Credit Scores were first developed over fifty years ago when Fair Isaacs Corp Developed the first credit scoring system. Today, the Fair Isaacs Corp Credit Score, which is called a FICO score, is the industry standard and used by lenders to evaluate whether to offer an individual a line of credit or a new home mortgage.
Credit scores are based upon information in a persons credit report and based on a numerical scale between 300 and 850. 850 is considered a perfect credit score, but anything above 760 is considered a very solid credit rating. While the amount of debt a person has plays an important role in determining their credit score, this typically only makes up about 30% of the credit score. The rest of the credit score is based off of the way an individual has paid off their debts, as well as the number of delinquent payments, the length of the credit history, and the types of loans offered.
Since a big part of a credit score is not how much debt you have, but how well you manage this debt, it is possible to maintain a healthy credit score even with a high level of debt. However, most loan administrators suggest maintaining a 30% to 50% debt to credit limit ratio.
One of the most important things that you can do to maintain a healthy credit score is to pay all bills off on time. Today, most banks offer free electronic payments, which can be a quick and easy way to ensure that all bills get paid on time. If a payment is missed, it should be paid off as quickly as possible.
Another important step in maintaining a healthy credit score is to pay off the debts that have the highest interest first, without a great deal of debt transfers. Many people, especially those who are having credit problems, also like to apply for any semi-attractive credit card offer they get, but too many credit inquires reduces your credit score, so this should be avoided. Instead, it is suggested to only apply for new credit once a year and to research potential credit offers before actually applying. Once a good credit offer is found, the credit inquire process should be completed in as short of a time frame as possible.
One big factor that goes into a credit score is the length of a persons credit history, so it is not usually advised to cancel a credit line, even if there is no credit balance. Instead, you can simply cut up the credit card, but leave the account open. This helps provide a longer credit history, even if you are not using it.
Using a debit card instead of a credit card can also be a good idea. These can be used in the same way a credit card would be and are accepted at all major retailers, but do not draw money from a credit line, but instead directly from a persons checking account. Some people even find that when they use cash, they are less likely to spend money, so it may be a good idea to do a little experimenting to get in the habit of efficiently managing money.
While credit reports and credit scores are arguably a very controversial device, if you wish to borrow money, having a high credit score is essential.
With the current financial situation, many people are asking themselves whether now is a good time to buy a home. This is actually a very personal question and there is no stock answer that will be right for everyone. Instead, it is important to evaluate your individual financial situation and personal needs, before making what is for many the biggest single investment of their life.
With that said, there are a few silver linings to the current economic situation, making buying a home a very attractive decision, especially for first time home buyers.
The number of foreclosures is still on the rise and while this is quite sad for those who are facing foreclosures, it means that there is an increased number of homes available on the market, which are priced significantly below what would have been considered fair market value even just a few years ago.
With many banks wanting to get the bad debt off their books, there are numerous opportunities for someone to buy a foreclosed home at significant savings. This is not reserved to only homes in poor neighborhoods or in bad condition either, as millions of homes all over the country are currently empty.
An increase in foreclosures also has an impact on the price of other homes, as with so many options available, home values across the country are dropping.
With that said, it is important to consider what this means about the generally accepted value of a home. Many of the root causes of the current financial situation can be traced back to the commonly held belief that “home values will always rise,” leading many to become involved in homes they can not afford. It is commonly held thought that home values are not actually at an all time low, but are instead reverting back to their actual value.
Interest rates are at an all time low, in part because the FED, which regulates interest rates on borrowed money, have set the interest rate at basically zero. While the FED interest rate is not the same one that lenders offer, mortgage banks base their interest rate off of the FED rate, which is why we are seeing historically low interest rates.
Where even just a few years ago, getting a fixed rate below 6% was all but unheard of, many lenders are now offering rates that are closer to 4% or even lower. This low interest rate can save thousands and thousands of dollars in interest.
