Rising Rates Means More Rejections – 8 Ways to Make Sure Your Credit is Up to Par

Fix Credit to Meet Rising RatesThe interest rate that you will qualify for, when taking out a mortgage loan, has a large impact on how much money you will be spending on your mortgage over the life of the loan. Interest rates used to be at near record lows until not long ago, but it looks like those times are over. The economy is recovering and, with it, so are the interest rates. Mortgage rates have been steadily increasing lately, causing more people to apply for mortgages. Getting a mortgage loan while the interest rates are still relatively low has determined many people who were considering the purchase of a home act now, before rates climb to an even higher level (Read: 4 Things Home Buyers Should Look Out for With Mortgage Rates On the Rise).

The difference between all-time low interest rates and current interest rates may not seem like much. One or two percent sound like a very small difference, but if you consider the fact that it is one or two percent of several hundreds of thousands of dollars yearly, you might not think one or two percent is negligible anymore. That small difference can mean tens or even hundreds of thousands of dollars over time.

Unfortunately, the increase in interest rates has also resulted in an increase in the number of people whose applications were rejected. You can learn more about this if you click here. Because people were applying for a mortgage on a short notice, in order to still take advantage of the low interest rates, many didn’t have time to make sure that they can actually qualify for the mortgage. One of the most important requirements when applying for a mortgage loan is that you have a good credit score. Buying a home with a low credit score will attract a higher down payment requirement, a higher interest rate, and, many times, rejection.

The good news is that your credit score is one aspect of your financial life that you can improve by just making a few changes and taking a few precautions. Having a good credit score will not only allow you to qualify much easier and quicker for a mortgage loan, but also qualify you for lower interest rates, meaning that you will be paying much less on your mortgage each month (Read: Boost Your Credit Quickly With These Simple Tips).

8 Ways to Make Sure You Have a Good Credit Score

A good credit score is something that you can be proud of, because it means that you are a responsible person that knows how to manage his or her finances. Unfortunately, life doesn’t always go as planned and certain events, over which you have little power, can quickly ruin your credit score, making the purchase of a home very difficult or even impossible. Avoiding putting yourself in a situation where your credit score could be damaged is ideal and should be a top priority, but sometimes things that are out of your control happen, and the only way in which you can recover is by rebuilding your credit score.

Here are 8 ways in which you can make sure your credit is up to par when applying for a mortgage loan.

  1. Get a copy of your credit report. You have the right to a free copy of your credit report per year. Knowing what your credit report contains is very important when trying to make sure that you can qualify for a mortgage loan. By looking over your credit report you can get a clear understanding of what your credit score is, what problems you have, and how you can start improving (Read: The Top 10 Components for Maintaining a Good Credit Score).
  2. Find errors on your credit report and dispute them. Errors on a credit report are not very common, but they do happen. The best way to find them is to carefully read your credit report and look for any inaccuracies or misinformation. These errors could have a large impact on your credit score, so finding them and disputing them as soon as possible is very important (Read: How Your Credit Score is Calculated).
  3. Pay your bills on time. The easiest way in which you can make sure your credit score is in a good range, and actually improving over time, is to not miss any payments and pay your bills on time each month. Being late for even a month can have a large negative impact on your credit score, and jeopardize your chance of getting approved for a mortgage loan.
  4. Avoid having too much debt. Especially before buying a home, having too much debt can seriously lower your chances of being approved for a mortgage loan. Large debt will also lower your credit score, making it even harder to qualify for a mortgage. Waiting until after you have bought a home to make any other large purchases using credit is recommended.
  5. Don’t take out too many credit cards. Credit card applications will appear on your credit report, and will affect your credit score. Lenders will also see you as someone who takes out too much credit, and will be reticent when deciding if they should approve your mortgage application or not.
  6. Keep using your current credit cards. Just having a credit card is not enough to keep your credit score in a good range. Using your cards, even for small purchases will be reported and actually increase your credit score by establishing credit history. Simply closing credit card accounts that you are not using will decrease your credit score. Click here to read more.
  7. Pay off some of your debt. Paying off debt will increase your credit score quicker than anything else. Your debt-to-income ratio will also improve, increasing your chances of receiving a mortgage loan without much difficulty. Having an unfavorable debt-to-income ratio will usually result in a mortgage loan application rejection.
  8. Extend your credit limit. Extending your credit limit will decrease the percentage of credit that you are using compared to how much credit you can use. Lenders will be more likely to extend the credit limit for a good customer, so choose a credit card with which you have had a long and clean history. Unfortunately, the credit limit extension means a new credit report check, so your credit score may decrease a little, but should recover quickly.

