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What’s the ‘Score?’ Understanding Credit and Lending Risks
Legal Realtor - by ROBERT S. KUTNER, ESQ. Partner, Casner & Edwards | Apr 27, 2016
The 2015 movie, The Big Short, highlighted bank abuses that led to the financial crisis of 2008. Loans had been issued to numerous borrowers with little regard to annual income or creditworthiness.
The loans were packaged in groups and sold. Since 2008, lenders have become extremely sensitive to the risks they undertake when lending. Consequently, they have tightened their standards when evaluating the creditworthiness of borrowers, relying on mathematical formulae, namely credit scores, for making lending decisions.
Some prospective homebuyers who have applied for financing with the belief that they would be approved at the lowest advertised interest rate have been surprised when advised they only qualify at a higher rate. The explanation is not necessarily based on the borrower’s income or the loan-to-value ratio for a property, but lies with the murky topic of a consumer’s credit score. Most borrowers should determine their credit scores before applying for a loan and take steps to eliminate factors that reduce their credit scores.
Credit scoring is a method for providing a snapshot of a borrower’s credit risk at a particular point in time by applying a mathematical formula to a borrower’s credit history to produce a three-digit numerical score that is intended to identify the risk that the borrower will fail to repay a loan. The most widely used credit scores are those developed by Fair Isaac Corporation and are commonly known as
Fair Isaac was founded in 1956. Its purpose is to assist lenders to manage credit accounts, to detect credit fraud, and to automate business decisions. The benefit
of FICO® scores is that they can be delivered almost immediately, helping lenders process loans and speed approvals. It is estimated that FICO® scores are obtained by lenders for more than 75 percent of mortgage loans.
FICO® scores range from 300 to 850 (Experian). They vary slightly among the other major credit report agencies: TransUnion (309-839) and Equifax (334-818). According to FICO®, there are five factors that are used to determine a consumer’s score:
•Payment history accounts for 35 percent of one’s score;
•The amounts owed comprise 30 percent;
•The length of credit history is 15 percent;
•Newly opened accounts and inquiries amount to 10 percent; and
•The “mix” of credit cards, retail accounts, installment loans and mortgage loans determines the final 10 percent.
Know The Factors:
The factors that affect a consumer’s score the most are late or missed payments and credit use (the ratio of how much credit is being used compared to the total amount of credit that is available). Length of credit history also affects the credit score, so it makes sense for a consumer to keep your oldest accounts open unless there is a compelling reason to close them. Negative remarks (like a late payment or accounts in collections) stay on one’s credit report for seven years.
FICO® scores exclude: the borrower’s age, race, color, religion, national origin, and marital status. They also exclude where the borrower lives, the borrower’s salary, occupation, employment history, rental agreements, child support obligations, and interest rates on particular accounts. Most consumers fall within the 600 to 700 range.
•A score of 720 or above is often considered excellent credit;
•680-719 is good;
• For scores 620-679 lenders generally take a closer look at the consumer’s file;
• 585-619 puts one at higher risk and generally makes one ineligible for the best rates; and
•A score of 584 or below makes lenders question whether to make credit available.
•The exact numerical range for each category is determined by the lender.
Lenders may purchase FICO® scores from each of the three major reporting agencies – Equifax, Experian (formerly TRW) and TransUnion. The numerical scores from each agency may vary by as many as 50 points. The primary reason for the variation is that the financial information received by each agency differs. While the credit reporting bureau controls the data, FICO® controls the scoring formula. For example, one consumer reported falling just short of the score needed to qualify for the best rate. He went to another lender that used a slightly different formula and was able to obtain a loan that generated savings of more than $20,000 over the life of the loan.
With regard to payment history, FICO® reports that it considers the frequency of late payments as well as their length and recency. For example, a 30-day late payment last month will carry greater weight than a 90-day late payment five years ago. When factoring in the amounts owed, the FICO® formula considers the amount owed, even if paid in full every month. It also includes how many accounts have balances, what type of loans (for example, installment or revolving credit) have balances and the percentage of the original loan that has been repaid. Paying down installment loans is a good sign.
Generally, the longer the credit history, the better the score. Taking on new credit can adversely affect one’s score. However, the FICO® formula distinguishes between opening new accounts and merely interest rate shopping. Rate shopping is generally not associated with a higher risk of default. Finally, the score for one’s account “mix” is affected by the kinds of credit accounts one has and the number of each. It varies for consumers with different credit profiles.
