Credit and Lending
Why This Blog?
Hi, my name is Harry Panosian, and I have been in the mortgage business for over 25 years. I worked for a mortgage banking firm early in my mortgage banking career. Since 2002 I’ve owned Blake Mortgage, NMLS ID 150459, an Arizona-licensed mortgage broker specializing in residential mortgages.
Understanding the Process
I’ve always wanted to write a book on mortgage finance. But have yet to set aside the time to do it. I wanted to write this book to teach people what I learned while originating loans. Throughout my career, I’ve realized that ordinary and extraordinary people struggled with the process. What’s scary is that most consumers need to understand how they arrive at an interest rate and fees to which they agree to pay for the loan term.
Even the most sophisticated borrowers need help understanding how to price a loan so that they are paying the lowest given rate with the lowest offered fees at the time the loan funds. Rates and fees are a market function, and that cycle has to follow the consumers buying or refinancing cycle. If interest rates are on an upward trend, it will naturally cost more to borrow money, and if they are on a declining trend, it will cost less. Of course, that’s oversimplifying it, but it is one of the many factors discussed in the following blog series.
Aim to Teach
This Blog series aims to teach you a shortcut to an outcome. What do I mean by that? This course will not make you an expert in mortgages, nor make you a loan officer for which you need a license to practice, but it will teach you step-by-step how to shop for the cheapest fees and the lowest rate for your given mortgage transaction. What I’m about to share with you is not rocket science, but you need to do a teeny-weeny bit of homework, which will save you tens of thousands of dollars throughout the term of your loan.
The Internet has millions of pages about rates, fees, loan programs, etc. Still, none shows the industry insider knowledge you need to get the lowest interest rate with the lowest costs on your next mortgage. When you complete this shortcut to an outcome, you will keep more of your hard-earned money in your pocket and not give it to the bank.
Harry Blake Panosian
CFP® CDFA ChFC® AIF® CMC®
A Friendly Reminder
Please remember that this blog should not be considered legal or tax advice. Please consult your attorney or CPA for tax and legal advice.
The discussed laws and principles are as they apply in the state of Arizona only. However, you could use rate and fee shopping techniques discussed in any jurisdiction subject to federal banking laws, the Dodd-Frank Act, the CFPB, RESPA, the “Truth in Lending Act,” and other applicable laws.
Before you start shopping for a mortgage or, better yet, before you even call the realtor, please go to this URL www.annualcreditreport.com and get a free copy of your credit report. The government allows you an annual retrieval of your credit report, giving you a snapshot of your credit profile for your entire life.
Remember, don’t call the realtor. Stay out of the Internet looking for a mortgage broker. Do this first.
The second step is to review your credit and ensure that your information is accurate and that your credit balances are correct. Look for inconsistencies, late payments, charge-offs, liens, and other irregularities. With clear credit, sufficient income, and assets to cover your debt-to-income ratio, and you have the required down payment, you will get a mortgage.
You have work to do if you have any late payments, incorrect credit balances, bankruptcies, charge-offs, medical collections, and tax liens which are notorious for ruining credit reports.
I can share an anecdote about a doctor whose own practice had submitted an unpaid balance on a medical insurance claim to a collection agency. It was the doctor’s practice turning him into the collection agency. He still needed to learn that the insurance company had yet to pay a hundred percent of the claim. People sometimes forget that just because you have health insurance, the insurance company will cover the billed items from the hospital or doctor. In reality, the insurance company may only pay a portion, and some of that bill may be your responsibility, which people tend to ignore. Then months go by until they discover a medical collection has been charged-off and credit ruined.
Three credit bureaus are repositories of your financial DNA. They are:
c. Trans Union
These three credit bureaus receive your payment history monthly from most of your creditors. Each creditor may have their reporting timetable, but they report to the repositories each month.
If you notice, I said “most “of your creditors and not all of your creditors. The reason is some creditors choose not to report to avoid competing creditors from raiding their accounts with new offers. It is especially true for creditors with higher rates than the market, who want to keep those accounts from competing offers with lower interest rates.