Making sure your credit is up to par when applying for a mortgage loan is one of the best ways of increasing your chances of approval. Interest rates are increasing, so you might think that this is your last chance of getting a fairly good rate. The truth is that it is a good idea to get a mortgage before rates climb even higher, but applying for a mortgage with a sub-par credit score will only result in a waste of time and money (Read: What Credit Score Do I Need to Qualify for a Mortgage?).

Are You a Twenty-Something Wanting to Buy a Home? Here’s What to Know

Twenty Something- 150x150Low interest rates and home prices have always attracted many young first time home buyers. Especially now, after the recent housing market crash, people who are looking to buy a home also have the option of buying foreclosed and distressed properties, which can still be bought for much cheaper than regular homes. But the housing market crash has also caused people to be more reticent when it comes to buying a home. First time home buyers are being especially careful before making such a large purchase, who may not be as stable financially or as sure as to how long they will be living in one location.

Home ownership when you are in your twenties, if you can afford it, can also be very beneficial in the long run. You will avoid wasting money on renting a place with no potential for equity and will also have much longer to pay off your mortgage before your retirement years. You will also build equity in your home when home prices are low, an advantage that you won’t get if you are renting. However, many young home buyers are afraid that they can’t qualify for a mortgage loan, or at least one that won’t have a very high cost. Being a twenty-something home buyer is the same as buying a home at any age. The most important factors will be your credit score, your income, and the size of your down payment. The actual problem that you might encounter is that you might be a bit young to have a perfect credit score, a large income, or enough money saved up to make a large down payment, but that can happen at any age. In this article, we will take a closer look at each of these three factors and how they can affect young home buyers.

Your Credit Score

A young person will probably be worried that he or she didn’t have enough time to build a good credit score, and the lenders will automatically reject their mortgage loan application. In reality, your credit score will probably be better than you think, and easy to boost. You are in your twenties, so you shouldn’t have any large debt or dark spots on your credit report. Also, if you don’t have credit, you can establish it fairly quickly, in a couple of years. Just having a credit card that you pay on time can help your credit score reach the “perfect” range very easily.

Because you are young and maybe haven’t found a stable job, you may have some unpaid bills that you think will affect your credit score. The most important thing is to pay them as soon as possible, but, unless they are referred to collection, they won’t affect your credit score in any way. You will probably have to pay a late fee if you are late on a credit card payment, but as long as you make the payment within 30 days, your credit score won’t suffer.

Your Income

Lenders have to make sure that your income is large enough to accommodate your monthly mortgage payment, which also includes the obligatory homeowners insurance and property taxes. Lenders usually require that your monthly mortgage payment is less than 30 percent of your monthly income. Also, the total money that you owe each month, including debt such as student loans, should not be higher than 43 percent, or even less for some lenders.

Lenders will also require that you have a stable job, meaning that you have held the same job in the same organization for at least two years. Self-employed home buyers will have to provide tax returns and other records for the past two years in order to qualify for a mortgage.

Your Down Payment

Your credit score will affect how much you will have to put down when buying a home. Typically, if you have a very good credit score, you will only have to make a 10 percent down payment. But you should also keep in mind that, if you put less than 20 percent down, you will have to pay a Private Mortgage Insurance (PMI), which will make your mortgage loan more expensive overall.

An alternative can be a Federal Housing Administration (FHA) mortgage loan, which require a much lower down payment, sometimes as little as 3.5 percent. FHA loans require a larger insurance payment, but also have lower interest rates, making them a good alternative to conventional loans. Active or retired military personnel can apply for a U.S. Department of Veterans Affairs (VA) mortgage loan, which requires no down payment. People who wish to live in a rural area can apply for a mortgage loan backed by the U.S. Department of Agriculture (USDA), which has many benefits over a conventional loan, but a longer waiting period.

