Riley Floyd

What is a FICO score?

FICO stands for Fair Isaac Corporation, a company that created the most used credit scoring model in the United States. An individual’s credit score is calculated through a statistical algorithm and is used as a factor in determining the likelihood of a borrower defaulting on a loan. FICO scores are generally used for obtaining mortgages, car loans or consumer credit. The scores are provided from the three major credit reporting agencies: Equifax, Experian and Transunion. Typically, there is a variance amongst the scores since each agency has a slightly different scoring formula. FICO scores range from 300 – 850, with higher scores being considered less risky. For mortgage lending purposes, any score over a 680 is considered good and above a 750 is considered excellent. Any score below 580 is considered great risk and will be challenging for such a borrower to secure financing.

The factors that contribute to a FICO score and the weighted percentages for each are as follows:

• 35% — timeliness of payments (adverse dings to scores for any payment greater than 30 days later, collections, past due accounts)
• 30% — the ratio of used debt to allowable debt for consumer credit (an individual that maxes out their credit cards will see a decrease in their score)
• 15% — length of credit history (the more credit history and showing proof of consistent timely payment, the better the score)
• 10% — types of credit used (installment, revolving, mortgage)

10% — recent credit inquiries and recent new credit (taking out a fair amount of new credit with multiple credit inquires can adversely impact a score)

There are some signs of strengthening in our Denver market. The metro area's inventory of available resale housing decreased 20% to 23,120 units in October from October 2007. Some of this reduced inventory is attributed to homeowners taking their properties off the market in frustration because their property is not selling, but lower inventory implies a strengthening market. Remember, the Denver area had housing inventory of 31,989 units in July 2006. Home sales rose 14% to 4,265 in September compared to the same month last year. This is due almost entirely to the lower-end of the market (under $180K) selling like hotcakes. October's median selling price for single-family homes decreased 12% to $206,000 from the same month of '07, and was down 4.7% from September's median of $216,150. Median selling price for single-family homes dropped 10.5% to $222,000 through October, from $248,000 through October '07.Prices are still falling, but at a slowing pace. This trend should continue into 2009 when it is expected to bottom out and slowly climb back. Hang on, it's gonna continue to be a wild ride!

As far as investment loans, little or no money down loans are impossible. However, lenders do permit the use of Home Equity Lines of Credit or second mortgages from other properties owned by the borrower as a source of down payment. Or, self-employed borrowers are using funds from business lines of credit to fund down payments or renovations (please note: there are asset seasoning guidelines for doing so and the debt incurred by accessing other credit lines must be accounted for against the borrower's debt-to-income ratio). Thus, we have clients leveraging themselves with other homes they own in order to get in with little or nothing down.

There are exceptions, but practically every lender requires Full Income Documentation on any investment purchase. Full Documentation requires the proof of income through W2s, pay stubs and/or tax returns, as well as proving liquid assets with bank statements. The max LTV is 85% on a non-owner single family property (75% for a 3 - 4 unit); however, most homes are being affected with the ‘declining market' tag. As such, the maximum loan permitted would be 80% of the purchase price. This is due to mortgage insurance companies refusing to provide MI on investment properties in declining markets. Also, if an investor does not have landlord experience in the past two years, new rules will now not allow any rental income to be included as monthly income. Hence, the buyer would need to qualify with the entire payment going against his/her debt-to-income ratio.

Another point to keep in mind is that Fannie Mae and Freddie Mac are only permitting a maximum of 4 financed properties on a borrower's credit report. Hence, if a borrower is looking to purchase or refinance a fifth home and already have four loans on their credit, they will face a tremendous challenge in securing financing. This latter rule only affects someone purchasing or refinancing an investment property/second home and NOT an owner occupied purchase.

All this being said, if an investor can put down 20% (or borrow a good chunk of that 20% from other homes they own or lines of credit), is Full Doc, with a 680+ credit score and DTI below 50%, rates are in the upper 6% range on 30yr fixed mortgages with no prepay penalties. With home prices bottoming up in most neighborhoods, coupled with a bullish rental market with increasing rents and low vacancy, investors can easily generate hundreds of dollars of cash flow per month. In fact, many investors choose 15 year fixed mortgages to pay off the loan quickly, yet still cash flow tremendously.

What is a FICO score?

FICO stands for Fair Isaac Corporation, a company that created the most used credit scoring model in the United States. An individual's credit score is calculated through a statistical algorithm and is used as a factor in determining the likelihood of a borrower defaulting on a loan. FICO scores are generally used for obtaining mortgages, car loans or consumer credit. The scores are provided from the three major credit reporting agencies: Equifax, Experian and Transunion. Typically, there is a variance amongst the scores since each agency has a slightly different scoring formula. FICO scores range from 300 - 850, with higher scores being considered less risky. For mortgage lending purposes, any score over a 680 is considered good and above a 750 is considered excellent. Any score below 580 is considered great risk and will be challenging for such a borrower to secure financing.

The factors that contribute to a FICO score and the weighted percentages for each are as follows:

• 35% - timeliness of payments (adverse dings to scores for any payment greater than 30 days later, collections, past due accounts)
• 30% - the ratio of used debt to allowable debt for consumer credit (an individual that maxes out their credit cards will see a decrease in their score)
• 15% - length of credit history (the more credit history and showing proof of consistent timely payment, the better the score)
• 10% - types of credit used (installment, revolving, mortgage)
• 10% - recent credit inquiries and recent new credit (taking out a fair amount of new credit with multiple credit inquires can adversely impact a score)

If you have not heard already, the inventory of home on the market in Denver has been declining. This is not true in many regions of the county. Your clients, who often only see national headlines, might not be aware of this favorable news. Our market has some unusual factors at work. Let's explore them, so you can better help your clients.

If you look at the first chart (MOI 1), you'll see the MOI (months of inventory) for Denver's suburbs on the bottom axis and the average sales price in that suburb on the axis on the left side. Denver metro currently has about six months of inventory (a balanced market, on average), but you can see there is a lot of variety from one city to the next. Lower cost areas, such as Thornton, are seeing inventory move fast. Sellers (mainly banks) don't have to wait long for offers. Thornton's average price in the last year was around $250,000 and the average MOI was about 3 months. Greenwood Village, on the other end of the scale, had about 13 MOI and an average price of about $1.4 million. Sellers are suffering there. The city of Denver is about in the middle.

If you look at the second chart (MOI 2), you'll see the MOI information sorted by the price of the home. In some cases, this might be more useful when you meet with clients. The city of Denver, for example, has many neighborhoods with homes under $100,000, and they are selling fast. On the other hand, upscale neighborhoods like Cherry Creek and Hilltop have significant levels of inventory and it's taking a long time to get homes sold, especially over the $1 million price barrier.

The left part of the chart show what percent of the active listings are REO (in red) and which are regular sellers (in green). For homes priced between $0 and $100K, regular (e.g.,, non-bank) sellers are 17% of the active inventory, but only 12% of the sales in the last twelve months. You can see on the left that since they are not getting their "fair share" of the sales, the MOI for the regular sellers under $100K is 2.7 months. For REO under $100K, it's a blazing 1.9 months. This probably isn't a surprise to any Realtor that has written an offer for a low priced REO and the listing agent has told them their buyer is competing with ten other offers. It's a strong seller's market at this price point!

Compare the homes from $480K to $1MM. Here, MOI is around 14 months - a very slow market. Your seller's experience with marketing time depends greatly on their price. I hope this information will help you demystify our market for your clients.