Last year, President Obama initiated the First Time Home Buyers Tax Credit, which offered up to $8,000 in the form of a tax credit that did not need to be paid back. The first time home buyers tax credit was intended only for those who had not owned a home in the last three years and was considerably different than the previous credit, which was a no-interest loan.
This tax credit was set to expire in December of 2009, but congress voted to not only extend it, but also offer a slightly reduced tax credit to people who have owned a home in the last three years.
These new tax credits for homeowners can significantly reduce costs and since it does not need to be paid back, it is a very attractive offer making buying a home in 2010 much more affordable. Those that can afford it can significantly reduce their interest payments by applying it towards the principal of the home or simply using it to help cover their bills.
Real estate can be an excellent investment, but since most do not have the money to purchase a home up front, it is usually necessary to use a mortgage. Mortgages are a long term loan and, like any loan, there are sometimes when it may be in your best interest to refinance the mortgage.
Refinancing a mortgage simply means taking the total amount owed and transferring it to a new mortgage and possibly a new lender. While there can be many advantages to this, it is important to determine if refinancing is right for you, as it is necessary to pay closing costs, similar to those paid when the home was purchased.
There are many different reasons to refinance a home, but the most common reason is to change the term or rate.
Refinancing to change the rate involves taking out a new mortgage that has a lower interest rate. Refinancing to change the term means taking out a new mortgage, which has a lower length than the previous mortgage. Often, people will do both and refinance to change the term and rate. Knowing when to refinance the term or rate involves identifying your break even point.
Refinancing a mortgage to cash out is the process of taking out a loan and using it to remove the equity from the loan. Equity is the amount of money you have put towards the principal of the loan.
So, for example on a $100,000 mortgage, after 10 years, the total owed to the bank is $85,000. This means there is $15,000 in equity in the home. A Cash out loan will give the borrower $15,000 in cash, but they will start over owing the lender $100,000.
In practice, however, cashing out a loan usually also includes the appreciation of the home. For example, in the above example, say that in those 10 years, the value of the home increased by $20,000. Now, even though the homeowner has only paid $15,000 in equity, technically, they have $35,000. This is the amount of actual equity plus the value of the appreciation.
This means that instead of only receiving $15,000 the homeowner could take out a $120,000 mortgage on their home.
Consolidating Debt works similarly, but involves bringing other debts, such as medical bills, credit card bills, or school costs into the loan. So, for example if the borrower owed $20,000 in student loans, they could add this to their mortgage and spread out the payments over the life of the mortgage.
These types of loans are the most heavily advertised, as they are the most profitable for the lender. However, it is not always in the best interest of the homeowner, because ultimately you are taking a big step backwards. With that said, cash out loans and consolidating debt can be a great way to pay off other lines of credit and bring them together under one large loan.
Another common reason for refinancing a mortgage is to remove someones name from the deed. Often this is after a divorce, but it could be a friend, relative, or business partner who simply wants to move in a different direction.
Whenever there are multiple people on the deed of a home, each person is considered to have an interest in the home. It is not even truly necessary for the person to be on the deed, because, as is the case with certain gifts, warranty deeds are often issued. Warranty Deeds indicate that others have an interest in the property and even though their name may not appear on the deed itself, if anyone buys the home, they will need to have all parties removed.
Since there are a number of instances where there is a need to remove someones name from a deed, often refinancing is the quickest and easiest way to remove the name. This can be especially tricky in cases of divorce, because even though a court may assign ownership of a home to one person or the other, this ruling is not honored by the lender.
Private Mortgage Insurance(PMI) is sometimes required on mortgages with less than 20% down. It is a type of insurance that covers the risk to the lender. It does not cover the entire cost of the home, but instead only the 20% down-payment.
In some cases, the PMI may be tax deductible, so there is little incentive to remove it, however if it is not and the homeowner has at least 80% equity in the home, refinancing to remove the PMI may be a good idea. It is important to note that it is the homeowners obligation to remove PMI and typically the bank will make no effort to have it removed.
