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Homebuyer 3
 

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    Homebuyer 3 Homebuyer 3 Document Transcript

    • 3: Understanding CreditIntroductionMaintaining or establishing good credit is an important part of the homebuying process. Youwill need a good credit rating in order to receive a mortgage loan and get a good interest rate.Poor credit and high debt can be obstacles to purchasing a home, but that does not mean youshould give up on your dream of homeownership. Using the strategies and information in thissection, you can overcome these obstacles and be one step closer to reaching your goal. Section Objectives:  Understand the basics of credit and its importance  Learn strategies to improve your credit score and address common credit problems  Understand your credit rights as a consumer  Understand how to handle credit when in the lending processWHAT IS CREDIT?Credit is:  The ability to borrow money and pay it back.  The ability to obtain services and goods today, based on trust that repayment will be made at a later time.  Used by lenders, landlord and other creditors to determine your character and trustworthiness In the view of creditors: good credit = dependable; poor credit = risky.WHY IS GOOD CREDIT IMPORTANT IN BUYING A HOME?Having a good credit rating can help you in buying a home because:  Lenders are more likely to give you a loan if you have handled past borrowing responsibly  You will save money on loan interest with a higher FICO score! See how much you can save in the credit scoring section.  You may be able to obtain Homeowner’s Insurance at a lower rate
    • Credit Reporting Agencies & Credit ReportsYour credit report is a detailed summary of your credit history put together by credit reportingagencies, plus additional facts about you that will help creditors judge your creditworthiness.WHAT IS A CREDIT REPORTING AGENCY?Credit reporting agencies, or credit bureaus, are companies that:  Collect your information and sell credit reports to creditors  Combine information from creditors, like mortgage lenders, and keep a credit file (report) for each person.There are three large, national companies that supply most credit reports: Experian,TransUnion, and Equifax.TYPES OF CREDIT REPORTSThere are 2 main types of credit reports. A soft-pull credit report will not affect your creditscore, while a hard-pull credit report can negatively affect your credit score.Soft Pull (Soft inquiry):Soft inquiries are all credit inquiries where your credit score is NOT negatively affected whenreviewed by a company. These include:  When you check your own credit such as from annualcreditreport.com  Credit checks made by businesses to offer you goods or services (such as promotional offers by credit card companies, cable, internet, phone, etc.)  Inquiries made by businesses with whom you already have a credit accountHard Pull (Hard Inquiry):Hard inquiries are inquiries where a potential lender or creditor is reviewing your creditbecause you’ve applied for credit with them. These include:  Credit checks when you apply for an auto loan, mortgage, credit card, or other type of credit  Mortgage lenders often make hard pulls for consumer pre-qualification and rate quotes (However, CHW lenders offer to pull soft inquiries for pre-qualification)
    • Sample Credit Report
    • Credit ScoringA credit score is a number grade attached to your credit report used by creditors to decidewhether to approve your application for a loan or credit card, as well as how much credit toextend and at what interest rate.FICO SCORES  Credit scores are often called “FICO scores” because most credit scores are produced from software developed by a company called FICO (Fair, Isaac & Co).  Higher scores are better scores, and most consumers score between 300 and 850.What’s in a FICO Score? FICO Score Breakdown  FICO Scores are based on five main Payment History categories in your credit report, as 10% shown in the FICO Score Breakdown 10% 35% Amounts Owed chart. 15% Length of Credit  The percentages in the chart reflect History how important each of the categories is New Credit in determining your FICO Score. 30% Types of Credit UsedCategories What it IncludesPayment History  Payment information on each type of account(35%)  Delinquent accounts or collection items  Presence of adverse public recordsAmounts Owed  Ratio of the amount borrowed to total amount available(30%)  Amounts owed on accounts and number of accounts with balancesLength of Credit  How long credit accounts have been opened or establishedHistory (15%)  The age of your oldest account, age of your newest account, and the average age of all of your accounts combined  Time since last account activityNew Credit (10%)  How long it has been since a new account was opened and the type of account that was opened.  Hard inquiries – length of time since lenders made credit report inquiries.Types of Credit  Number of (presence, prevalence and recent information on) various types ofUsed (10%) accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts)11 Source: http://www.myfico.com/crediteducation/whatsinyourscore.aspx
    •  Activity: Who has a Higher Credit Rating? Name Annual Income Loans Credit Cards & Payment Susan $31,750 Car loan for $12,760 One credit card is paid off, second credit card has a limit of $7,500 and she has a $4,000 balance on the card. She has never missed a payment on her credit cards Jonathan  $52,000 None None  He pays all of his expenses with a debit card or cash Maria $40,000 None – she paid cash She has one credit card for her car with a balance of $12,000 and a limit of $12,500 She has missed two payments in the last year because she was traveling Who do you think has a higher credit score and why? ______________________________________________________________________________ ______________________________________________________________________________