Buying a home in your twenties is not harder than buying a home at any age, but it may be harder to qualify for a mortgage. Because you are just starting out in life, usually fresh out of college and with some debt, you might find it more difficult to come up with the large down payment or have a good enough income. But if you can do it, buying a home when you are twenty-something will be more beneficial than waiting until you are in your thirties or forties.

Your Mortgage Rate is Determined How? The Answer May Surprise You!

Your Mortgage Rate is Determined How-The Answer May Surprise You- 150x150Finding a good mortgage rate is very important when shopping for a mortgage loan. Lenders compete with each other to offer borrowers the best rates, but you must understand that the interest rates that lenders advertise are influenced by several factors, and you will probably end up paying a higher rate than the one you initially thought you would. Even a slight increase in interest rate translates in thousands over the life of the loan, so getting the smallest possible rate should be your main goal when looking for a mortgage.

The interest rate that you will have to pay is determined by taking into account what your credit score is, which part of the country you live in, how many mortgage points you are buying, the size of the down payment that you will be making, and, ultimately, the lender that you choose to go with. All these factors can significantly influence what your interest rate will be and make a large difference in what you will be paying over the years. In this article, we will have a look at each of these factors individually in order to better understand how your mortgage rate is determined.

Your Credit Score

Credit scores have a huge impact on mortgage interest rates. You might have a good credit score,and be comfortable with it, but you might be paying significantly more on your mortgage than a home buyer with a perfect credit score. Perfect credit scores are usually in the 740 and above range, while credit scores that are considered good are in the 700 to 740 range. With a credit score lower than 700, your interest rates will most likely be much higher than those of someone with a higher than 700 credit score. Even more, people with credit scores under 620 will not only receive high interest rates on their mortgage loans, but find it very difficult to actually get a mortgage loan.

Remember that you can check your credit report once per year for free, so keep an eye on your score before applying for a mortgage, and try to improve it as much as you can. If you are not in a hurry to become a home owner, and can postpone buying a home for 1 or 2 years, then you have plenty of time to make significant improvements to your credit score by paying off your debt and making sure that everything is paid on time.

The Part of the Country That You Live In

Depending on which region of the United States you live in, your mortgage rates might be higher or lower. There are no rules, but usually mortgage rates are higher in regions where the cost of living is higher. You should take this into account as well when deciding where you want to move. If you don’t have big reasons for moving in a certain region, then you could look at other similar areas in the country where the cost of living is lower, which means that your mortgage rate will be lower.

How Many Mortgage Points You are Buying

By buying points, you are basically pre-paying interest in order to lower your interest rate. One point normally costs 1 percent of the total loan amount and reduces your interest rate by one eighth of one percent. Buying a home is very expensive initially, so you should make sure that you can afford to buy points before deciding that they are worth it. Another thing that you must consider before buying points is how long you are planning to live in the home. Buying mortgage points is not recommended for those who plan on moving after only a few years.

How Much Money You Are Putting Down

The size of your down payment will help you save money in two ways. First, if your down payment is 20 percent or larger, you won’t have to pay for Private Mortgage Insurance (PMI), which can be quite expensive. Second, home buyers who make a smaller down payment will be seen as a bigger default risk by the lender and, most likely, asked to pay a larger interest rate. So coming up with a larger initial payment will help you save significantly over trying to save some money at closing by putting down a smaller amount.

Your Lender

Even if you have a good relationship with a mortgage lender and you are promised the best mortgage rates, shopping around and comparing offers from multiple lenders is never a bad thing. Lenders may be competing with each other, but they also participate in various lending programs and have other rules of structuring their mortgage loans and fees.

There are several factors that have an influence in determining your mortgage rate, and you might think that you are getting the lowest mortgage rate, but you should pay attention to other aspects of your mortgage loan before signing a contract. You might be offered a much lower interest rate by a lender, but, unless you pay attention, they might charge you significantly more on closing costs than other lenders. This can even lead to losing money over going with the lender that offered a slightly higher interest rate, but lower closing costs. Fortunately, with a little research and carefully comparing several mortgage offers, you will be able to find a mortgage loan that will suit your needs.

