Getting a Loan
This calculator is made available to you as a self-help tool. All examples are hypothetical and for illustrative purposes only. Any calculations assumes the theoretical borrower will have excellent credit and are based on information you have provided. Any amount calculated is an estimate only. The actual amount may be higher or lower depending on location, loan type, and many other determining factors. This information was prepared by an independent third party, and accuracy is not guaranteed. We encourage you to seek personalized advice from qualified professionals regarding all financial issues and needs.
Glossary of Mortgage Terms
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1st Time Home Buyer
Thinking of buying your first home? There is nothing more exciting and yet more scary.
It doesn't have to be hard.
We will be there to help and advise you every step of the way. The most important thing to understand is that the FIRST STEP must be to get PRE-APPROVED. Being pre-approved is a formal loan application process. We look at your credit, your income documentation, and your assets. This is very different than just being "pre-qualified," which is just an informal discussion with a loan officer about your finances. A "pre-qualification" in today's world is next to worthless, and no seller or REALTOR® will ever rely on it to help you purchase a home.
So, if you are ready to be fully prepared for your home purchase adventure, please contact us today and fill out the easy to use form, and we will call you shortly to discuss your specific needs and scenario.
Credit is a major part of any lender's loan approval process. If you have questions about your credit or need assistance in improving your credit, please contact one of our loan officers and we would be happy to help you.
FICO SCORE - WHAT IS IT?
- Fico stands for Fair Isaac Company, the company that created the original scoring system.
- The Fico score (credit score) is the best tool lenders have to evaluate and measure the risk they are taking when lending money or extending credit to a borrower.
- What the credit scoring model seeks to quantify is how likely the borrower is to repay a loan and make the payments on time - can they payoff debt without being more than 90 days late at anytime in the future.
- It is a snapshot of a person's credit at any given moment. A person's credit score is like a report card of how a person manages their finances as an adult.
- The exact formula for creating an individual's Fico score is a
closely guarded secret because, if people knew the formula, they
could manipulate it.
- This means that nobody can tell exactly what the point impact of any particular action a person takes will have on their credit score.
- Since scores take into account everything in a person's credit report, closing an account may have a positive effect on one person's score, a negative effect on anothers, and do nothing to still another person's.
- The credit score changes the moment there is a change on a person's credit report. If there is a collection reported today, the score will decrease immediately.
Why is it important?
1. It can influence almost everything you do including:
- Obtaining a cell phone account
- Getting credit cards, or lines of credit
- Getting mortgage and automobile loans
- Getting insurance
- Getting utilities turned on and how big a deposit you will have to pay
- Looking for a new job
2. It is the factor that determines what interest rate you are going to get when you borrow money from a lender. A low credit score results in a higher interest rate, monthly fees, and amount of interest being paid over the total life of the loan. This means your credit score directly affects your monthly cash flow, your ability to fund your retirement, your ability to finance your children's college education, etc.
* For example, if a person with a 630 credit score wants to buy a $300,000 home with 10% down, using a conventional loan, they will have to pay an additional 3 points or $7,000 more than a borrower with a 740 credit score.
The Three Credit Bureaus
1. The FICO score is offered by the three major credit bureaus:
B. Trans Union
- In the mortgage business we run a "tri-merge" credit report that merges all three types of reports into one. The lender throws out the top and bottom score and uses the middle score.
- If a husband and wife are qualifying, the lender takes the lowest mid-score of the two.
2. A borrower will
probably have 3 different scores from the three different bureaus
A. The bureaus don't all share the same data. Some creditors report to every bureau and some report to only one or two.
B. The software is
different for each of the bureaus to calculate the scores.
3. A persons credit score changes daily. Yesterday's credit score has nothing to do with today's. Significant changes up or down can occur in the space of one week. Usually, unfortunately, people have done something to hurt their score.
The Highs and Lows of Credit
A. 850 is the highest credit score and 350 is the lowest.
- 720 - 850 is a great credit score (only 1 in 1,300 people in the United States have a credit score above 800). Borrowers in this range will get the best interest rates available.
- 680 - 720 is a good credit score, and borrowers in this range will still get a very attractive interest rate and access to most available loan programs.
- 620 - 680 is an o.k. credit score. Borrowers in this range may find themselves paying slightly higher rates for some types of loans.
- Below 620 is sub-prime territory. A borrower with a credit score below 620 is going to get an inferior interest rate because they are a riskier investment for a lender.
