Finance

Looking to buy a house? Make sure you know what will truly hurt and help your case with lenders — and don’t fall for the misinformation mortgage lenders can spread.

There’s a lot of misinformation being propagated about what does and doesn’t hurt your credit score, and much of it is coming from sources who should know better: mortgage lenders.

Now, let me say first that I’ve worked with several excellent lenders who really knew their stuff and kept up to date, not only on loan trends but on the information that’s available about credit scoring. That’s important, because the FICO credit score, in its various permutations, is used in three-quarters of all mortgage lending.

But what I heard from several lenders responding to my recent column, "8 big mortgage mistakes and how to avoid them," was the kind of bad advice that can cost you money and keep you from getting the best loans.

So if your mortgage broker gives you any of the following advice, take a tip from me: Find a new broker.

Closing accounts can help your credit score
No, no, no. For the umpteenth time: Closing accounts can never help your credit score, and may hurt it.

Every time I write this, I get more e-mail from people who say their mortgage lenders told them exactly the opposite. It’s true that having too many open accounts can hurt your score. But once you’ve opened the accounts, you’ve done the damage. You can’t repair it by shutting the account, and you may actually make things worse.

The credit score looks at the difference between your available credit and what you’re using. Shut down accounts, and your total available credit shrinks, making your balances loom larger, which typically hurts your score.

The score also tracks the length of your credit history. Shutting older accounts can also make your credit history look younger than it actually is, which can hurt your score.

Of course, credit scores aren’t the only thing lenders look at when making decisions. They typically consider other factors, such as your income, assets, employment history and credit limits. Mortgage lenders in particular might look at your total available credit and ask you to close a few accounts as a condition for getting a loan.

But if your goal is to improve your credit score, you generally shouldn’t close accounts in advance of such a request. Instead, pay down your credit card debt. That’s something that actually can improve your score.

Checking your FICO score can hurt your credit
Unfortunately, I heard this one from a mortgage broker who is otherwise pretty smart. He was confused about which type of inquiries hurt your score and which don’t.

Applying for new credit is generally what hurts your score. Ordering a copy of your own credit report or credit score doesn’t count. Those mass inquiries made by credit card lenders, who are trying to decide whether to send you an offer for a pre-approved card, also aren’t going to hurt you, either — unless you actually take them up on their offers.

If you want to minimize the damage from credit inquiries, make sure that when you shop for a mortgage you do so in a fairly short period of time. The FICO score treats multiple inquiries in a 45-day period as just one inquiry and ignores all inquiries made within 30 days prior to the day the score is computed.

For most people, one inquiry will generally knock no more than 5 points off a score (and scores typically run from 300 to 850, so that’s not a big percentage).

Credit counseling will hurt your score as much as a bankruptcy
The current FICO formula ignores any reference to credit counseling that may be in your file. That’s been true for the last three years, after researchers at Fair, Isaac, the company that created the FICO scoring system, noticed that people getting credit counseling didn’t default on their debts any more often than anyone else.

Your ability to get a loan could still be hurt by credit counseling, however. Your current lenders may report you as late, because you’re not paying what you originally owed or because your credit counselor isn’t sending your payments in on time. Late payments do hurt your credit score.

Lenders consider other factors besides credit scores in making their decisions, as well. The factors they look at can vary widely. Most want to know your income, for example. Some want to know how much savings you have or whether you’re a homeowner. Some will find credit counseling disturbing, while others see it as a good sign.

The mortgage lenders who don’t like credit counseling generally treat its enrollees the same as if they had filed for Chapter 13 bankruptcy. Chapter 13 is the kind of bankruptcy that requires a repayment plan and is looked at somewhat more favorably than Chapter 7, which allows you to erase many of your debts. You might still be able to qualify for a loan from one of these lenders, although your interest rates will almost certainly be higher than if you had perfect credit.

If you plan to get a mortgage soon, and you’re not already behind on your debts, it’s probably smart to steer clear of credit counseling. If you’re already in trouble, however, a good credit counseling agency might be able to help you get back on track.

Your FICO isn’t the only score you need to check
This came from lenders who thought the FICO score is offered by only one of the three credit bureaus: Equifax.

