e-Filed digital filing is required.
• Must be able to reasonably project borrower’s  income and debts over the next three years.

Asset and Other Income Documentation

• Previous two months bank statements – all banks, all accounts with all pages including blank pages.
• Current statements of all investment accounts with all pages including blank pages.
• Current statements of all retirement accounts with all pages including blank pages.
• Current leases to prove leasehold income.
• Other documents as may be required to prove income.

 Standards

• Payment to income ratio (PTI) – Conventional – 28%
• Debt to income ratio (DTI) – Conventional – 43%
• PTI – Government (FHA, VA, USDA) – 38%
• DTI – Government – 44%
• FICO® Scores 640+*

In the present regulatory climate many lenders impose underwriting rules (referred to as “overlays”) that are more restrictive than required by law or regulation. One set of overlays: bankruptcy, foreclosure, short-sale and deed-in-lieu of foreclosure prevent entry or reentry to the mortgage market for certain time periods as displayed here. Points and fees which may charged to borrowers are defined and limited. For the details, click here.

Exceptions to QRM and ATR

Investment properties are exempt. These are provably non-owner occupied residential properties. The proof is provided with 1040’s and schedules as well as the income shown with bank statements and an accompanying lease agreement. Credit Unions and banks serving underserved communities also have certain exemptions. As well, there are non-QM loans which do not feature low down-payment options or highly favorable rates and terms.

Media outtakes/observations from the industry biased view:

“…lenders are imposing higher than usual credit scores and other tough standards on people applying for government-backed mortgages. The lenders say they’re exceeding the government’s own criteria in a bid to insulate themselves from more financial penalties and lawsuits. And several analyses suggest that millions of potential home buyers are getting shut out as a result.” The Washington Post recently published: Why the next pick for U.S. Attorney General has huge implications for the housing industry.

Critique: For a well thought critical observation of potential serious failures of the discussed reforms, read QRM’s Missed Opportunities for Financial Stability and Servicing Reform by Alan Levitin. Mr. Levitin states in part that “… QRM was (a) missed chance to fix servicing for both investors and consumers.”

*On FICO® Scores, the best rates at the lowest cost are available for borrower with a minimum 740 middle score based on the FICO® models used by lenders which are also used by Fannie Mae and Freddie Mac. With lower scores one may expect a higher rate with additional underwriting overlays such as lower DTI and LTV, more liquid assets and higher down payments among other overlays.

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Financially Speaking™ – James Spray, RMLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | October 4, 2014 November 22, 2016

 Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and  complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal  interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use  this information in whole and not in part providing you give full attribution to James Spray.

FICO 9 and Mortgages

 

 

 For this post, we are simply quoting from other media sources to help our readers understand the new FICO 9 credit scoring model. In spite of what you may have read, the FICO 9 credit scoring model will not help significantly, if at all, with home mortgages. At least not anytime soon. FICO 9 will be utilized sooner by vehicle and credit card lenders.

On August 23, 2014, The Motley Fool published Why New FICO Score Rules Could Be a ‘Game-Changer’ In Helping You Obtain a Loan stating, in part, the following: “According to FICO, the median FICO score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points.

 FICO’s new more lenient model should also benefit collection agencies. Consumers with unpaid medical debts now have an incentive to settle, knowing that FICO will stop including in its calculations any record of a consumer failing to pay a bill, if the bill has been paid or settled with a collection agency.

Auto and Credit Card Lenders Will Be First to use FICO 9

 “This is great news for collection agencies,” Rood said. “It provides laggards with an incentive to pay up. Before these changes, you were incentivized not to pay off your debt. The last thing you wanted to do was trigger a new ‘date of last activity’ report for an old debt, say, a debt from 2008. Again, you were just better off not paying it because older debts weighed less heavily against you on your credit report than new debt. The new scoring model will likely be implemented by credit card and auto lenders first. Mortgages typically lag in adopting new scoring models.”

Mortgage Lenders Will Be Last to use FICO 9

The New York Times in their article of August 7, 2014 titled: Credit Scores Could Rise With FICO’s New Model explained it very well. “For consumers to see any benefit, however, lenders have to adopt the new scoring techniques. FICO last introduced a new model, called FICO 8, in 2008. Since then, FICO said that about half of its customers had started using that model. 