- The 500's - here the interest rates get really ugly and often lenders just reject the borrower's application if anything else in the file is amiss. (1 out of 8 people in the United States have a score between 500 and 600) - roughly 30 million people). Borrowers in this range need assistance in getting their credit score improved so either they can qualify now or sometime in the future. If they do get a loan now with a super high interest rate, they may be able to refinance in 12 -24 months into a normal interest rate loan if they make their mortgage payments on-time and clean up the rest of their credit, and they are represented by a loan officer who cares about their financial well being.
- Which borrower would you rather have? A borrower doing 100% financing with a 700 credit score, or a borrower putting 20% down with a 520 credit score?
B. The most misunderstood impact on credit scores is the lack of credit. In order for a credit score to be in a favorable range, an individual must have open active lines of credit. All current scoring models rely on an individual's past payments to creditors.
- dIf you have an insufficient number of these trade lines, your score will be in the 500's or below.
- If you do not have any open, active revolving trade lines, you will need a minimum of two to get started.
- If a borrower has no credit score, the fastest way for them to generate one is to either get a checking or savings account at a bank, go to a bank and get a secured credit card, or get a family member with good credit to put them on an old credit card as a signor.
A. Delinquencies (30 - 180 days) collections, judgments and charge off accounts stay on for 7 years whether they are satisfied or not from the date of the critical missed payments.
- The more recent the delinquency and the greater the severity of the delinquency are the two key things to focus on about delinquencies.
- The highest scores result from consumers who have longstanding active accounts with no delinquencies in the past two years, and especially the last 12 months.
- Chapters 7, 11 and 12 remain for 10 years from the filing date.
- Chapter 13 remains 7 years from the filing date.
- Accounts included in bankruptcy will remain 7 years from the date they were reported as included in the bankruptcy.
C. Public records - city, county, state and federal tax liens remain 15 years from the filing date. Paid tax liens remain 7 years from the paid date of the lien.
D. Closed Accounts
- Positive paid and closed accounts remain for 10 years to help the score.
- Closed accounts with delinquencies remains for 7 years from the date they were reported closed - whether closed by the creditor or by the consumer.
E. Child support judgments remain 7 years from
the date the judgment is filed.
F. Inquiries - most inquiries remain for 2 years. All inquiries must remain for a minimum of one year from the date the inquiry was made.
The Five Factors that make up a Fico Score
1. PAYMENT HISTORY equals 35% of the total FICO score.
- Items like collections and charge-offs that are 3-4 years old have little impact on the credit score
UNLESS: You pay them off. The minute you pay them off they
become "updated" and the "date of last activity" becomes
current. The more recent the delinquencies, the more the
credit score drops.
- You want to keep bad debt dead and good debt active. When it comes to credit reports, an older credit history is better.
Missing low payments is better than missing high payments. So, if you missed a $40 per month payment, it won't have as negative an effect as if you missed your car payment of $650.
2. AMOUNT OWED equals 30% of the total credit score.
Amount owed measures the balances on revolving accounts - usually credit cards. This is a tricky area, but, if understood, can significantly influence the credit score.
The ratio only pertains to revolving debt, usually credit cards. To calculate the ratio, simply divide the current balances on people's revolving lines by the credit card limits.
There are point breaks at 50%, 30% and then around zero.
- Zero balances of course are the ideal to maximize your credit score.
- 30% balances to credit limits are almost as good and more realistic for most people.
- 30%-50% balance may lower a credit score slightly (10-20 points)
- 50%-70% causes your credit score to drop substantially - up to 30-50 points.
- 70%-100% causes an even steeper decline in your score probably from 70 to 100 points into the high 500's or low 600's.
- Over the limit accounts can be devastating.
Most debt guru's recommend that you pay off highest interest rate cards first as a financial wealth building strategy. That's a good idea, but, if you are thinking of purchasing or refinancing a home, better money saving strategies are to pay down any credit cards that are over 30% of the limit or to spread the balance over a few cards rather than having it all on one card. Your credit score will improve, and you may end up saving thousands of dollars by getting a lower interest rate than you would otherwise have gotten.
The credit scoring system does not discriminate between personal and business credit cards. So, if a person has business credit card debt, and it's maxed out, their score will be lower_.
3. LENGTH OF CREDIT HISTORY equals 15% of the total credit score.
- The longer your credit history the better. Don't cancel a credit card that's several years old or you may lower your score. A person with new credit will have a score lower than someone with old credit.
- You should make a purchase on each of your credit cards at least once every 2-3 months. If a card goes longer than that without any activity, it may show up as unrated, and you don't get the points you might have otherwise received.
There can be a dilemma when a borrower takes out a new credit
card to create a higher limit when we just said that a newer card
will shorten your length of credit history.