In reality, all three of the bureaus offer FICO credit scores using the formula developed by Fair, Isaac, but they each give the scores a different name. At Equifax, the FICO is known as the Beacon credit score. At TransUnion, it’s called Empirica. At Experian, it goes by the unwieldy title of "Experian/Fair, Isaac Risk Model." Complicating matters further is that you’ll probably have three different scores from the three different bureaus, largely because the bureaus don’t all share the same data. One bureau may list more accounts for you than another, for example, and the differences (in types of accounts, payment histories, credit limits and balances) will be reflected in the score that bureau computes for you.

Because of those differences, it does make sense to pull and examine your credit reports from all three bureaus before you apply for a big loan like a mortgage. Many mortgage lenders take the middle score from the three bureaus when making their decisions, so fixing errors in all three reports before you shop for a loan is smart.

You can get all three of your FICO scores from myFico.com.

But the ways you improve your credit score are the same in any case: Correct errors. Pay your bills on time. Pay down your debt. And apply for credit sparingly.

County Properties has gone to great lengths to provide our homebuyers with the highest level of service available in every aspect of your home purchase. Over the years our sales team has closed homes with hundreds of different lenders.  In doing so, we have seen our homebuyers incur unnecessary costs by some of these lenders.  This is why we have selected a preferred lender for homebuyers to assist you by providing financing for your new home. 

You may ask yourself, why it is necessary that each homebuyer obtain final loan approval with a preferred lender?  This explanation may help in clarifying any questions you may have as a prospective homebuyer.

• PROFESSIONALISM:  The preferred lender is thoroughly pre-screened in the following areas:  financial stability, references, experience, number of financing programs available, ethics and fees.  We insist that our clients receive the most competitive fees / interest rates and are treated with honesty and integrity. 

• TIMING: When purchasing a new home there are crucial timetables that must be followed.  If the loan approvals are not issued in conjunction with our building timetables, it may prevent us from including in your home many of the “optional” selections you may have selected.  In addition, because many lenders are not familiar with new home construction, your decision to use a lender other than the preferred lender may result in delays in final delivery of your home.  This delay may also create moments of undue and undeserved stress and costs to you.

• ACCOUNTABILITY: If an approved lender does not treat you with ABSOLUTE respect, or if, due to their performance, they fail to meet specific deadlines or close the transaction in a timely manner, they stand to lose more than just your satisfaction.  They could also lose our future business.  For this reason, we are confident that out homebuyers will receive every extra consideration.

COSTS: The preferred lender has a proven track record. Often times when an outside lender is selected by a homebuyer many extra and costly burdens are placed on the escrow company to provide additional documentation to that lender.  Any costs for this additional documentation may be passed on to you.  We prescreen the preferred lender for overall loan costs and “junk fees”.  It is our goal that you receive the best loan program for your needs at the lowest of cost.  In addition, the preferred lender can provide you with long-term interest rate

U.S. LEADING INDEX UP SLIGHTLY AFTER FIVE CONSECUTIVE MONTHLY DECLINES
The U.S. leading index rose 1 percent in March following five straight months of declines, due largely to the ongoing credit crisis and a slumping housing market, according to the latest data released by the Conference Board Tuesday.
Vendor performance and favorable interest rates were positive forces on the index in March, offsetting the negative impact of higher unemployment claims, sagging building permits, and stock price data.

S&P sees end to subprime mortgage writedowns

Standard & Poor’s said subprime write-downs for large financial institutions are likely past the halfway mark, but they could still hit $285 billion.

MAKING SENSE OF THE STORY FOR CONSUMERS

• S&P’s statement gave a boost to financial stocks and helped Wall Street indexes pare losses.
• The purging of bad loans in the subprime market through foreclosure or refinancing ultimately will strengthen everyone’s ability to obtain mortgages.
• Fewer foreclosures mean fewer vacant homes, which may make a neighborhood a more desirable place in which to live. That, in turn, could increase the demand for housing.

Bear Stearns Rescue Is `Finger in Dike,’ Scholars Say

With Bear Stearns Cos.’ rescue, the $200 billion subprime crisis joins a long history of government bailouts to preserve jobs, homes, and savings.

