Why Is My Credit Bad
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When you begin the process of securing a home loan, often you will compare mortgage rates first. It is soon after many find that their credit history is nto as good as they thought. Your credit maybe considered bad and causing a low score for a number of reasons. While there are numerous reasons for bad credit some of the more common ones are as follows. You have numerous credit cards that are maxed out or close to the credit limit, you have unpaid judgments or collection accounts, you have 30 day late payments showing on your payment history. All of these examples can cause severe drops in your credit score.
One area people overlook that can negatively impact their credit report is failing to honor mobile phone contracts. Cell phone companies give away free phones to customers who sign on with their services for a specified period of time, usually one to two years. Terminating subscription to the phone service before the expiration and failing to reimburse the phone carrier for the cost of the free phone is considered breaking the contract. Cell phone companies would then report to the credit bureaus and cause a blemish on the credit history. Such blemishes are not serious, but they nonetheless lower credit scores.
Credit scores generally range from about 350 to 850.
* 800+ = great credit
* 700-799 = good credit
* 600-699 = average credit
* 500-599 = bad credit
* under 500 = hard to get a loan at all
Your credit can be bad for a variety of reasons:
Late payments
High Account Balances
Bankruptcy
Collections
Chargeoffs
To minimize negative on your factors you will need to pay down balances, make payments on time, dispute incorrect information, and let the passing of time lessen the impact of past bad credit.
Too many inquires at one time can affect your credit score.
If your credit score is low because of a high balance on a credit card, transfer some of the balance to another card. Try not to open a new card because to do this can also reduce your score.
One reason why your credit may be bad is because of erroneous information reported on your credit report. This can happen to anyone and is actually quite common. This is one reason why you need to check your credit report out at least once per every 12 months. By checking you credit report for free you can keep an eye on your credit and make sure that you take care of any erroneous information when it happens, not when you are trying to apply for a loan and it comes as a surprise to everyone. Utilize your one free annual credit report each year to take a look over your credit to make sure everything looks well. There are many reasons as to why credit report errors can happen so make sure that if errors do happen to you that you rectify the situation immediately.
Maintaining high balances on your credit cards and other revolving debt negatively impacts your credit score. Paying down credit cards balances below the 70%, 50%, and 30% thresholds is a quick way to boost your credit score.
Paying down your credit card balances to around 30% will help your score. If you can, try to keep the balance at that level at all times. If you need to raise your score quickly, and don’t have the money to pay down your balances, you may request that your creditors increase your credit limit. This will in turn lower your balance in comparison to the limit.
Only use this technique if you are responsible with your credit. Once your limit is increased, it may be tempting to go on a shopping spree. Know that if you do this, you will be in a much worse situation than when you started. Not only will you have more debt, but you will increase your ratio of balance to limit.
You should frequently check your credit report at least twice a year to know what your credit profile looks like. Sometimes erroneous items appear on credit that you may not know about and when it comes time to utilize your credit it can affect the rate you will get. Depending on the state you live in, you are allowed at least one free credit report per year from each of the three major credit bureaus; Experian, Equifax and Transunion.
Watch on your credit report for companies that are illegally renewing the chargeoff date every month in order for the account to never gain history. These companies you should call and address this immediately.
Here is a general guidline which outlines the five major types of information used to calculate a FICO score. Each type of information counts as a percentage of a total FICO score:
- 35% Payment History
- 30% Amounts Owed
- 15% Length of Credit History
- 10% New Credit
- 10% Types of credit
There are several ways to increase your credit. However the fundamental principle is the bills must be paid on time. This doesn’t mean by the due date. For the sake of your credit a payment must NEVER be more then 30 days late. If you are acquiring 30 day lates on your credit then your credit standing will deteriorate quickly. Judgments also hurt your credit even if you pay them.
It is also important to note that a credit score is a snapshot. Although it shows your payment history, length of credit, etc., having inaccurate (negative) information removed from your credit bureau report will immediately reflect an increase in your score.
If you do decide to pay off some of your credit cards, be sure to leave the cards open. The credit bureaus look favorably upon accounts that have been open for a substantial period of time, especially if they are showing a zero balance.