Mortgage Myths Finally Explained

Mortgage Myths Finally Explained-150x150Before buying a home, most people go through the same process, which mostly involves researching for lots of information. While going through mortgage loan options, pros and cons of each type of loan, and using mortgage calculators, you may come across on some information that has very little truth to it. Mortgage myths are very common, especially online, where anyone can post information about buying a home. While some of these myths are harmless and you will probably find out the truth before buying a home, there are others which can potentially cause some serious damage, and interfere with your ability to buy a home. In this article, we will explain some of the most common and dangerous myths, to ensure that you make the best decisions when shopping for a mortgage loan.

Top 5 Mortgage Myths

  1. The best mortgage is the one with the lowest interest. Looking only at the interest rate when comparing mortgage loans is a huge, but common, mistake. Several other important factors should be researched before deciding on a mortgage loan. Things like the overall cost of the loan, the down payment required and the closing fees are also important, if not even more important than the interest rate. There are also the adjustable-rate mortgages which offer a low interest rate in the beginning, but which can increase significantly over the repayment period.
  2. Pre-approved for a mortgage loan is like already being approved. The mortgage loan pre-approval process is designed to take a simple look at your financial situation, and give you an idea about how much you can borrow. Once you find a suitable home, you will have to provide more important information about your finances, such as employment information, to your lender. Sometimes, this additional information can affect the amount of money that your lender will let you borrow, or even cause your lender to refuse giving you a mortgage loan.
  3. 30-year mortgages are your best choice. 30-year mortgage loans are, indeed, very popular, and probably the most common choice among home buyers, but that doesn’t mean that this type of loan is the best for you. Depending on your situation, a 15-year loan, for example, might be a better choice, even if the payment will be higher. Paying off a loan in half the time, means that you will save significantly on interest, which will make the overall cost of the loan lower, and save you money.
  4. Fixed-rate mortgages are your best choice. Fixed-rate mortgages may be more popular, but you should decide on which loan you want to go with, based on your situation. For example, many home buyers don’t live in the home that they bought for very long, which makes adjustable-rate mortgages a better option for them. Adjustable-rate mortgages start out with a fixed interest rate, which lasts for a predetermined period, and it’s generally lower than the interest rate on a fixed-rate mortgage loan. By getting a mortgage loan with an adjustable-rate, you will be saving money over a loan with a fixed-rate, if you don’t plan on living in the home for a long while.
  5. You won’t be granted a mortgage loan if your credit score is low. Credit score has a large influence on whether you receive a mortgage loan or not, the loan type, loan amount, interest rate, and the down payment. But having bad credit doesn’t necessarily mean that you will be refused when you apply for a mortgage loan. You lender will see you as a high default risk, and your loan will probably not have the best terms, such as the interest rate, and the required down payment, but your lender will be willing to help you buy a home. After all, they have only to gain if they bring in a new customer.

You’ll be encountering mortgage myths at every step when researching mortgages and the home buying process. It is up to you to tell apart myth from reality. Knowing the dissimilarity between these two can make the difference between getting a mortgage loan that you are comfortable with, or one that will cause you nothing but issues down the line. Getting the best deal is your main goal when shopping for a mortgage, so being prepared will help you avoid falling into some expensive traps, and even ruin the chances of becoming a home buyer.

Need a Second Mortgage? A Home Equity Line of Credit Could Be the Answer!

Need a Second Mortgage-A Home Equity Line of Credit Could Be the Answer-150x150Similar to a credit card, a home equity line of credit could be the answer for home owners who are looking to take out a second mortgage. A home equity line of credit has several unique features and more flexibility than regular home loans, so it might be a better choice for those who need a second mortgage.

What is a Home Equity Line of Credit?

A home equity line of credit (HELOC) gives home owners the possibility of borrowing against the equity in their home. The borrower doesn’t receive the whole loan amount upfront. The lender will establish a line of credit from which the borrower can withdraw, up to the agreed total amount, much like when using a credit card.