To stay on top of your credit, you should sign up with one of the credit bureaus mentioned above for monthly reporting of your credit profile. This service is free if you sign up with one credit bureau. They will try to upsell you to sign up for all three bureaus, which will set you back, usually by thirty dollars or more. You do not need to do this. Just sign up for the free one.
In addition to the credit bureaus, there are credit reporting agencies which number in the hundreds, that provide the tri-merge credit report that most lenders require, which shows all of your credit scores from the three repositories. More on that later.
Time Will Heal
As I mentioned, if you have any dings on your credit, such as late payments collections, charge-offs, bankruptcies, repossessions, short sales, foreclosures, etc., you need to address them individually. There’s nothing you can do about late payments other than make sure that they reflect the true nature of the delinquency. Time will heal them, and it depends on the type of debt. Mortgage late payments are a big no-no. That is supposed to be your most important obligation, and lenders frown upon that. Different guidelines apply depending on the mortgage loan you are trying to get. However, that is one of the more severe delinquencies you could have. Government programs are generally more forgiving on credit dings than other conventional financings.
If there are any open collections on your credit report, it behooves you to contact the collection agency, and you can usually negotiate a lower settlement than what’s outstanding. However, the longer the collection stays “open, “the more impact it will have on lowering your credit score.
During the great recession, which we’ll discuss in detail later, there were a lot of foreclosures. “Short sales” were not even invented then. Government-sponsored agencies that securitize many conforming loans relaxed some of the restrictions governing these loans, but there is still a “Seasoning “requirement on these events.
Identity Theft & Credit Freeze
Not a day goes by that you don’t hear about somebody’s identity being “stolen” and their lives ruined. Or worse. You hear about some hacker from a remote location hacking into a large corporation’s database and stealing personal data, including Social Security numbers, dates of birth, home addresses, income information, etc.
Cybersecurity experts continuously remind us to protect our online access with sophisticated passwords and change them regularly to stay ahead of the hacker’s reach. It is a cumbersome process. Yet necessary. Identity theft protection will not guarantee against hacker intrusion. If you want to avoid this type of violation against you, it’s best to have your credit frozen at each of the three credit bureaus. It can make things a little bit more difficult for you, but if you do not need an immediate loan, you could always unfreeze your account, and once you complete the transaction, you can “Freeze” your credit again.
If you put a credit “freeze” on your account and apply for credit, lenders will contact you for permission to do what they need.
FICO & Credit Scoring
Watch this video:
Credit scoring is a numerical representation of your credit habits. It considers available credit at your disposal, the amount utilized, payment and length of history, the number of recent inquiries, and new and open accounts — other factors include derogatory items that we discussed earlier.
Since there are three separate credit repositories, each provides its credit scores. Most lenders use the middle number of the three to represent your overall credit.
Your credit scores will determine what loan programs may be available to you. The higher your credit score, the more liberal your lending terms will be. FICO scores range from a low of 300 to a high of 850. Most lending programs will not lend on scores below 620. There are, however, exceptions to this rule, as nonconventional lenders may lend on scores as low as 500. But the rates on these types of loans that are considered subprime loans will be prohibitive, and the down payment requirement will be a lot more than conventional loans.
What if you do not have a credit score or any conventional credit? Some programs will use nonconventional credit, such as your monthly rent payments, utility payments, etc., to underwrite your file manually, but that is beyond the scope of our conversation here.
Just remember to maintain good credit habits. Paying your bills on time, making prudent decisions with your use of credit, and refraining from opening those tempting department store and hardware store offers to open new credit in return for a discount on your purchase at the store, may hurt you on the long run.
Credit Lates & Foreclosures
In a deed of trust state like Arizona, generally, once you are 90 days late, the lender will commence the foreclosure process with a “NOD” or a “Notice of Default.” A “NOD” means you will get a letter from the lender citing a notice of default, threatening to auction your home at a public sale on the courthouse steps. The late fees will start mounting, and legal fees will soon ensue if you cannot bring the current loan. Finally, the foreclosure process will begin.
In non-deed of trust states, the process is different and usually takes a more extended period, as foreclosure is a judicial process. It means that it will go through the courts until you settle.
