Credit and Your Mortgage in a Subprime World
Drive through your neighborhood and you'll see the signs. 'Price reduced' or 'For sale by owner.' As the subprime mortgage crisis continues rippling through the economy, there's a sea change on the neighborhood level. Homes that might have moved quickly a year ago are lingering on the market. Foreclosures are way up (nearly double from last year) and purchases way down.
With prices depressed due to slackening interest, people are trying to sell their homes themselves to save the 6% realtor commission. The strategy isn’t necessarily working. National home prices are expected to drop for the first time since 1950 when prices were first recorded.
With mortgage companies tightening loan requirements, many people who would have qualified before are shut out of the market. Losing that pool of potential buyers makes it just that much harder to unload your house especially if you're in 'jumbo' loan territory (homes selling above $417,000). Not only are the heady days of zero-down loans gone for these properties, buyer incomes must now be fully documented and all procedures followed strictly.
With investors less interested in these high dollar properties, banks are now charging more to make loans (the government doesn’t guarantee these loans; they’re too large). Lenders burned by their own policies of loose lending are not going to let it happen again. Interest rates have leaped from 6%-9% in some cases, creating an understandable lack of enthusiasm.
What if you want to buy in this troubled market and don’t have sterling credit? It may be harder to buy a home, but it’s still possible. Your credit report is critical, because that's what lenders rely on to make their call. These documents, kept by the nation's top credit bureaus (TransUnion, Equifax, and Experian), contain your complete credit history.
You have the legal right to see all three reports once a year free of charge. Visit www.annualcreditreport.com to see yours or sign up for one of the credit monitoring services online which provide free reports and credit scores as a sign up bonus. Prior to the mortgage meltdown, credit scores as low as 550 qualified for subprime mortgages. Scores above 700 are what lenders are looking for now. Additionally, many housing lenders use their own private scoring system so what you see in your TransUnion credit score may not necessarily match the lender score.
To increase your credit score, start by paying all your bills on time. Your payment record accounts for roughly 1/3 of your score, with recent behavior patterns being most important. Next remove any errors on your credit report that make you look unreliable. Credit reports are notorious for containing errors from payment history to balances to name and address.
Check all 3 reports carefully. If you find problems, go through the dispute process with the bureau that is reporting the item. Write a personal letter describing the situation (do not use a form downloaded from the Internet) and include copies of all your documenting information. The good news is that your creditor is required to prove their allegation. If they are unable to provide documentation then the item must be removed from your report.
Plan to put at least 5% down for a home today, and if your credit isn't perfect probably more. Avoid adjustable rate mortgages which offer tempting low incentive rates that become higher at some point in the future. The only way to make these loans work is if you plan to occupy the house for only a short time, and sell before the mortgage resets.
Across the nation, shrinking home prices are causing anxiety. It's a great time to buy because there are deals out there. Though it may be tougher to qualify for a loan, once you have one you could have your pick of the neighborhood.
In your financial life, few things figure as prominently as your credit report and credit score. Learning the basics of the credit report process, and keeping your credit report free of errors, is essential to good financial health. You should focus on improving your credit score as the highest credit scores receive the best interest rates and loan terms. On a mortgage, a difference of 100 points could be worth hundreds of dollars each month.
Since 2005, all Americans have the legal right to obtain a free annual copy of their credit report from TransUnion, Equifax and Experian credit reporting bureaus. This law is intended to help consumers reduce errors in their credit reports by minimizing the obstacles to viewing credit reports. To receive a free credit report visit the official site run by the bureaus: annualcreditreport.com
Your personal credit score is a number from 350-800 which stands for your credit risk. The higher numbers are considered less likely to default. Credit scores come from mathematical formulas that measure many variables in your credit report such as payment history, public records, and debt to income ratio.
The Fair and Accurate Credit Transaction Act (2003) amendment to the FCRA Fair Credit Reporting Act guaranteed all Americans the right to see their credit report once a year to check it for errors. To learn more about free credit, credit scores and financial terminology, visit our glossary page.