The loan is given out based on the borrower’s credit score and equity available in his home. Home equity lines of credit, which are different than home equity loans, usually last for 5 to 10 years in which you can withdraw the amount that you need, for which you will be charged interest. Interest will not be charged for the whole credit line available, but only for the amount that you are actually borrowing. The period in which you can use the money is called a draw period, and it is followed by the repayment period. Repayment periods usually last 10 to 20 years, but some home equity lines of credit require payment at the end of the draw period.

Because a home equity line of credit allows you to withdraw as much as you want, within the set limit, the interest on this type of loan will be calculated daily, rather than monthly.

Benefits of a Home Equity Line of Credit

HELOCs have several strong advantages which should make this type of home loan a good choice for your second mortgage. Here are the most notable:

  • You will be charged interest only on the amount of money that you use, and not the whole credit line amount. The interest, which is tax deductible, will also be lower initially than it would be on a regular mortgage loan. There are, however, a few fees associated with setting up the loan and keeping the line of credit open.
  • Applying for a HELOC is a very simple process and the fees are much lower than on a conventional mortgage loan.
  • Withdrawing funds from a HELOC is as easy as using your own bank account. You can just use the money through a debit card or by writing checks.
  • Home equity lines of credit are also a good option for home owners who wish to make repairs or start a home improvement project, pay for education or medical expenses.

Drawbacks of a Home Equity Line of Credit

Home equity lines of credit are not the perfect loan, so they do have some disadvantages, as well. Here are the ones that you should keep in mind:

  • HELOCs are riskier than adjustable-rate mortgages, meaning that the interest rate can significantly increase over night. Interest rates change during the draw period, unlike ARMs, which give you a fixed rate for at least 5 years.
  • Paying a low interest in the beginning can be a trap for those who don’t have a good budget plan. The interest might be much higher when the time comes to pay off the principle.

As long as you are disciplined, understand what a home equity line of credit involves, and what are its advantages and disadvantages, this type of loan might be a great choice when you need a second mortgage.

Should You Take Advantage of a Portable Mortgage?

Should You Take Advantage of a Portable Mortgage- 150x150Portable mortgages allow you to move your mortgage from one property to another. When moving and taking out a new loan, instead of repaying your initial mortgage, you transfer it to the new home. This type of mortgage first appeared in 2003 and was introduced by E*TRADE Mortgage. The portable mortgage was only offered on 30-year mortgages with a fixed interest rate. It featured a higher interest rate than a regular mortgage, and it could only be used to purchase single-family homes. The home purchased with a portable mortgage was required to be the borrower’s permanent residence. The borrower was also required to have a clean credit report, and provide all of the necessary documentation.

Advantages of a Portable Mortgage

Like all mortgages, a portable mortgage can be the perfect fit for you, depending on several factors. For example, if you move frequently or have a job that requires you to change locations every few years, the portable mortgage might be a great choice. There are two main advantages of a portable mortgage:

  • Avoid the cost of taking out a new mortgage loan. Usually, when you take out a new mortgage loan, closing costs and other fees can be in the thousands of dollars, making the overall cost of the loan much higher than you initially thought it would be. You will still have to pay some fees, but you will save significant money in closing costs compared to taking out a new loan without having the portable mortgage option. You will also avoid paying any pre-payment penalties on your initial loan.
  • Avoid an increase in interest rate. If you have qualified for a good mortgage interest rate on your original loan, then you can carry the same interest rate to your new loan. If your credit was good when you took out the first mortgage, but has decreased since then, you will still be able to qualify for the same interest rates, unlike with a regular mortgage loan where the interest rate that your lender will give you will be strongly influenced by your current credit score. This can be a great advantage, especially if you are moving frequently.

Disadvantages of a Portable Mortgage

Portable mortgages do feature some disadvantages, as well, but it all comes down to whether you really need this type of mortgage. As with the advantages, how much you move has an influence on how well this mortgage suits you. If you don’t move too often, then this might not be such a great choice for you when it comes to choosing a mortgage loan type. The two main disadvantages of a portable mortgage are:

  • Higher interest rates. A portable mortgage is a good choice for some individuals, and they will save money even if the interest rates are higher. If you are not in the situation of needing a portable mortgage, and come to the conclusion that you will end up paying more, then it is better to keep searching for a conventional loan that might better suit you.
  • Good credit required. Unlike regular mortgage loans, where you can also qualify with not so stellar credit, in order to get approved for a portable mortgage, you will need a perfect credit score.

