Lenders Still Want Great Credit Scores for Mortgages
These days, many consumers are likely finding it easier to obtain many types of credit, as lenders have significantly slackened requirements for most loans and credit cards. However, the qualifications to obtain a good mortgage rate remain stubbornly high across the country.
Even as credit conditions improve significantly nationwide and many financial institutions are once again broadening lending efforts, many are still being extremely tight with financing for mortgages, according to a report from the New York Times. In fact, even as subprime lending for credit cards opens up considerably, many consumers with low credit scores will find themselves extremely unlikely to even be considered for a home loan approval.
A recent study by the Federal Reserve Board indicated that consumers with a credit score of 620 willing to make a 10 percent down payment are now less likely to be approved for a mortgage than they were in 2006, the report said. Further, some were even reticent to extend financing to borrowers making a similar down payment when their credit rating was 720.
This is because most lenders are still extremely gun-shy about lending large sums of money to anyone but the most qualified borrowers, the report said. In many cases, those who are approved for a home loan will also pay far higher rates on the mortgage than those who have top-notch credit scores, even as the average interest rate has hovered below 4 percent for some time now.
“If you don’t have good credit, you’re not going to get that crazy low rate,” Deborah MacKenzie, the director of counseling at the Stamford, Conn., nonprofit the Housing Development Fund, told the newspaper.
Typically, the only way consumers can improve their credit ratings so that they can qualify for a home loan is by being smarter about managing their various lines of credit, including keeping credit card balances low and making all payments on time and in full. These are the two biggest factors comprised in a credit score. However, consumers can also be hurt by applying for too many new lines of credit within a short period of time, so avoiding this ahead of shopping around for a mortgage can be crucial to maintaining good credit health as well.
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The rate at which consumers fell behind on their home loans declined considerably in the first quarter of the year, and now stand at levels not seen in years.
The delinquency rate on home loans for properties of between one and four units fell to 7.4 percent of all outstanding loans in the first quarter of the year, down from 7.58 percent in the fourth quarter of 2011, and 8.32 percent in the same period last year, according to the latest statistics from the Mortgage Bankers Association. While declines are traditionally viewed in the first quarter of every year, the MBA’s data shows that the drops this year were more significant than traditional adjustments would have predicted, showing that the declines are real, rather than the result of seasonal norms.
“Newer delinquencies, loans one payment past due as of March 31, are down to the lowest level since the middle of 2007, indicating fewer new problems we will need to deal with in the future,” said Michael Fratantoni, the MBA’s vice president of research and economics. “The percentage of loans three payments or more past due, the loans that represent the backlog of problems that still need to be handled, is down to the lowest level since the end of 2008. Foreclosure starts are at their lowest level since the end of 2007.”
Delinquency fell for all types of mortgages except VA loans on a quarter-over-quarter basis, the report said. Prime fixed rate loan delinquency now stands at 4.07 percent, and late payments for prime adjustable-rate mortgages dropped to 9.05 percent, down from 9.22 percent in the fourth quarter. Further, loans backed by the Federal Housing Administration also saw drops in delinquency, falling to 12 percent from 12.36 percent a quarter earlier. The rate of homes that were in foreclosure increased on a quarterly basis, however, rising to 4.39 percent.
As the economy continues to generally improve, consumers are finding themselves in a better position to pay off all their outstanding debts on time. Factors such as declining unemployment rates and rising salaries have contributed to Americans feeling better about their personal financial situations. Experts believe that these trends will likely continue for some time, meaning that the housing industry may continue to improve, encouraging more qualified buyers to enter the market.
In the last year or more, many consumers have made conscientious efforts to reduce their reliance on credit cards and increase the timeliness of their payments, leading instances of delinquency and default to slip to at or near all-time historic lows.
But lenders will likely see their net charge-off rates slip for one more quarter before expanding again by the end of the year, finishing 2012 with higher rates of defaulted accounts than they began with, according to the latest report from analysis firm Fitch Ratings, entitled “Credit Cards: Asset Quality Review.” At the end of the first quarter, the net charge-off rate observed by the nation’s seven largest credit card lenders stood at 4.02 percent, down from 4.2 percent at the end of 2011, and 6.39 percent in the first quarter of that year.
Further, charge-offs are well below the five-year average of 6.51 percent observed between 2007 and 2011, the report said. And because of trends in 30-day credit card delinquencies, which itself is well below the five-year average, it’s likely that the current charge-off rate will decline once again in the second quarter of this year.
However, the trend may soon reverse because consumers are once again feeling better about their finances in general, the report said. Portfolio contraction among major lenders more or less held steady in the first quarter of the year, and smaller card issuers actually saw more consumers opening new accounts.
As a consequence of this trend, which may also be the result of expanding credit standards that are allowing subprime borrowers to once again access lines of credit they were unable to tap just a year ago, it’s likely that defaults will begin expanding once again, trending back toward historical averages from the current levels. Many had long projected that there must be a logical point at which charge-offs bottomed out, and we could soon see that point.