You want to avoid foreclosure at all costs.
The great recession in 2008 brought a slew of foreclosures, short sales, and bankruptcies. It reached unheard-of levels as homeowners could not keep up with their mortgage payments. As a result, their property values severely declined, consumers lost jobs, and many properties had encumbrances greater than their appraised values. As a result, consumers unable to sell abandoned these properties, and lenders began foreclosing on them. This chain of events had a tremendous impact on the real estate market for years.
Recovery was slow. The foreclosure and short sale effects on credit scores were severe. Consumers who were once homeowners were now paying rent. For a borrower to qualify for a conventional mortgage, lenders generally require seven years of seasoning for foreclosures. Since this catastrophe, lenders have eased up on the seasoning requirements for foreclosures and short sales. At this writing, the seasoning requirement on a Fannie Mae and Freddie Mac loan for “Foreclosure” and “Short sale” is generally four years. Please check with your lender for the specific seasoning requirements. Typically, federally insured and guaranteed loans such as FHA and VA have a more liberal seasoning requirement.
A chapter 7 bankruptcy also has a four-year requirement, and lenders frown upon borrowers who have Any credit dings post-bankruptcy.
These seasoning requirements are continually changing depending on market conditions. It used to be that all short sales and foreclosure seasoning was seven years.
The “short sale” came into vogue with the advent of the great recession. The overwhelming number of foreclosures was causing an oversupply of inventory. Lenders came up with a solution: the Short Sale. By working with homeowners who had lost their jobs and could no longer afford their mortgage payments, the short sale provided them with a more graceful exit. It made those properties available for purchase by other borrowers. The process usually took 6 to 12 months, and realtors started specializing in short-sale property. The Short Sale solution eased the oversupply of inventory in the marketplace, and it was the beginning of the recovery in the housing market.
Even though the short sale alleviated the oversupply in inventory, the impact on credit scores was severe. However, As the market recovered, Fannie Mae and Freddie Mac were more lenient on consumers with short sales instead of “foreclosures.” This distinction would help borrowers later as they tried to get new mortgages as the seasoning requirement was different for foreclosures versus short sales.
There are three types of bankruptcies:
Chapter 7, Chapter 11, and Chapter 13
Generally, getting a conventional loan will be challenging if you have any bankruptcy that is still in process.
Once you have established credit after bankruptcy and do not have any derogatory credit, post a specific “Seasoning” period, you will most likely be able to get a conventional loan if all other underwriting criteria are met, such as income, assets, employment, and down payment.
Government programs have more liberal seasoning requirements than conventional loans. Check with your loan officer to see the applicable seasoning for the given loan program.
Some programs out there charge very high fees and interest rates. That will finance borrowers with more recent bankruptcies; however, they require large down payments. Therefore, I suggest scrutinizing these programs before originating such a loan.
Credit rescoring occurs when a borrower is a few points shy of a target credit score, and they pay down some debt and get their rescoring entity to do a simulation that will, in most cases, bring up the credit score for a borrower to qualify for a given loan.
You have to pay tax and mechanic’s liens before or at funding; otherwise, you will not be able to get the loan. These liens take precedence over a first mortgage; therefore, the lender will not fund the loan when these liens are present.
Furthermore, even if paid off, a federal tax lien may disqualify a borrower because the lender will most likely require additional information for the delinquency.
Inquiries constitute 15% of your credit score. Therefore, repeated queries to open new accounts, especially in the last 24 months, may hurt your overall score.
Applicants are always concerned that a credit inquiry will impact their scores adversely. Especially when applying for a mortgage loan if various lenders pull their scores repeatedly. In addition, consumer credit inquiries from online retailers and many others will also impact the score.
The best way to avoid this would be to do your homework ahead of time with annual credit report.com and be confident of your score.
Your credit report also includes the following:
- Your employment history.
- Residential history.
- Any variations of your name.
- Phone number.
- Date of birth.
- Any tax lien.
- Other types of delinquencies.
Be aware that the consumer credit act compels creditors to remove derogatory credit from your credit report over seven years old. Some exceptions apply here. Please check out the link below for more information on the consumer-credit-protection-act.