However we have to look at the percentages - "length of credit history" is only worth 15% whereas "amount owed" is worth 30%. It is probably advantageous to get the new card to spread out your existing debt. You will be penalized on the new card you just obtained but you will benefit from having those balances reduced and that section of the score is worth twice as much.
4. NEW CREDIT equals 10% of the total credit score. The most significant part of new credit is inquiries.
- An inquiry is when someone pulls your credit for the purpose of giving credit. There are two types of inquiries - one impactful and the other not.
Hard inquiries - these can cost you from 2 to 50 points. They include:
- Inquiries from a potential creditor or lender, the IRS, or someone who has a judgment against you.
- If you have a good credit report, a hard inquiry may only cost you 2 - 5 points.
- If you are a credit wreck, you are under a magnifying glass and can lose 25 to 50 points.
- Because looking for a mortgage or auto loan may cause multiple lenders to request your credit report even though you are only looking for one loan, multiple auto or mortgage inquiries in any 14 day period count as just one inquiry. Additionally, the score ignores all mortgage and auto inquiries made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won't affect your score.
- Inquiries affect your score up to one full year. They don't drop off until a year after you have your credit inquired on.
Your score is only reduced for the first 10 inquiries from 2-50 points depending on the other variables involved. Once you get to 10 inquiries you might as well go out and get 50 inquiries because it isn't going to affect you any differently than if you had just 10.
Soft Inquiries - cost zero points and include:
- You pulling your own credit report,
- When a person pulls their own credit report the credit scores may be different from those pulled by a lender.
- One of your existing accounts pulls your credit for a periodic review,
- Inquiries related to insurance and
- Inquiries made by potential employers.
5. TYPES OF CREDIT used equals 10% of the total score.
Types of credit used includes:
- Credit cards and lines of credit,
- Retail accounts,
- Installment loans and
- Mortgage, automobile and consumer finance accounts.
Credit bureaus like to see a variety of types of credit and a good mix is always best.
- An ideal mix of credit would be:
- A mortgage loan,
- An automobile loan,
- Major credit cards or lines of credit,
- All paid on-time over a period of 1 - 2 years.
Three to five revolving credit card accounts (credit cards or lines of credit) is the optimal number that the score really rewards. Anything less than that means you haven't established enough credit, and anything more means you may be a heavy credit user subject to being penalized.
Now, as I said earlier, 1 out of every 8 prospective homebuyers have a low score between 500 and 600, which means they are faced with the fact that they might not qualify for a loan they can afford. It is important to your financial future to work with a lender who knows how to manipulate the score, who knows how to explain to the client what is happening, and who can set up a plan for the client based upon the possibility of them receiving a type of loan they weren't expecting to have to accept.
We seem to be transitioning away from a 100% seller's market where every home had multiple offers within days of coming on the market and listings were like money in the bank to all of you to a more normal market where buyers have a high dollar value to a Realtor®. In this situation it is critical to develop as many prospects into viable and eager buyers as possible.
How we improve people's credit scores!
We have four different tools to assist credit challenged borrowers that have proven to generate more commissions for my Realtor® partners.
1. The first is our Credit Repair Kit. I give this kit to every client that has extremely low credit scores when I first meet with them. It gives them strategies and instructions on how they can solve their issues themselves. This is great for people who don't have the money to pay for somebody like a credit remediation company to assist them.
2. The second tool is our PATH2BUY. We use this to stay in touch with people who are working on their credit problems. Our goal is to assist you in getting your credit upgraded, no matter how long it takes.
3. The third tool we use is rapid re-scoring, which can be a fast and effective way to correct errors and omissions on a client's credit report within as little as 72 hours. The key to rapid re-scoring is that the borrower has to have proof, usually in writing, from the creditor to send to the re-scoring company. The re-scoring company then turns the proof over to the credit bureaus, and, if the bureaus agree a mistake was made, they will make the correction and update the client's credit report, allowing for a new credit score to be calculated. Rapid re-scoring does not erase negative credit history from the credit report. Rapid re-scoring costs $35 to $100 for each error to be corrected for all three bureaus.
4. The fourth tool we use is credit restoration or credit remediation. This is a longer process than rapid re-scoring and usually takes 90 to 180 days. What happens in this process is that the consumer pays a credit remediation company with an intimate knowledge of the credit scoring model to work with the credit bureaus on items the consumer feels are incorrect on their credit report. Once the credit bureaus are notified of a disputed item, they have 30 days from the date they are notified of a dispute to verify the item(s) in question with the original creditor. If the original creditor does not verify the account within that time, the disputed account must be corrected or deleted from the credit file. At this point the score will adjust immediately. Credit restoration can cost anywhere from $350 - $1,200.