Jim Marcinkowski 239-936-4232

Typically, a person with a low credit score is in this position because they lack structure in his or her life. There are, of course, cases where unplanned health or employment complications are to blame, but for the most part, these are individuals who lack the discipline to pay their bills on time or curb their spending. This is your opportunity to be the "knight in shining armor" that provides them with a simple roadmap to get back on track.

Let's take a look at some examples that can help to quickly improve less-than-perfect credit scores for the potential home buyer:

Let's say we have a borrower with a credit score of 664. She has a concentration of credit card debt on one card; let's say $17,000 on a card with a $20,000 limit. At the same time, she has four or five additional credit cards, all with a zero balance. I would advise the borrower to distribute the debt over a number of her cards. Remember, a borrower's credit to debt ratio represents 30% of his or her overall score. By simply changing the ratio of available credit to debt, the borrower in this example could possibly increase her credit score to something closer to 700, saving thousands of dollars on her mortgage.

Another thing to take into consideration in a case like this is what percentage each of the five factors measure in the resulting credit score. Let's say we have a borrower with a "credit high" (the maximum debt allowance on all cards, combined) of $20,000. He has one card that is used for business purposes that is pushing the limit. I would advise the client to get two new cards and, once again, spread the debt out over all of his cards, leaving 50-70% available credit on each card. This will positively affect his overall score, based on the five elements of the FICO scoring model.

Conversely, the borrower should be advised not to close any existing credit card accounts, even if they are at a zero balance. Some people think they are doing themselves a favor by having fewer cards, but they lose out on the credit history factor. Even if the borrower does not have a good rate on an old credit card, they are rewarded for having the long-term credit history, and from time to time they should make a small purchase to keep the account in an active status.

These are just a few examples of what borrowers can do to improve their credit scores when they consider buying a home. If they are disappointed by the fact that they cannot get the most desirable loan up front, I would continue to monitor rates and their specific loan scenarios on an ongoing basis and advise them when they will have a chance to turn this situation around. The new mortgage debt will temporarily drop the score, but once the first payment registers as "paid," the score will begin to go up again and eventually present the opportunity to refinance at a lower rate.

Stay tuned for Credit Scoring, Part IV: Credit Remediation

Part II: The Five Factors of Credit Scoring

There are five factors that comprise the credit score. They are listed below in order of importance, just as an underwriter would look at the score: Payment History: 35% impact. Paying debt on time and in full has a positive impact. Late payments, judgments and charge-offs have a negative impact. Missing a high payment has a more severe impact than missing a low payment. Delinquencies that have occurred in the last two years carry more weight than older items. Outstanding Credit Balances: 30% impact. This factor marks the ratio between the outstanding balance and available credit. Ideally, the consumer should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when trying to purchase a home. Credit History: 15% impact. This marks the length of time since a particular credit line was established. A seasoned borrower is stronger in this area. Type of Credit: 10% impact. A mix of auto loans, credit cards, and mortgages is more positive than a concentration of debt from credit cards only. Inquiries: 10% impact. This quantifies the number of inquiries that have been made on a consumer's credit history within a six-month period. Each hard inquiry can cost from 2 to 50 points on a credit score, but the maximum number of inquiries that will reduce the score is 10. In other words, 11 or more inquiries in a six-month period will have no further impact on the borrower's credit score.

Remember, a computer that's not taking any personal factors into consideration calculates these scores. When a credit report is generated, it is simply today's snapshot of the borrower's credit profile. This can fluctuate dramatically within the course of a week, depending on the individual's own activities. Borrowers should be made aware of this when they enter into the loan process, and know that it's not in their best interest to go out on a shopping spree. They need to make sure they are not creating a negative impact on the score while the lender is reviewing their file.

Secondly, it is often beneficial to compile a tri-merge credit report. This provides scores from the three credit bureaus, Experian®, TransUnion®, and Equifax. The lender should be provided with this rounded profile because these three scoring systems can vary in their results. The lender is going to look at the middle score and throw out the other two. In many cases, this works to the borrower's advantage.