Typically, the foreclosure process begins when the homeowner misses three consecutive payments, however recent legislation has made it a little bit more difficult for lenders to foreclose in some cases. Even once a home has entered into the foreclosure process, it is almost always possible to reverse it, providing the missed payments are made up.
There are several loans, often called Foreclosure Bailouts, which are designed to allow the homeowner to refinance the home, any missed payments, and any fees owed to collections agencies. However, it is very important to be careful when accepting foreclosure bailouts, as they are a type of subprime mortgage.
Initially, they offer relief, but over time it ends up costing the homeowner much more. Of course, when facing foreclosure, often subprime mortgages are the only option.
There are a number of other reasons why refinancing a home may be a good idea. For example, if the home has liens on it, it is sometimes possible to refinance and remove the liens, absorbing them into the total loan amount.
It is also becoming common to refinance a home and take out additional funds for remodeling. For example, if the home needs a new roof, but the homeowner can not afford to pay for it, it is sometimes possible to refinance to include the cost of the renovations.
For each reason to refinance, there is a reason not to. Many of the offers most homeowners receive to refinance are from subprime lenders and while they may seem like a good offer at first, will end up costing the homeowner much more in fees.
It is always important to explore all of your options and make sure you calculate the break even point, which is the number of months it will take for the closing costs associated with refinancing to be offset by the saving of refinancing. There is no set rule, but it is generally not recommended to refinance if the break even point is greater than 48 months.
Refinancing a home loan can offer a number of advantages in certain situations, but it can also be risky and it is possible to loose money if you are not careful. It is also not free, as it is necessary to pay closing costs, similar to those paid when the mortgage was first taken out. Knowing when to refinance and when not to is therefore extremely important.
Typically, the golden rule in the real estate industry is that you should wait until the interest rate is at least 2% lower than your current rate before refinancing. It was often referred to as the 2% rule and was touted by most financial professionals, with the belief that this was the point where the savings outweigh the costs of refinancing.
However, today, most financial advisors will not recommend that you follow the 2% rule, primarily because the math simply does not add up. It certainly works well for the lenders, but it does not help the consumer.
Instead of only focusing on interest rates, it is instead essential to take into account the closing costs associated with the loan. This includes not only whatever points you are paying the lender and their application fee, but also an appraisal, credit report, title insurance, and attorney fees.
As an example of how to evaluate whether refinancing lets say that under the new loan, your interest rate would be $50 less a month and the closing costs would be $9,000.
To determine if you should refinance, divide the closing costs by the amount saved in monthly payments. This will tell you the break even point, or when you will recoup your closing costs.
$9,000 / $50 = 180
So, in 180 months or 15 years, you would break even. This makes it easy to see that refinancing is not such a good idea.
Now, lets say that your closing costs are only $4000 and you save $100 a month.
$4,000 / 100 = 40.
So, in 40 months or 3.3 years, you would break even. This is much more acceptable, because this means that after three years, you will have saved more than your closing costs and will end up dramatically reducing the amount of interest you pay.
There is no set limit of when the break even point is right and when it is wrong. A great deal of this depends on the income, assets, and personal situation of the lender. However, usually if the break even point is less than 4 years(48 months) it is generally a good investment.
The above examples described when to refinance the interest rate, but sometimes it is a good idea to refinance the term. The term refers to the total length of the loan and is usually 30 or 15 years, although lenders offer mortgages of almost any term.
Generally, shorter terms mean a lower monthly mortgage payment and longer terms means a lower monthly payment. However, even though you are paying more each month with a shorter term, the amount of interest paid is almost always lower.
For example, consider a home that is $100,000. If you were to take out a 30 year fixed rate mortgage at 4.5%, your monthly payments would be $506 and you would pay $82,406 in interest over the course of the 30 years.
If, on the other hand, you took out a 15 year loan with that same interest rate, the monthly payment would be $764, but the interest would be only $37,698.
As a result of the dramatic effect lowering the length of your term can have on the total amount of interest paid over the course of the loan, it is sometimes a very prudent investment.