By federal law, every consumer may obtain their credit score once each year from each of the three major credit reporting agencies: Experian, TransUnion, and Equifax. If a large loan is to be obtained, all three scores may be obtained simultaneously at web sites such as www.AnnualCreditReport.com. A free credit report and score is also available at www.experian.com and a 30 day free trial of a credit monitoring product that includes one’s credit score is offered at www. fico.com and at www.transunion. com. To guard against fraud protection, a consumer may request one report every four months. By doing this, erroneous financial and background information can be corrected before it becomes an obstacle to financing.
Free monthly credit scores may also be obtained online at various web sites, including www. CreditSesame.com and www.CreditKarma.com. However, care must be taken when providing social security numbers and other personal information, since the internet carries a substantial risk of fraud.
Also under current federal laws (the Fair Credit Reporting Act and the Equal Credit Opportunity Act) when a consumer’s application for credit is rejected, the consumer must be provided the reason for the rejection within 30 days. Historically, consumers have been kept in the dark about their credit scores. It is recommended that before a prospective buyer begins the process of searching for a home, they check their credit report at each of the three reporting agencies.
Improving the Score:
To obtain a better score, borrowers should pay bills on time. Simply closing an account in which a payment was missed will not eliminate it from a credit report. It is also recommended that the borrower pay off debt, rather than moving it around. Unused credit cards should not be closed, since having fewer cards may lower one’s score. Finally, avoid opening several new accounts within a short period of time, since this will lower one’s score.
With education about the factors used to formulate their credit scores, consumers can put themselves in the best position to obtain the best financing rates.
Did You Know…
Mortgage rates are at historic lows, remaining at or below 6%, and well below their all-time highs of over 18% in the 1980s.
The rate of return on a housing investment dramatically increases the longer it is held (Harvard University Joint Center of Housing Studies).
The median net wealth of a renter household is $4,800, while the median net wealth of a homeowner household is $171,700. (Federal Reserve Survey of Consumer Finances)
What you should know about the market:
“All Real Estate is Local”
Market conditions being reported nationally do not necessarily reflect the real estate market in your local community, neighborhood or street. Speak to a REALTOR® who truly knows your local market.
Owning a home not only provides you with shelter, but it is one of the best ways to build wealth. In addition to the tax benefits, real estate has delivered the most consistent positive return over any long-term investment during the last 40 years.
The right time to buy (or sell) is when it is right for you. Trying to time the market is extremely difficult as the only way to know the market has hit bottom is when prices are on their way back up.
It's time to go from renter to homeowner.
We're dedicated professional ready to server you. We're ready to assist you with the most important purchase of your life.
Ten Rules to Follow When Selling a Home
Hire a good agent. A professional who knows your neighborhood and has a good track record in your community will go a long way in helping to find a buyer.
Clean out the clutter. Open spaces look best. Clean, and clean some more to make a good first impression.
Spiff up the property. Make any improvements that will improve the show of your home. When possible, stick with the simpler (and less expensive) options to be sure the buying price covers your investment.
Determine the worth. Know the fair market value of your home. Your REALTOR® can help you assess the cost. You may also want to have the home appraised.
Price it right. A REALTOR® can help you objectively set the price so that it reflects the value of your home and the trends of the surrounding community.
Come up with a plan. Are set on your price, or eager to move? How low are you willing to go to settle?
Get pre-approved for your next move. If you’re looking to buy another house, make sure you know your financial situation.
Figure out your selling costs. Commission, ad costs, attorney fees, taxes and prorated costs may all come into play. Real estate agents deal with transactions every day and can give you a very close estimate of seller closing costs.
Set the stage. Clean the windows, open the curtains, turn on the lights, display fresh flowers. A bright house is a welcoming house.
It’s show time. Be ready and willing to have your home shown any day, even with short notice. Making it difficult to see will also make it difficult to sell.
W.Skinner Realty offers a variety of services to our clients. We provide services to help you take advantage of the value in your home. I use a variety of sales tacticts to quickly attract the most qualified buyers. My commission rates are negotiable. I will sell your home for the best possible price in a reasonable time with the least inconvenience to you. W.Skinner Realty will market your property to the best possible buyers, thus getting you the best offers.
When you decide to sell your home, call me. Willie Skinner at (617) 719-9504
Did you Know?
Home Inspection Facts
About Home Inspections
A standard home inspection is a visual examination of the physical structure and major interior systems of a residential building consisting of one to four dwelling units. An inspection can be likened to a physical exam by a physician; however, it should be clearly understood that a home inspection is not to be confused with an appraisal, a building code inspection, a guarantee of any kind, and/or an insurance policy on the condition of the property.