Remember that a credit score amounts to a prediction of how likely it will be that you go 60 days late or more on your mortgage in the next two years. One thing that will really lower this score is if you carry high balances on revolving debt and then start making a few of the payments late. This is the pattern of a consumer who is close to getting in trouble with debt.
Things that may go into a collection or judgment that will hurt you credit include unpaid medical payments, unpaid utility payments, and unpaid cell phones or cable payments.
If you have old collections on your credit report, paying them off now can actually hurt your credit. Credit Agencies look at the age of a delinquent item: if you pay it off the “date of last activity” becomes recent instead of old. There are many reputable credit repair agencies or credit counselors that can help guide you in restoring your credit.
My Adjustable Mortgage Is Adjusting Up Too Much
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“My adjustable rate mortgage is adjusting up way too much!”
That’s a complaint Loan Officers are hearing a lot lately. You’re not alone. Different estimates are that between 500 billion and 1 trillion dollars of adjustable rate mortgages (ARMs) are set to adjust by the end of next year.
Some good news – your ARM, as opposed to a fixed rate mortgage, has almost definitely saved you thousands of dollars in interest over the last few years. Congratulations!
Stop the “PAYMENT SHOCK” Blues and look into a Fixed rate until the trend of Adjustable Rates has settled.
Adjustable Rate Mortgages, which are approaching the end of their fixed rate period, will continue to adjust upwards so long as market interest rates continue on their upward trend. Many borrowers with adjustable rate mortgages who don’t like the idea of their payments going up are seeking the security of refinancing into a fixed rate mortgage. Don’t wait until you miss a payment to refinance your adjustable rate ARM mortgage. Lock in a low fixed rate today.
Some homeowners in areas that have seen property values plummet that purchased their homes with 100% financing and ARM mortgages may find it difficult to refinance their mortgage. There are 125% equity programs that may help you if you are in this situation.
Another feature of the adjustable rate loan should be noted: commonly, adjustable rate loans are assumable by a creditworthy buyer. In other words, having an assumable loan might make it easier for you to sell your home in the future; if the buyer wants to take on your existing assumable loan.
If your mortgage rate is adjusting too much then it may be time to look into refinancing your mortgage loan. You can explore the options of refinancing your mortgage into a fixed rate mortgage to stop the loan from ever adjusting over the life of the loan or you can compare rate quotes even look into refinancing your mortgage loan into another adjustable rate mortgage. Refinancing your mortgage into another adjustable rate mortgage will provide you with the lowest rate for your situation again and a rate that is fixed for a short term. Either option can provide you with the financing you need and get you away from the home loan that is currently adjusting by leaps and bounds.
For some people, interest rates are going up 3-4% once their adjustable rate mortgage adjusts. This is resulting in a payment increase of anywhere between $100 and $500 a month, possibly more depending on the size of your loan. A good, experienced loan officer can help you sort through your options.
The Home Mortgage Process Start To Finish
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The Mortgage Loan Process begins with an initial consultation between the borrower and the broker. During the first conversation, it is extremely important for the borrower to discuss what they hope to accomplish with their new investment in real estate. It is then the duty of the broker to best determine how to accomplish that goal, with the current qualifications of the borrower. Unfortunately, borrowers often end up in the wrong mortgage product because their lack of communicating what they truly intend to do. Borrowers also must remember to be upfront and truthful with their broker from the start. Remember, the broker acts as the borrowers representative and structures the loan for presentation to underwriting. They will help their borrower around any weaknesses they may not want to disclose to underwriting. From the conversation the broker will take a written loan application….
After taking a complete application, one of the very first things that the loan agent must do is access the applicant’s credit report. A competent mortgage professional will examine not only the credit scores but do a line by line analysis of the report and highlight any information that could be considered derogatory. Once the report has been examined the Loan Officer will review it with the applicant and get their response to any derogatory information.
After all of the documentation is collected we will send your loan package to underwriting for evaluation. Underwriting will then decide if the proper information has been sent or if they want to see additional information to make a final determination for the mortgage.
After submitting your application to an automated underwriting system such as DU or LP, you will be given a conditional approval letter. This conditional approval will outline all the required documents needed to accompany your application.
Your application along with the required documents will be submitted to an underwriter. An underwriter is a trained credit-risk analyst who will do everything possible to help you receive loan approval. It is the responsibility of the underwriter to insure all documents supplied with the application meet the lender’s requirements.