Mortgage lenders have been slower to adopt new scores, and most are using even older versions, experts said, because Fannie Mae and Freddie Mac are still using them in their own underwriting software. Fannie and Freddie did not say whether they had plans to switch to the updated FICO score that weighs medical collections less heavily. But they both said they were confident in the tools they use.”

Finally, law professor and author James Kwak, states the facts very simply: “…the financial district of the Western societies, Wall Street, and outdated software may very well be the norm not an exception.”

The Take Away

The take away on all this, according to Ted Rood of the Mortgage News Daily is that “(home and mortgage) buyers should keep paying those medical bills and avoid collections to ensure their loan approvals!” This statement was excerpted from the article titled: New Credit Score Model Would be Great for Housing! Too Bad it Won’t be Used.

Final Word

Our regular readers already know of our thoughts on FAKO credit scores and the release of FICO 9 adds yet a new dimension. Consumers purchasing their scores from the myFICO site will get real FICO scores but they are likely not going to be the scores which mortgage lenders use. So what can you do? You can write or call elected officials and ask that they help Fannie Mae and Freddie Mac catch up with the times.

More on FICO 9 from the FICO Blog.

UPDATE: 09/22/15 | GSEs Struggle to Update Credit Scoring Models

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Financially Speaking™ James Spray, RMLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 |September 23, 2014 | Updated September 22, 2015

 

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

Credit: Use It to Build It (Part 2)

 

 

 

 

 

 

As discussed in Credit: Use It To Build It -Part 1, it is essential to qualify for and properly use credit in order to have credit. A thin credit file does little good to help one build or rebuild credit. Thin credit is described as a file lacking in length and depth of credit history. Thin is not a good thing in the credit sense.

The length of a credit history is a matter of time. A short credit history may have accounts that have been open for a matter of months or one or two years. A long credit history may span decades because open, active accounts remain indefinitely.

The depth of a credit report is an issue of the number and types of accounts you have. A credit history with only one or two accounts will likely be considered thin, even if it spans many years. A “thick” file would have several accounts of different types. For example a credit history could include credit cards, installment loans and a mortgage.

The Basics

Let’s start with the basics, understand the mechanics of the FICO Pie Chart as well as the art and science of Rebuilding Your Scores. Credit scores are not a big mystery; they are simply a measure of the information reported to the credit reporting agencies by your creditors. Learn about your credit reports control that which you can as to what is reported and your credit scores will follow.

Credit Score Facts

On credit scores, how do they work? What you can do to raise your scores is discussed in this blog. It is necessary to understand there is a difference in the credit scores one may obtain for free via the Internet. These are not the scores used by lenders. They may not even be close to those used by lenders. In this blog we discuss the difference between what we call FICO or FAKO Scores?

Join a Credit Union

Not just any credit union will do. Some credit unions are so large they act more like a bank than a credit union. To learn a little more about credit unions and to find one you can join, read our blog titled: Credit Union Power. This is a key step to reestablishing your credit. Once you’ve become a member, ask for help to set up a $500 secured installment loan. Next, utilizing some of your savings, as much as possible, set up a secured credit card account and use it properly.

Beginning Anew or New?

Whether beginning from scratch as a young person with no credit or whether starting again, the tasks are quite similar. Read through both Part 1 and Part 2 of these blogs to learn more of what to do and not do as you begin this new journey. If you have a family member with excellent credit, read and share this blog on this which we call inherited credit. You have the opportunity to learn about how it works and how it doesn’t work.

Credit Utilization

Anyone who uses credit cards could have high utilization, particularly those which pay off their balances in full each month. This is because balances are often reported to the credit bureaus mid-billing cycle. So if you have a $5,000 limit and you charge $4,000 in a month, you could be reportedly utilizing 80% of your available credit. The result is most often dramatically reduced FICO™ Scores.

We wish you success!