During an inspection, the inspector will review the readily accessible exposed portions of the structure of the home, including the roof, the attic, walls, ceilings, floors, windows, doors, basement, and foundation as well as the heating/air conditioning systems, interior plumbing and electrical systems for potential problems. Home inspections are not intended to point out every small problem or any invisible or latent defect in a home. Most minor or cosmetic flaws, for example, should be apparent to the buyer without the aid of a professional.
Timing of the Home Inspection
A home inspector is typically hired by a potential homebuyer right after the offer to purchase contract is signed, prior to executing the final purchase and sales agreement. However, before the potential buyer signs the offer to purchase contract, he/she should be sure that there is an inspection clause in the contract making the purchase obligation contingent upon the findings of a professional home inspection. This clause should specify the terms to which both the buyer and seller are obligated.
Selecting a Home Inspector
Good referral sources for home inspection services are friends, neighbors, or business acquaintances who have been satisfied with a home inspector. In addition, lawyers and mortgage brokers may also recommend a home inspector. The names of local inspectors can be found by searching the Division of Professional Licensure website at www.state.ma.us/reg/boards/hi, or in the Yellow Pages where many advertise under "Building Inspection Service" or "Home Inspection Service."
Real estate brokers and salesmen may not directly recommend a specific home inspection company or home inspector unless representing the buyer as a buyer's broker. Brokers, however, may provide assistance to buyers in accessing information on licensed home inspectors.
A current home owner may also want to get a home inspection to identify any problems, especially if the owner plans to sell the home in the near future.
Following are additional tips when searching for a home inspector:
As of May 2001, home inspectors are required to be licensed in the Commonwealth of Massachusetts. A home inspector's license should be verified prior to hiring. Consumers should not be confused by home inspector "certifications" offered by, or sold by home inspection trade societies or companies, obtained via home study courses, or provided by home inspection companies that certify their own home inspectors. Since the home inspection business is unregulated in most states, certifications are available to anyone. A home inspector's license can be verified with the Board of Registration of Home Inspectors at its website or by calling the Board at (617) 727- 4459. The home inspection company that is retained should welcome the potential buyer's presence at the home inspection. The home inspector should be willing to address all of the buyer's questions and provide a full verbal and written report.
Those hiring an inspector should expect an open door policy from the home inspection company to be able to ask questions about the content of the home inspection report in the future.
During the Home Inspection
While not necessary, it is recommended that the buyer be present for the inspection. This allows the buyer to observe the inspector, ask questions directly, and obtain a better understanding of the condition of the home, how its systems work, and how to maintain it. The written report may be easier to understand if the buyer was present during the inspection. It is important that safe access and sufficient lighting is provided so that the inspector can inspect the property. Inspectors must provide a written evaluation report based on the standards of compliance in accordance with Massachusetts General Laws Chapter 146.
At the conclusion of the home inspection, the buyer should be well informed of the condition of the home. It should be known if there are visible, apparent problems, if repairs need to be made, or whether or not there are any risks of concealed damage, and whether further investigation is recommended and/or required.
Other Inspections and Tests to Consider
It is strongly recommended that potential buyers consider having the following inspections and/or tests performed prior to signing the final purchase agreement: lead paint, pests, wood destroying insects, including termites, and air quality including radon gas. While some home inspectors are qualified to offer these services, these inspections and tests are not part of the basic home inspection and should be contracted through qualified licensed professionals in those fields. It should also be noted that the seller is required, under 105 CMR 651.010, to provide the potential buyer with an affidavit disclosing the presence of Urea Formaldehyde Insulation if it exists. In addition, the seller under 105 CMR 460.750(A) shall disclose if the property has been inspected for lead paint and provide copies of any lead paint reports concerning the residential permises or any dwelling unit therein.
Filing a Complaint
While most licensees conduct themselves as true professionals, the Division of Professional Licensure will take action against those licensees who fail to maintain acceptable standards of competence and integrity. In some cases, complaints are made by dissatisfied consumers, however, dissatisfaction alone is not proof of incompetence or sufficient grounds for disciplinary action.
If you have a serious complaint about a home inspector, call or write the Division's Office of Investigations and ask for a complaint form. The Division's Office of Investigations is located at 239 Causeway Street, Boston, MA 02114. The phone number is 617-727-7406. A copy of the complaint form can also be downloaded from the Division's website (www.state.ma.us/reg/).
Massachusetts Association of Realtors