George's Blog

Blog 11.doc

George Duarte, MBA, CMC

“The Real Deal Guy”(SM)

In today’s challenging mortgage lending environment, one factor that is more critical than ever is your credit score. This is the number that is determined by the 3 credit repositories- Trans Union has the Classic Score, Equifax has the Beacon Score, and Experian has the Fair, Isaac (FICO) score. A real estate credit report pulls all three databases, and all three give a score for each borrower. Therefore a husband will have 3 scores and a wife will have her own three scores as well. The middle score of the three is considered “the” credit score. A husband and wife credit scores may be very similar, or quite different.

The credit repositories are the huge databases that all creditors report payment and client histories to. Each repository has a proprietary mathematical algorithmic formula in reviewing someone’s credit history that ultimately spits out a number. The inputs of this number are based on the amount of credit, how long the credit history has been established, the debt balance relative to the credit limit, on time payment history, and many other factors that are in fact secret and obscure.

It is very important to understand that good credit scores are more important now than ever, in this very conservative lending environment. Historically, the minimum credit score necessary for a Fannie Mae “A” paper conforming loan was a 620, but now, if it is less than 680 for either party, husband or wife, then Fannie Mae has a significant points surcharge of as much as 1.75 points. The pricing and underwriting now is all about perceived risk, and lenders and their investors are very credit averse right now, and will be for some time.

Fannie Mae and Freddie Mac have lost billions in the last quarter of 2007, and are looking to make it up by surcharges being imposed. They are now charging a .25 point fee, just because they can, for no particular reason, called “adverse market” conditions. They are charging extra fees for cash out, usually .5 point, and a 1.75 point additional fee for a credit score under 680. These can add up to considerable amounts in determining the pricing of a loan in a purchase or refinance, and can even impact it is worthwhile to refinance or not.

For the best financing terms possible right now, you’ll want to have a 720 or higher credit score, 80% loan to value ratio (either 20% down or 20% equity in the property), and full documentation of your income, and at least 90 days worth of payments in cash reserves.

More on credit scores, tips and tricks in the next installment-

George Duarte, MBA, CMC

The Real Deal Guy (SM)

Blog12.doc

Manage Your Credit and Credit Scores, Pt 2

By

George Duarte

The “Real Deal Guy” (SM)

In our last installment I discussed what a credit score is, some of the inputs that affect your scores, and the great importance of strong scores (over 700). In this part, I will give you some tips to help manage and increase your score, and keep it high.

1. Be very careful about applying for new credit- resist those offers in the stores that say “sign up for a card today, and get an additional 20% off” Whenever a consumer applies for credit an inquiry hits your report, and can deduct anywhere from 5-25 points off your score, depending on how many recent inquiries you have. Many people play the “credit card shuffle” game, paying off credit cards with lower interest rate credit cards, and transferring the balances. While this may seem like a good idea, it is in fact very bad for your credit scores for 2 reasons- you will have a continual number of inquiries, and you will also lose points because you will not have a long history of credit with the same creditors- one of the best ways to boost your score.
2. If you are in the loan process, do not pay off collections and charge offs, negotiate with the creditors, come to a payoff agreement, then pay them off in escrow, which a lender would require anyway. If you are not in the loan process, and do not expect to be applying for a loan for some time, then now is the good time to get those debts cleared up. Feel free to consult with me on the best methodologies for negotiating with creditors-that can be a whole column by itself- I don’t have a credit repair service, just help to advise consumers on how to go about it, and I don’t charge a fee for this advice.
3. Do not close credit card accounts, this is related to item no. 1 above, especially if you have had them a long time. Just pay them down to zero, but leave them open.
4. Do not consolidate your debts into one or two cards, this will hurt you in a couple of ways. The first way will be that you would probably have a balance higher than 30% of your approved loan limit on that card, and will lose points that way. Secondly, you would lose points by closing the accounts that are being consolidated, as mentioned above.
5. Make all your payments on time, even if they are the minimums! If your minimum payment is only $10 or $20, don’t skip it and pay double next time, pay it!
6. Do NOT co-sign for loans for anyone, friends, relatives, kids. More people have had their credit ruined through auto repossessions and other credit problems they have co-signed for, it is a cryin’ shame. If your friends, relatives have bad credit, that is their problem, don’t let them drag you down, too.

So those are the most important things to keep in mind in managing and defending your credit history. I cannot stress strongly enough how important it is to have strong credit-

Till next time

George Duarte, MBA, CMC, CMPS

The “Real Deal Guy” (SM)

   Much ado had been made of the tax refund checks that will be going out to taxpayers after they file their taxes this year, with the intention that people will go out and spend these refunds and stimulate the economy. Polls do indicate however, that these refunds will go towards current debt service, or put back in the bank for a rainy day, thereby casting doubt on the results of this exercise.

   However, another benefit from the Package that has not been well publicized at all is that the Conforming Loan limit, currently $417,000, will be temporarily raised based upon the median home prices according to local metropolitan statistical areas (MSA’s).

Here in the San Francisco Bay Area, we will qualify for the maximum new conforming loan amount of $729,750. Conforming loans are underwritten and purchased by Fannie Mae (Federal National Mortgage Association), and Freddie Mac ( Federal Home Loan Mortgage Corp.), both of which are known as GSE’s ( Government Sponsored Enterprises). These corporations are hybrids that are partially owned by the US Government, but whose stock is publicly traded. They are designed to provide liquidity to the mortgage marketplace- what they do is buy loans from Banks, Mortgage Bankers, Credit Unions and other lenders, package them in securities, either stocks or bonds, and sell them on Wall St., which then generates more cash for them to buy more loans from lenders.  This ingenious system was created 60 years ago, and is responsible for consistent mortgage loan money being made available to home buyers and owners.

   Fannie and Freddie are more important than ever now, because the other investors in mortgages have fled the Market- the “Credit Crunch” you have heard so much about. Fannie and Freddie are left as the most reliable and consistent source of mortgage money to lend now. FHA loan limits will be raised also to match the conforming loans.

Why This Development is Huge For Us

  California, and other “high cost” areas should have had this higher loan limit formula long ago, but now until the end of December 2008, we have a window to take advantage of.

Who will benefit from this development?

1. People who have jumbo loans now that have adjusted, or will be adjusting.
2. People who have Jumbo fixed rate loans now with a rate over 6.00%
3. People who are looking for homes in the $417,000-$740,000. price range, who otherwise would have been stuck with a Jumbo loan rate.
4. People who have homes for sale in that price range that were Jumbo and now are conforming- greatly increasing the affordability to potential buyers, and marketability of the homes, just in time for the prime spring buying season!
5. People who have subprime loans that have adjusted or will be adjusting, and need some flexible underwriting guidelines can utilize the FHA as a replacement. There are essentially no more subprime lenders in business- those left are like hen’s teeth. If FHA loans limits were higher in the first place, we wouldn’t have had nearly as many subprime loans.  FHA is known and designed for more flexible underwriting guidelines than Fannie and Freddie, and will accommodate credit scores as low as 570.

This is all wonderful news folks! Things are looking up, as long as you or your friends are paying attention to this great opportunity. If you are in the above categories, or know someone who is, you should definitely check this out.

At this time, the conforming 30 year fixed rate are around 6.00% and the Jumbos are around 7.00%, so for a $650,000 loan, the difference is $427.47 per month! Could you use a $427.47 per month raise in your income, or reduction of your outflows? Of course you could-

Don’t wait—

The Real Deal Guy (SM)

George L. Duarte, MBA, CMC, CMPS

March 3, 2008