With historically low rates, many homeowners are watching closely
for the right time to refinance their mortgages. Those with good credit
may well recall being showered with praise by a mortgage broker during
the initial purchase for that solid credit score.
That was then. This is now.
A few years ago, a score of 620 or higher was good enough. That
increased to 680 in early 2008. Then it jumped to 720 in April last
year and 740 in August, says Rodney Anderson, senior managing partner
of Plano, Texas-based Rodney Anderson Lending Services.
In the
past, any score of 700 or higher would get a double thumbs-up from
credit experts. Now, rate adjustments begin kicking in at 740, with
every 20-point drop adding another adjustment.
In other words,
many people who were taking pride in their credit habits either must
pay significantly higher or try to make quick changes to nudge their
scores upward. 'What used to be great is now only good,' says mortgage
broker Todd Huettner, president of Denver-based Huettner Capital.
Refinancing that would have worked a year ago might well not make
sense, he adds.
'I have clients all the time who literally wind up with a score of
739, 719, 699, 679 ... and it costs them money to either fix it or pay
for it,' Huettner says.
One of Huettner's clients, who always had
a score of about 740, went to do a refinance and found her current
score at 719. 'The reason was, she put a new washer and dryer on a
store credit card,' he says. Many store cards are actually revolving
credit, and your limit may well be equal or about equal to the purchase
you're trying to make that day.
Take the application that
Stamford, Conn.-based Luxury Mortgage Corp. got recently. Interested in
lowering the rate on an existing mortgage, the borrower could verify
substantial income, assets and personal credit history, says chief
executive David Adamo. But the borrower's credit score had taken a hit
after co-signing an auto loan for his son that had not been paid timely.
'As
a result, the borrower, who otherwise met every other criterion, was
unable to refinance the loan at a rate that made economic sense,' Adamo
says.
Another wrinkle in today's market: Even those with FICO
scores of 740 or higher are penalized for buying in a geographic market
on the downswing. 'This adjustment affects all borrowers, regardless of
score, if in a declining market,' says mortgage broker Jim Heidelberg,
president of Heidelberg Capital Corp. in Tampa, Fla.
In many
cases, the added costs of rate adjustments are 'enough to make a
refinance that would otherwise make sense have no benefit to the
borrower,' Huettner says.
The road to new scoring
How did we get to this new reality?
The
nation's two largest mortgage lenders, Fannie Mae and Freddie Mac,
suffered major losses in the market last year and then redefined risk,
announcing price adjustments for borrowers with FICO scores below 720,
says Sean Cragg, vice president of sales for Ann Arbor, Mich.-based
Gold Star Mortgage Financial Group.
And, in case you were
wondering, 'these fees have nothing to do with your mortgage company or
its various products and cannot be negotiated away,' Cragg says.
All
mortgage bankers, brokers and credit unions must comply with the higher
interest rates and delivery changes in all traditional mortgages, says
Heidelberg. Only entities intending to hold the mortgages in their own
portfolios can follow their own guidelines.
Worse news may be on
the horizon. 'There are many factors, including proposed legislation
and regulation, that continue to change the mortgage lending
landscape,' says David Chung, managing director of Towson, Md.-based
CreditXpert Inc., which provides credit analysis services to consumers.
'In the near term, it is more likely that this benchmark will continue
to rise than fall.'
Surprise, surprise
Joe
and Jane Homeowner have likely heard of the new credit restrictions.
But the actual cost to them is often a surprise when they sit down with
a broker.
'Often, lenders will quote rates that include the
adjustments, without calling attention to them in order to avoid a
negative reaction from their customer,' says James Guthrie, a partner
in New Home Finance in Suwanee, Ga.
Less surprising are other
factors that go into securing financing for a new or existing mortgage.
Paola Kielblock, national products manager for Sun Prairie, Wis.-based
Fairway Independent Mortgage Corp., clarifies today's requirements:
• Good credit.
• Stable job, with a minimum of two years of employment.
• Reserves after closing, including a minimum of two to six months of mortgage principal, interest, taxes and insurance.
• Down payment from the borrower's own funds.
• Low debt-to-income ratio. The required ratio varies between banks but
is generally less than 40 percent, according to many in the industry.
• Good loan-to-value percentage. It also varies, but it's often cited as less than 80 percent.
Having
equity in your home is a major factor in getting approved for a
refinance and in finding the best rate, says Cameron Findlay, chief
economist for LendingTree.com. The more equity in the home, the less
risk there is to the lender if the home is repossessed.
Taking action on your score
What can a homeowner who wants to refinance do with a good FICO score that's not good enough?
'Virtually
everyone can raise their scores by at least 10 (points) to 20 points,
sometimes significantly more in 30 days,' Anderson says. Here's what to
do.
1. Find out what might have gone wrong. Applicants
should know their credit score, understand what it means to their loan
rates and ask their loan officers to use credit analysis on their
behalf, says Chung. Credit analysis tools are a simple way to identify
key score influencers by scrutinizing the information contained in each
of an individual's three credit reports to look for inconsistencies,
errors and omissions that may artificially depress the score.
2. Correct any inaccuracies.
Although consumers can improve scores on their own, Kielblock notes
that credit agencies offer services to mortgage brokers to help
consumers raise their credit scores if something is reported
inaccurately and there is proof of a discrepancy.
3. Decrease the percentage of available credit used.
This can be done by paying down balances or increasing credit limits,
says Guthrie. Ideally, this means keeping balances as close to zero as
possible, and definitely below 30 percent of the available credit
limit, experts say.
'We've seen people increase their scores by as much as 90 points or more, simply by paying off the right cards,' Anderson says.
4. Move things around.
If one income can be used to qualify for the loan, transfer accounts to
'park' the debt in the other party's name, Guthrie says.
5. Get a rapid rescore.
It's the only way to find out fast if an attempt to improve a score was
successful. It's done through your lender and a rescoring company. The
process takes about a week, but it can get the loan process back on
track. The downside is it costs a few hundred dollars. The credit
bureau Experian has seen an increase in rapid rescoring requests, says
spokeswoman Cynthia Baker. 'While we haven't done a direct
cause-and-effect analysis, anecdotally, the volume does appear to have
increased as interest rates have dropped in March,' she says.
Aside
from working toward a better score, there are two additional options.
One is paying points to buy down the interest rate. 'This is only a
good idea if the borrower will then live in the house beyond the
break-even point, meaning the time where the money they've paid in
points is made up for by way of less expensive monthly payments,' says
Findlay.
The other option: shopping around. Some lenders, such as
Palo Alto, Calif.-based Addison Avenue Federal Credit Union, have
loans, known as 'portfolio' loans, that aren't subject to blanket rules
on credit scores because the lender intends to keep them rather than
sell the loans in the secondary market.
Michelle Edwards,
national mortgage sales director, reports that for these loans, her
company increases the cost of a mortgage only for consumers whose
credit scores are below 680. One customer looking to refinance avoided
a pricing adjustment because of compensating factors such as
loan-to-value ratio, assets and length of employment.
In a
perfect world, anyone contemplating a refinance or a new mortgage
anytime within the next year or so would start working on getting the
ideal credit score now.
But what if that didn't happen? Try not
to let your emotions drive how you feel about your interest rate. A
mortgage is a financial decision that should be driven by economics,
'not the pursuit of the world's lowest rate because having it would
make you feel good,' Heidelberg says.
He also says some consumers
wait six months for a slightly better rate when a refinance could save
$500 a month means missing $3,000 in savings. As Heidelberg says,
'This is foolish.'
Source: YFinance
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