Soon after your application is approved you will receive a commitment letter that explains the terms of your loan, including any loan conditions that need to be met prior to closing. Read your commitment letter carefully, and be sure to follow the instructions to ensure a timely closing.
In the case that your application is not approved, your loan officer or mortgage broker can help you
determine what actions need to be taken to obtain financing.
From the time the application was taken the broker has three days to send you RESPA compliance forms.
An appraisal will be ordered as to support the value of the property. The loan is based off the overall value of the property and is crucial to get the appraisal done right away. Typical time for appraisal vary from area to area depending on demand and market conditions.
Your loan officer or mortgage broker has asked you a number of questions at application. Your answers,
credit report information, and the loan program you’ve applied for will help determine if you qualify
for an instant mortgage approval using an automated underwriting system. These systems are often referred to as DU and LP. They stand for Desktop Underwriting and Loan Prospector.
Documentation requirements vary, depending on the loan program, credit profile
and various other requirements of the lending institution. In some cases only minimal documentation
is required. In other cases more detailed documentation may be required.
An appraisal will be ordered at application to determine the fair market value of the property you are
purchasing.
You can either lock in your interest rate (rate lock) or float your interest rate. It is important to discuss
these options with your loan officer or mortgage broker.
At application or shortly after, you will receive a Good Faith Estimate and a Truth-in-Lending Statement,
which will show your annual percentage rate (APR). These documents are required by federal law and
disclose the credit terms of your loan and approximate closing costs.
The underwriter may ask for additional information on a case by case basis, considered a stipulation of funding.
After deciding on the loan program, the applicant must supply the necessary income and assets documents (W2’s, paystubs, bank statements, etc.) as required by the chosen loan program. Because these documents are essential to the underwriting process, the application package cannot be submitted without them. Therefore, it is important that the applicant present them without delay.
Its important to gather all of the remaining conditions quickly as the lender may still need a few days to review them. After all conditions are met your loan will be “cleared to close”. Generally at this time the settlement agent or title attorney will take over and prepare for closing.
Good Faith Estimate Explained
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Loan Officers are requried to send a Good Faith Estimate to their clients as part of their pre disclosures. The Good Faith Estimate will have a line by line description of all finance charges associated with the loan. The Origination Fee is the fee your Loan Officer is charging to originate your loan.
When looking at your GFE look to see that the lender/broker has included what the title company will be charging. Though your lender/broker is not able to waive these charges they may be able to marginally influence the charges. One item that is not negotiable is the title insurance. This is usually divided into two parts, lender’s insurance & owner’s insurance.
Other charges can be Loan Discount or Loan Discount Point. This is most commonly referred to as “Points”. It is the cost of buying down the rate to reduce your overall monthly payment. The more you pay to buy down the interest rate, the less you will have to pay on the overall interest on the life of the loan. Some loans will have no points and some may have a required cost due to the particulars of the loan.
If an escrow account is going to be setup for you (this is usually a good idea for new homebuyers and those who have a harder time setting money aside for later) then look in the section for Reserves Deposited with the Lender. Depending upon your state you will have anywhere from 2-8 months of reserves that are included that will be held by the lender for your escrow account. The two items held in reserves are your home owner’s insurance and your property taxes.
Another item located on the Good Faith Estimate is Government Recording and Transfer Charges. These are the taxes that most jurisdictions include to get their fair share. On a purchase the taxes, stamps and recording fees are usually split between the seller and buyer. On a refinance, the taxes fall solely on the homeowner. Make sure this area is completed so it does not come as a surprise down the road.
Another form that is often used in replacement of the Good Faith Estimate is the MLDS. Mortgage Loan Disclosure Statement.
Just remember when looking at the Good Faith Estimate there will be Estimated Closing Costs and Estimated Prepaid Items. The prepaid items (escrow monies, taxes, etc.) are mandatory collections. The Closing Costs are what should be looked at attempt a true apples to apples comparison.
The Good Faith Estimate is often the first from that will disclose many of the most important aspects of your loan. The law requires your good faith estimate be provided by your lender or broker no later than 3 days from the receipt of your complete application. Be sure to carefully examine the interest rate, term, monthly payment, and amount due at closing to ensure the loan you are applying for is what you think it is.