Stay tuned for Credit Scoring, Part III: Dealing with Challenges

Part I: Good Credit Translates into Lower Rates for the Consumer In the 1960s, Fair Isaac Corporation started working on a system lenders could use to evaluate the likelihood of receiving repayment on loans. Prior to that, it was really a matter of trusting an individual to be a "man of his word," so to speak. Fair Isaac sought to take human error out of the equation with a reliable system that could determine whether or not consumers were truly worthy of credit, and thus FICO was born. This evolved to become the standard for lenders by the 1980s. Credit scoring has an enormous impact on a borrower's ability to purchase a home. It can mean the difference between getting a good interest rate and the home of their dreams, or whether they even qualify at all. For this reason, it is important for borrowers to understand the credit scoring process, and to know what their credit score is when they look to obtain mortgage financing. What the credit scoring model seeks to quantify is how likely the consumer is to pay off their debt without being more than 90 days late on a payment at any time in the future. Credit scores can range between a low score of 350 and a high of 850. The higher the client's score is, the less likely they are to default on their loan. Only a rare one out of approximately 1,300 people in the United States have a credit score above 800. These are the slam-dunk clients that walk away with the best interest rates. On the other hand, one out of eight prospective home buyers are faced with the possibility that they may not qualify for the loan they want because they have a score between 500 and 600. Stay tuned for Credit Scoring, Part II: The Five Factors of Credit Scoring

The Impact of a Government Shutdown on Mortgages In the wake of news stories that the US will face a government shutdown and default on its outstanding loans if a debt ceiling agreement isn't reached, you may be wondering what the impact would be to the mortgage industry and closings. The last time we went through a government shutdown in 1995, it was a pain, but not a panic. If a shutdown were to occur again, here are the top six areas that could be impacted: 1. FHA Case Numbers: For each FHA loan, we are required to order a FHA case number. This number is generated before an appraisal can even be ordered. With a shutdown, we may not be able to order case numbers. Because of this, it is critical to let us know if there is a contract executed on any loan, so that our office can go ahead and order a case number without risking the loan being on hold during a shutdown. Note: with the new FHA guidelines, a contract must be executed before a case number can be ordered. The ability to close FHA loans is questionable, depending if HUD keeps its website running to obtain FHA case numbers and CAIVRS. During the November 1995 shutdown, case numbers could not be obtained, but this was prior to the internet and was a manual process. The shutdown in 1995 mainly caused a delay rather than a drop in FHA loan origination. But if lenders decide to stop accepting FHA applications, it could be a problem. I think we may see delays but not a complete shutdown of the FHA. 2. 4506 IRS Transcripts: Each loan requires the verification of at least one tax return by the IRS to verify the numbers that each customer presents on their tax returns. During a shutdown, this process would be delayed as the IRS wouldn't be at work to verify the transcripts. 3. Verifying Employment of a Government Employee: We are required to verify the employment of each customer. If the customer is a federal government employee, we would be unable to verify his or her employment during a shutdown. 4. FEMA: Homes in a Flood Zone: Homes that are determined to be in a flood zone would not be able to close as flood insurance could not be obtained. 5. USDA: During a shutdown, the USDA office would be closed because they have government underwriters that insure behind the lender. With a shutdown, we would see delays with all USDA loans. 6. VA: Like the FHA, the disruption is possible – but not absolute – during a shutdown. This would all depend on if they continued to allow their website to function. A disruption would cause delays in VA appraisals and the issuing of certificates of eligibility. If the website was closed during a shutdown, we would see delays in all VA loans. Stay tuned for updates if necessary on this very important time period. And if you have any questions, please call or email today.

You've probably heard the saying, "When you fail to plan, you plan to fail." That is especially true when it comes to buying a home today. Underwriters are following strict guidelines–and that means even things like bank deposits and transfers are under scrutiny.

Here's some insight on how underwriters analyze bank statements...and what you need to know and do (or not do) during the loan process.

Today, many banks require an explanation and proof of source of funds for any large non-payroll deposits that are listed on a bank statement. What is deemed a large deposit is largely determined by the underwriter and can be as low as a few hundred dollars. The reason for the underwriter's concern is that an applicant may be borrowing money from individuals, or accepting money from an interested party to the transaction, to help with the settlement costs.

It's easy to see how this bank requirement can create a lot of frustration, especially for people who are used to moving money between their accounts, which many of us do today. The key thing to remember is that anyone applying for a mortgage should avoid transferring money between accounts or making large non-payroll deposits during the home buying or selling period. While that may feel like an inconvenience, the time and headache you'll save yourself from having to account for all your deposits will be worth it.

Let me know if you have any questions at all about this or if there's anything I can do to help you at this time. Lets makes things happen!