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Financially Speaking™  James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | September 21, 2014

 

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

Credit: Use It to Build It (Part 1)

 

Embarrassed: Believes No One Will Grant Credit

My very good friend, we’ll call him Ramsey (not David), does not use credit. Mind you, he’s not just a simple follower of some nameless cult leader advocating that no one should ever use credit. Ramsey’s a regular fellow, professional, married with grown children and grandchildren, too. Ramsey simply does not use credit and has not used credit in the past 8+ years. The only credit he’s had in the past several years is bad credit due to medical bills. These are the type of medical bills CFPB studied and recently discussed. These are the medical bills which have ruined credit for so many for so long. This is compounded if one is not offsetting the bad credit with good credit. And he wonders why he has such poor credit scores. One must use credit to get credit for using credit.

Fear of Credit

Tips for overcoming credit phobia – Although you intellectually understand that using a credit card is beneficial, you might still have emotional concerns. Perhaps you misused or didn’t understand how to use and not use credit when you were younger. Perhaps you had a bad experience. Start over and don’t make the same mistakes, you’ve learned what not to do.

The good news is that you can take steps to get more confident about the proper use of credit.

Check your attitude and thinking – One reason people overspend with credit cards is they are thinking incorrectly. Internalize the idea that credit cards provide short-term loans. When you swipe your card, you’re borrowing money – and you’ll have to pay it back. Plastic isn’t free money or additional income. And it does not replace income.

Confront your fear – Ignorance breeds fear, so the best way to overcome a fear of credit cards is to become more educated about them. The Board of Governors of the Federal Reserve System put together this wonderful guide to help you learn more about credit cards.

Make a budget – The best way to keep your spending under control is to make a plan for how you’ll use your funds. Be realistic about your budget and stick to it. You can use this budget form from Google for free. TIP: The most restrictive budgets usually fail.

Track spending by keeping receipts – After setting up a budget, keep tabs on how you’re doing by tracking your spending. You can use online banking or any other method you’re comfortable with, just do it.

Sign up for alerts – Most credit card issuers give you the option to set up text or email alerts to be reminded of billing due dates, your current balance, etc. Even though you’re keeping track on your own, setting up an alert adds an extra layer of protection against overspending or not timely paying.

Learn the facts –. Do not let your in-use credit be more than 20% of the available credit, ever. Better is to have no more than 10% of your credit limit in use as you are building or rebuilding your credit reputation. To learn more click and read this and then this.

Next, we heartily suggest you read: Credit: Use It to Build It – Part 2

Image attribution

Financially Speaking™  James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | September 19, 2014 | Revised March 31, 2018

 Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

Credit: Use It or Lose It!

 

Credit Atrophy

In neither of the below situations had either credit user been reckless or irresponsible. Neither had run up large balances and there were no late payments. The problem with each was that they simply hadn’t been using credit and had allowed open accounts to age-out from lack of use and be closed by the credit provider.

She Quit Using Credit

In December, my mortgage client’s co-signer’s FICO Scores were all over 830 and given that 850 is the ceiling, we call these great scores! In February, when my client was ready to set a closing, her co-signer had no reported FICO Scores. This means they had fallen below the mortgage score floor of 350.

His Credit Cards Expired

In the early Summer of  2013, my son-in-law began shopping for a home in their new town. His scores were all in the early 800s. By the time it came to schedule a closing in late Summer, his scores had all dropped into the 740 range. What happened? His unused credit lines were closed by the providers. The result was that his usage of available credit increased such that his scores dropped. Rather than having less than 20% of his available credit in use, he now had more than 45% of his available credit in use. He had not increased the amount of credit he was using. He lost open unused credit, which had a negative impact on his overall score as it appeared he was overusing credit.

Retired Credit

“FICO has the primary scoring model for mortgages and most other lending decisions. Its model require an [creditor] update to a credit report within the last 6 months. Your credit file is usually updated monthly for active accounts…” Source.

What to Do?

The card issuers have models which track your usage or lack thereof. The credit provider also incurs ongoing costs such as credit reporting, accounting and audit controls. Be Aware: If you are not using the credit card every six months, or so, the creditor may simply close the account. If the account is not being reported, it cannot be scored. If nothing else, charge something you need to purchase regularly, perhaps a pair of socks. Pay the invoice when due and never pay interest.

Image attribution

Financially Speaking™  James Spray, MLO, CNE, FICO Pro

CO LMO 100008715 | NMLS 257365 | August 22, 2014 | May 14, 2018

 

Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.