Deciding whether a portable mortgage is right for you or not depends mainly on how long you plan to keep your first home before moving into a new one. So the best thing to do is do your homework, learn what is involved with portable mortgage, know its advantages and disadvantages, but more importantly, have clear knowledge of your financial situation and future plans.

Life After Foreclosure: Your Future in Home Ownership Revealed

Life After Foreclosure- Your Future in Home Ownership Revealed- 150x150Losing a home to foreclosure is a very stressful and discouraging experience which may have a negative influence on one’s desire to own another home. Fortunately, a foreclosure is not the end of the world, and it doesn’t mean that you can never own a home. Depending on the circumstances of your foreclosure, it’s just a matter of time before you will be able to apply for a new mortgage.

When Can You Apply for a New Mortgage?

Normally, you have to wait seven years after the foreclosure to buy another home. This is the period of time that is required by the government-endorsed organization Fannie Mae, a company that has purchased a large number of mortgages in the United States. The foreclosure remains on your credit report for seven years, but even after that you will need a good credit score in order to secure another mortgage loan.

If your foreclosure was caused by extenuating circumstances, like losing your job, a significant pay decrease, or illness, the period of time before you can reapply for a mortgage loan is reduced to three years. Extenuating circumstances are events that are beyond your control and must be properly documented.

Another possibility is that some lenders will be willing to give you a new mortgage loan right away. Unfortunately, the new mortgage loan will probably require you to pay a very large down payment and high interest rates.

How Can You Improve Your Credit Score?

Defaulting on your mortgage will have serious repercussions on your credit score. The foreclosure will show up on your credit report for seven years, but you should start rebuilding your credit score right away. If the foreclosure is the only negative event on your credit report, then you can rehabilitate your credit score in as little as two years.

In order to start increasing your credit score you will need a credit card that you will use to pay for your purchases. On-time payments will reflect on your credit report when the time to apply for a new mortgage loan comes. It is important to make sure that all three credit agencies record your payments on a monthly basis.

The housing market crash has left many Americans with no other options than finding a place to rent. Fortunately, recovering from a foreclosure is not as hard as it seems, it just takes a while. Rebuilding your credit and regaining the lenders’ trust can help you get a new mortgage loan in only a few years. Foreclosure is a scary and depressing process, but, through a little research and a lot of determination, you can quickly get back on track and become a home owner again.

 

Understanding Private Mortgage Insurance

Q&A-Understanding Private Mortgage Insurance- 150x150Question: I am unclear on specifics with private mortgage insurance (PMI).

1. Why can the price can range from 80-300 for the same loan amount? 
2. How and when does it actually disappear when your loan-to-value is below 80%? For example- does that mean another appraisal is needed or does it go off of the purchase price, and what if you just happened to have an appraisal recently?

Understanding PMI Specifics

Answer:  Mortgage insurance rates vary from one type of mortgage to the other. Depending on the type of mortgage you’ve taken out, your mortgage premiums will depend on the rate capped on your mortgage type. Various types of mortgages include subprime, nonconforming, and jumbo, among others.

There are several factors affecting private mortgage insurance. They include:

1.    Loan-to-value (LTV) ratio

PMI heavily relies on the LTV ratio. LTV is the amount of the loan in relation to the value of the home expressed as a percentage. Most mortgagors require the mortgagee to purchase a mortgage insurance cover when the balance on the loan exceeds 80 percent of the home’s purchase price. The table below shows how LTV ratio affects the PMI rate.

As a general rule the higher the LTV, the higher the cost of insurance. A $350,000 loan at 85 percent will cost more to insure in comparison to a $150,000 loan at 85 percent. Similarly, a $120,000 loan at 85 percent will cost more to insure in comparison to a $120,000 loan at 90 percent. Mortgage insurance stops at the point when you’ve built 20 percent equity in your home. This is achieved when your LTV ratio has reached 80 percent. To discontinue insurance premiums, you should report to your lender so that they instruct your mortgage insurer to stop charging you mortgage insurance.