Millions of accounts were written off by lenders as uncollectable during and immediately following the recent recession as card issuers tried to shield themselves from significant loan losses as a result of consumers who could no longer afford to pay their bills. However, the improving economy has emboldened most major lenders to once again extend credit to those who previously defaulted on their accounts.
Children are not supposed to have a credit report in their name, but new studies have found that the number of those who do is growing considerably, which can pose major problems for affected kids.
People under the age of 18 who have a credit report in their name are almost certainly the victims of identity theft, and this is a large and growing problem nationwide, according to a report from the Columbus Dispatch. Some studies have found that large amounts of kids have been a0ffected by identity theft, in which the crooks open large amounts of credit in their name and steal tens of thousands of dollars or more, and leave their young victims to carry the blame.
Often, this type of crime is carried out when a thief gains access to a kid’s Social Security number, the report said. Sometimes this can happen as a result of data breaches at hospitals or schools, and other times, their relatives may steal their identity. These youngsters are usually targeted because they will have no credit history and, since parents wouldn’t normally even think to make sure their son or daughter has a credit report in their name, the crime is unlikely to be discovered for a long time.
“These kids’ Social Security numbers are particularly valuable to thieves because they can go years without detection,” Bo Holland, chief executive of AllClearID, told the newspaper. “Because of privacy restrictions, the credit bureaus can’t share with parents what they find in their (child’s) files. So they don’t know who is using the Social number or what accounts were opened.”
The most common way a child who has been victimized by this type of crime discovers the problem is when they turn 18—sometimes even older—and apply for a line of credit, the report said. To their dismay, they may learn that they’re saddled with significant debts, such as those for auto loans, credit cards and sometimes even mortgages, that have gone long periods of time without payment.
One thing parents who are concerned about this type of crime can do is contact the credit reporting agencies and ask them to put a freeze on their kids’ credit until they turn 18 and are capable of obtaining some types of loans on their own.
By: Gerri Detweiler
If it seems like everyone’s talking about credit scores these days, it’s probably not your imagination. Consumers appear to be getting smarter about credit scores. At least that’s what the results of a survey of 1000 consumers by the Consumer Federation of America (CFA) and VantageScore Solutions show. Compared to a year ago, a larger percentage of consumers correctly answered a variety of questions about credit scores. But there were a few key concepts that tripped up many respondents.
Most of those surveyed did well on the basics. They knew that:
- Mortgage lenders and credit card issuers use credit scores (94 percent and 90 percent correct respectively). And many other service providers also use these scores — landlords, home insurers, and cell phone companies (73 percent, 71 percent, and 66 percent correct respectively).
- The three main credit bureaus — Experian, Equifax, and TransUnion — collect the information on which credit scores are frequently based (75 percent correct) and that it is very important for consumers to review their credit reports with those agencies to learn if they are accurate. (82 percent correct).
- Consumers have more than one generic credit score (78 percent).
- The following types of information influence scores: missed payments, personal bankruptcy, and high credit card balances (94 percent, 90 percent, and 89 percent correct respectively). And that making all loan payments on time, keeping credit card balances under 25 percent of credit limits, and not opening several credit card accounts at the same time help raise a low score or maintain a high one (97 percent, 85 percent, and 83 percent correct respectively).
So What’s The Problem?
CFA’s Executive Director Stephen Brobeck said he has “have never seen such improvement from one year to the next,” in the organization’s consumer knowledge surveys. But there was still some basic information about credit scores that many didn’t understand. In particular, consumers didn’t seem to grasp how expensive poor credit scores can be. For example, fewer than one in three were aware that, on a $20,000, 60-month auto loan, a borrower with a low credit score is likely to pay at least $5,000 more than a borrower with a high credit score.
While credit scores don’t take factors like age, marital status or race into account, just over half thought a person’s age (56 percent) and marital status (54 percent) are factors used to calculate credit scores, and 21 percent incorrectly believe that ethnic origin is a factor.
Consumers are also confused about how inquiries affect credit scores. Just 9 percent correctly knew that “multiple inquiries during a 1-2 week window” will not lower scores. In reality, when it comes to FICO scores, recent inquiries within a short period of time for mortgage, auto or student loans don’t affect scores, and going back in time, multiple inquiries for the same type of loan in those categories are treated as a single inquiry. The exact time period varies, depending on which scoring model is used. Similarly, multiple inquiries within a 1-2 week window won’t lower VantageScore scores.
The Smartest Consumers Know Their Scores
Checking one’s credit scores apparently does help cut through the confusion; those who had seen their scores recently were more likely to correctly answer the survey questions. But fewer than half of those surveyed (42 percent) had received at least one of their credit scores during the past year. Of those who did see their scores, the top sources were a website (49 percent) and a mortgage lender (45 percent).