Often, many people will refinance their loan after about 5 or 10 years, to a shorter term, thereby saving a great deal of money.
In Western Cultures, almost everyone would like to be rich. This is the nature of a capitalistic society and the line between greed and wealth is often intertwined. One of the most popular ways of making money is investing and Real Estate Investment can be very profitable.
When investing in real estate, there are several different approaches, but the age old adage of “Buy Low and Sell High” is something that has historically worked very well in the real estate industry.
Some people prefer to buy a home, perhaps fixing it up, and then sell it. This is often referred to as Flipping a Home, as the idea is that you buy it and sell it as quickly as possible for a profit.
While many have had tremendous success buying and flipping homes, there is a very high risk associated with it. This is because you are to a large degree at the whim of the current housing market. If house prices begin to fall or there are too many under priced homes in the area, this can mean taking a loss.
The current market of an excellent example of how this can backfire. Starting in the Nineties and continuing until a few short years ago, home prices were almost always increasing. It was common for a home to increase 25%, 50% or even 100% in the course of only a year or two. As a result, real estate investors were making incredible profits. Then, beginning in 2007, the bottom fell out of the credit market, home values began dropping, and people began loosing their homes. Many investors were left holding homes that were no longer increasing in value and were actually depreciating.
The other disadvantage is that most of the time, the investor is fighting the clock. Seldom will they actually purchase the home outright and instead a mortgage is usually used. This means that each month that the house remains unsold, they are loosing money.
Today, home prices are actually much lower than they were, but in the past when flipping a home, it was often necessary to find a home that was in disrepair and fix it up. This works extremely well for those who can preform the work themselves, which is called sweat equity, but for those that must hire contractors this can be very expensive.
Also, as a result of the fluctuating home prices, many investors have lost money after paying to fix up a home that was in disrepair.
In the past, when it came time to evaluate a prospective loan applicant, a very personal approach was taken, with a human manually reviewing the loan application. Today, almost all lenders now use an automated underwriting system(AUS.)
The AUS automatically reviews and evaluates the loan application and credit history of the applicant, as well as the total amount of the requested loan, using a mathematical formula to determine eligibility. The entire process only takes a few seconds and it either does not approves the loan or marks it as a Strong File or Weak File. A Strong File indicates that the application meets the loan requirements and does not require any additional documentation. A weak file, on the other hand, indicates that there were some discrepancies or problems with the application, so more documentation is required.
For example, someone with a strong file, might not need to provide any employment documentation or tax forms, while someone with a weak file would.
While the loss of a personal touch in the underwriting process definitely has negative connotations, one of the nice things about using an AUS is that initially, there is often no need to provide any documentation.
Depending on how the Automated Underwriting System evaluates the application, there are three basic levels of documentation: Full Documentation, Stated Documentation, and No Documentation.
Full Documentation loans will require that all aspects of the application are verified by a third party. Generally, this means providing tax forms, such as the past few years W2s and paycheck stubs. The lender may also require that the applicants bank verifies the loan using a Verification of Deposit(VOD) form. Typically, the full documentation loan is the most common type of refinance loan.
Stated Documentation loans are when the lender simply uses the information that is provided on the loan application, without actually verifying it with a third party.
No Documentation loans, as the name implies, are loans that require no documentation. The lender does not request any banking or employment information, as well as not running a credit report.
In some cases, the consumer does has some control over how much documentation they provide. Of course, from a literal standpoint, they are free to provide no documentation at all, but the lender is under no obligation to offer a loan in this case. Instead, it is almost always up to the lender to determine how they will document the mortgage application.
With that said, some lenders do offer a no documentation loan, but they will usually require a 20% down-payment and the mortgage will have a higher interest rate.
In the end, the lender is out to make money, so while they may be willing to forgive a minor digression on ones credit report, they will only do this if they think it is profitable. Anytime they do accept a risk, such as not checking employment, the lender will usually increase fees or rates to counterbalance this risk.