LTV

PMI Rate
for 30 year mortgage

PMI Rate
10, 15, 20 year mortgage

80.01% – 85%

.32

.19

85.01 – 90%

.52

.23

90.01% – 95%

.78

.26

95.01% – 97%

.90

.79

 

2.    Types of PMI

There are three types of PMI:

(a)   Borrower-paid PMI- it is the most popular option. The cost of insurance is added to the mortgage price and the lender pays it in the normal monthly principal repayment. The lender then submits it to the insurance company on your behalf.

(b)   Lender-paid PMI- the PMI rate is added to the current mortgage rate so that the borrower doesn’t have to make separate payments. Since PMI isn’t deductible, you’ll enjoy interest deductions because it is combined with the mortgage rate. This means that a borrower with a lender-paid PMI is likely to pay a lower amount to the mortgage insurer than the borrower with a borrower-paid PMI.

(c)    Piggyback loan- it is referred to as a “piggyback” loan because a second mortgage is pinned to the original mortgage and it simultaneously closes with the original mortgage. There are several variations, but many lenders use the 80-10-10 criterion. Here, the borrower can take an 80 percent first mortgage, automatically avoiding PMI. The second mortgage becomes 10 percent and the other 10 percent is cleared as a down payment.

3.    Location of the property

The location of a home influences PMI premiums significantly. A home located in a place where the value of homes is consistently declining will be charged a higher mortgage insurance rate or even fail to be covered completely. In some parts of the country, condominiums are charged higher mortgage insurance rates than single-family homes because they are prone to value volatility. The location of a home can therefore cause a significant difference in the mortgage insurance payable on the same type and amount of loan for different borrowers.

4.    Borrower’s credit score

The credit score of a borrower affects the interest rate on any type of mortgage. The impact can be so huge as to exceed the mortgage rate, resulting in hundreds of dollars of additional expenses. PMI has been designed to protect the mortgagor from default. Even though various ways can be used to structure a mortgage to avoid PMI, a poor credit score may hamper such efforts.

Lenders use the borrower’s credit score to gauge the risk of default. Therefore the lower the borrower’s credit score, the higher the PMI rate. This means that two borrowers in the same loan category and amount can pay different insurance costs. The FICO credit score ranges from 350 to 850 and most Americans lie between 600 and 800. A score below 620 qualifies in a subprime mortgage category, which has a higher PMI charge than other types of mortgage loans.

 

What is a Mortgage Credit Score?

Mortgage-Form1-150x150A new type of credit score, designed especially for mortgages, was released in 2012 by the Fair Isaac Corporation (FICO) in collaboration with data firm CoreLogic. This new type of credit score will serve as another tool that, together with the traditional FICO score, will help more people become eligible for a mortgage loan.

The FICO Mortgage Score Powered by CoreLogic will contain information that other credit bureaus, such as Equifax, Experian and TransUnion, don’t include in their credit reports. This should paint a complete picture of whether you are financially responsible or a risk for default. Information on your rent payments or child support payments will be included in this new credit report, and will be taken into consideration when determining your credit score.

Benefits of the Mortgage Credit Score

The developers of the new FICO Mortgage Score stated that its main purpose is to help more people become home owners, but critics say that it will only generate more inaccuracies and privacy problems. Some of the key benefits of this new credit scoring system are:

  • The mortgage credit score will help prospective home owners who don’t have a long payment history record, which is a large part of the traditional credit score. If you don’t have enough experience with other loans, such as credit card or car loans, then this new type of scoring can work in your favor.
  • Takes into account other on time payments. Nontraditional information, which wasn’t taken into consideration when determining your credit score in the traditional way, such as a payday loan that was repaid on time, can help you get a loan easier.
  • Recent events in the real estate market have made it harder for lenders to evaluate borrowers, so the new credit score will also benefit them by more accurately predicting mortgage risk. It is estimated that the FICO Mortgage Score can predict mortgage risk 7.5 percent more accurately than the old FICO credit score.