MAKING SENSE OF THE STORY FOR CONSUMERS

• Bear Stearns failing would have reverberated well beyond the investment banking sector. Large investment bankers such as Bear Stearns provide much of the capital that eventually finds its way into the pool of money used to fund mortgage loans.
• Most investment bankers are heavily leveraged. That means they fund investments by borrowing. If they invest well, they can pay off debt and still make a profit. But if no one will lend to them, investment bankers can neither pay debt nor make investments. That combination can cause an institution to fail. Bear Stearns was not the only heavily leveraged investment bank. Many other large Wall Street firms also are dependent on the ability to borrow to survive, so a loss of confidence resulting from the failure of a major player could easily have brought down several others.
• The credit crunch, or consumers’ difficulty obtaining mortgage loans, is one of the greatest hindrances to a real estate market rebound. In recent months, even prospective buyers with good credit have had trouble securing a loan. If financial markets stabilize, that could help boost demand for housing.

Mortgage resets: Ignorance may be bliss, but it could mean a lot of pain for all the players in the subprime crisis when a record number of adjustable rate mortgages reset.

"I don’t know if there’s anything much [borrowers] can do," said Keith Gumbinger of HSH Associates, a publisher of mortgage related information. "Hopefully, they’ve been prudent about preparing for it, building a nest egg or refinancing the loan."

But most borrowers are likely to just scramble to pay the higher expenses – some of which will jump by 50 percent and come as a big surprise.

According to a survey conducted last month for the AFL-CIO by Peter D. Hart Research Associates, three quarters of borrowers have little clue about how much their payments will increase when their loans adjust. Nearly half don’t know how their loans actually reset.

"This survey shows that many homeowners simply are not prepared for the steep rise in mortgage payments that this market inflicts on ARM holders," John Sweeney, president of the AFL-CIO, said in a press release.

When asked whether they were confident or worried about making their monthly mortgage payments over the next few years, 41 percent of homeowners whose adjustable rate mortgages (ARMs) had already reset said they were worried. Only 18 percent of pre-reset borrowers were concerned.

The record round of resets has been getting a lot of attention across the board. Congress, the Bush administration, government agencies, regulators and community groups and lenders all have their own ideas on how to offer relief. Mark Zandi, chief economist for Moody’s Economy.com, believes that borrowers are more informed than in the past, but he doesn’t see that knowledge translating into better results.

"The success rate for loan modifications is not improving much," said Zandi. "In September, defaults surged."

Zandi blamed the surge, in part, on the sheer number of borrowers seeking help; servicers who need to hire and train new loan counselors are unprepared for the volume.

And technical roadblocks to mortgage modifications are slow to being dismantled. Contractual obligations between servicers and investors who buy the loans can limit the options servicers may offer borrowers.

According to Michele Taylor, a community reinvestment organizer for the Chicago-based National Training and Information Center (NTIC), some investors stand to make less money if a loan is modified, so they’re not playing ball.

"We’re hearing from servicers, ‘Nothing can be done because the investor won’t allow it,’" she said. That occurs even when the same servicers have worked out favorable modifications for other borrowers.

Tax and accounting considerations are also hindering workouts. One initiative that could help is the Bush administration’s proposal to forgive taxes when mortgage principals are lowered. But any relief action as a result is unlikely to take place before October’s record round of resets.

There is a light at the end of the tunnel, however. "We may be approaching a tipping point after which we’ll have more success with saving borrowers’ homes," said Zandi.

He thinks servicers may move toward giving ARM borrowers an extra three to five years of payments at initial low "teaser rates," giving them a little breathing room until home prices rebound. Unpaid interest could then be folded back into principals and loans refinanced.

NTIC is pushing for a similar freeze as part of its "Save the American Dream" campaign. It’s suggesting a two-year moratorium on resets.

But the mortgage situation can’t hope to improve until banks tighten lending practices, and it doesn’t look like they’re quite on track. This past summer, the Mortgage Bankers Association revealed that delinquency rates for loans made in 2006 were rising.

And a new report from investment bank, Friedman, Billings, Ramsey, suggests that as conditions began to collapse during the first half of 2007, lenders still failed to vet borrowers carefully.

According to the report, lenders did not tighten underwriting standards until July or August, when the subprime crisis came to a head. As a result, delinquency rates for these most recent loans are even higher than those for 2005 and 2006.

With so many poorly underwritten loans, future delinquency rates and foreclosures could soar. And while October will be the peak year for resetting ARMs in 2007, new records will be set in early 2008; March will see more than $100 billion in resetting loans.

It could be a bumpy ride.