Disadvantages of the Mortgage Credit Score

As you are well aware, the traditional FICO credit scoring system comes with its pros and cons, and so does the new FICO Mortgage Score. Here are a few of its disadvantages:

  • Other issues will affect more heavily. Home buyers with problems, such as divorce, evictions, child support, or who bought a home before the economic crisis, will have a harder time getting a loan or rebuilding their credit, because the new credit score will accentuate their issues.
  • Unknown time frame for dispute resolution. It is unknown if consumers will have the ability to dispute and resolve any inaccurate information in their new credit report in a timely manner.
  • There is no guarantee that the new mortgage credit score will result in more loans being granted. Also, there are no guarantees that lenders will even use the new FICO Mortgage Score. Only smaller lenders have started using it, while big lenders are more concerned with sorting out loans with issues that they have already given out.

This new credit score may have benefits on paper, for now, but only time will tell if the new FICO Mortgage Credit Score will indeed help more people become home owners. The most important thing is for you to understand your financial situation, including your credit score, which can be the only thing standing between you and home ownership.

What Credit Score Do I Need to Qualify for a Mortgage?

Credit-150x150Buying a home through a mortgage loan involves many factors, one of the most important being your Fair Isaac Corporation (FICO) credit score. The credit score is a tool used by lenders to help them determine how much money they can lend to you and at what interest rates. Your credit score is included in a credit report, which is a history of all your loans and payments. As you have probably guessed, a good credit history means that your credit score will be high. If you have missed or late payments, that will lower your credit score and make you appear as a risk in the eyes of a lender.

What is a Credit Score?

The Fair Isaac Corporation (FICO) credit score is the most popular type of credit scoring system in the United States. Your credit score is a 3 digit number that is determined by using information in your credit report, such as payment history, amounts owed, and length of credit history. This number is used by lenders, such as banks or credit unions, as well as mobile phone companies, landlords, or insurance companies to determine if you qualify for their services.

There are three major credit agencies in the United States: Experian, TransUnion and Equifax. Each of these agencies use a slightly different algorithm to calculate your credit score, so checking with more than one of them is always a good idea.

You can get one free credit report per year by visiting AnnualCreditReport.com. Unfortunately, there is an extra fee involved in order to receive your credit score, as well. Credit reports might contain errors which will affect your credit score. You should always check your credit report for any erroneous data, and have it corrected by reporting it to the issuing credit agency.

Credit Score and Qualifying for a Mortgage

FICO credit scores range from 300 to 850. The higher the score, the lesser risk the lender is facing when granting you a loan. The lower the score, the more risk that you won’t receive the loan, or that you will approved with some pretty high rates. Not all lenders will require the same credit score to qualify for a certain loan, but you can use these score ranges to get a general idea:

  • No credit. Having no credit is a bad spot to be in when applying for a mortgage loan. You are seen as a high default risk by lenders, but the good news is that having no credit is actually better than having bad credit, because it allows you to qualify for loans designed for people with no credit.
  • Very bad credit. A credit score below 600 is considered very bad credit and it is, most likely, the worst situation you can find yourself in when deciding to become a home owner. It is very difficult to be approved for a mortgage loan without a co-signer or a very large down payment when having very bad credit.
  • Bad credit. A credit score in the 600 to 650 range is considered bad credit and, like in the case of very bad credit, it would be extremely hard for you to qualify for a mortgage loan.
  • Fair credit. You are seen as a moderate credit risk by your lender when you have a credit score in the 650 to 700 range. A fair credit will qualify you for fairly decent rates, but you won’t have access to any special packages or the best rates.
  • Good credit. A credit score between 700 and 750 is considered good credit and will allow you to qualify for better rates and terms.
  • Very good credit. People with credit scores in the 750 to 800 range are regarded as low risk by lenders, and will qualify for some of the best rates and options available.
  • Excellent credit. Someone with no negative data on their credit report, and a long and spotless credit history will have a credit score of over 800, and will have access to the best mortgage loan deals and rates available from most lenders.

Having a lower score can be frustrating, but credit score is ultimately your responsibility when you consider becoming a home owner. Improving your credit score takes time and patience, so prevention is the key. Making payments on time and not borrowing more than you can repay will ensure that, when the time comes to apply for a mortgage, your credit score will be favorable and you will receive a good deal, saving you lots of money.