    • A Good Credit Score Pays Off! Using the 30-year mortgage example below, if your current FICO score is 650 and you increase it by 50 points (to a score of 700), you could save $34,747! Example rates for a 30-year mortgage on a $200,000 home2 Interest rates as of 7/18/12 FICO Score APR Monthly Payment Total Interest Paid 760-850 3.241% $869 $112,993 700-759 3.469% $895 $122,068 680-699 3.651% $915 $129,411 660-679 3.87% $940 $138,365 640-659 4.312% $991 $156,815 620-639 4.872% $1,058 $180,899 Example rates for a 15-year mortgage on a $200,000 home3 Interest rates as of 7/18/12 FICO Score APR Monthly Payment Total Interest Paid 760-850 2.608% $1,344 $41,879 700-759 2.839% $1,366 $45,831 680-699 3.023% $1,383 $49,008 660-679 3.245% $1,405 $52,873 640-659 3.692% $1,449 $60,765 620-639 4.259% $1,505 $70,984 Calculate your own savings potential with a higher credit score at: www.myfico.com/myfico/creditcentral/loanrates.aspx 2 Source: http://www.myfico.com/myfico/creditcentral/loanrates.aspx 3 Source: http://www.myfico.com/myfico/creditcentral/loanrates.aspx
    • Tips for Increasing ScoreCategories Ways to Increase ScorePayment History  Generally, the longer you have paid on time, the better your score(35%)  Avoid closing accounts with positive payment history.  Ask a family member with good credit if you could be an authorized user or joint account holder on their credit card – if their creditor reports this to the credit bureaus. Be aware of the risks of attaching your credit report to another person.Amounts Owed (30%)  Use 30% or less of your available credit limit on credit cards and other revolving loans  Pay attention to credit card limits – card companies can lower your credit card limit triggering over the limit fees.  Pay off debtLength of Credit  If you are young or don’t have a very long credit history, don’t open aHistory (15%) lot of new accounts too quickly. That can lower your average account age and your score.  If you pay off your credit card, don’t close the account if it is in positive standing.New Credit (10%)  Shop for a home or car loan within a 30-day period.  Think twice about store offers to open a new credit card to receive an instant discount on your purchase. The new account could lower your score and cost you more in interest rates.  When you apply for new credit, a “hard inquiry” shows up on your credit report and can affect your credit score for 12 months. Too many hard inquiries can send the message to creditors that you are desperate for new credit.Types of Credit Used  Opening new accounts to have a better mix of credit does not(10%) guarantee an increase in score  Be careful using “Payday” and title loans – some lenders may view these higher cost forms of debt negatively
    • BANKRUPTCYHow does bankruptcy affect credit?4As long as the bankruptcy remains listed on your credit report, itwill factor into your score. A bankruptcy is considered as a verynegative event on your credit report; however, as time passes,the negative impact will lessen.Typically, you can expect bankruptcies to remain on your credit report (from the date filed) for:  Chapter 11 and 7 bankruptcies – up to 10 years  Completed Chapter 13 bankruptcies – up to 7 yearsHow does bankruptcy affect your ability to borrow?5After a Chapter 7 bankruptcy, the borrower must wait out the FHA’s minimum“seasoning” period.Chapter 7 Bankruptcy Waiting Periods  All borrowers must wait least two years after the discharge date of a Chapter 7 Bankruptcy. The discharge date should not be confused with the date bankruptcy was filed.  FHA regulations demand a full explanation to be submitted with the FHA home loan application.  To get a new FHA insured mortgage loan after Chapter 7, the borrower must qualify financially, establish a history of good credit in the wake of the filing of the Chapter 7, and meet other FHA requirements.Chapter 13 Bankruptcy Waiting Periods  FHA rules allow a lender to consider approving an FHA loan application from a borrower who is still paying on a Chapter 13 Bankruptcy–but only if those payments have been made and verified for a period of at least one year.  The borrower isn’t automatically able to apply for a new FHA loan if they meet this requirement- -the court trustee’s written approval is a condition of the policy. Additionally, the borrower must write a detailed explanation of the bankruptcy and submit it with the loan application.  The borrower must have good credit, a satisfactory employment history and other financial qualifications.LETTER OF EXPLANATION6A Letter of Explanation (LOE) can be used to explain any circumstances that led to the presenceof issues or problems with your credit report. It usually consists of the following components:4 Source: http://www.myfico.com/crediteducation/Questions/Bankruptcy-Types.aspx5 Source: http://www.fha.com/fha_article.cfm?id=3056 Source: http://www.trulia.com/blog/frances_flynn_thorsen_srs_e-proa/2008/12/crafting_a_letter_of_exp
    • 1. Cite the entry or inquiry with the creditor name, amount of monies involved and the date(s).2. Explain what happened and why. Be honest about any circumstances that led to financial difficulties or issues on your credit report. An underwriter will consider life impacting personal events and circumstances as important factors in making an approval decision.3. Describe the steps you took to correct the problem. Some examples may include “I paid the amount owed” or “I entered into a payment arrangement.”4. Describe your improved financial health habits. Explain how you have changed your financial habits for the better. If you made a mistake and failed to pay a bill, admit the mistake but explain how you have changed and now place a priority on paying your bills on time.5. Provide documentation to back up your letter. Some examples include:  Divorce based credit issues: Divorce decree or separation agreement, court ordered documents for child support, tax documents for most recent year filing jointly, paperwork pertaining to arrearages in child support, and printout from domestic relations court showing either satisfactory child payment history or arrearages.  Job Loss: Layoff notice, Unemployment Office records, and other proofs of dismissal.  Injury Resulting in Inability to Work: Proof of Workman’s Compensation and letters from doctor or employer about the injury.  Business Failure: Tax returns for the most recent year or proof that the borrower is no longer self employed (i.e. current pay stub from employer).
    • Sample Letter of Explanation7Re: Mortgage ApplicationDear Sir or Madam:This letter provides explanations for each item listed in my credit report obtained inconnection with my mortgage application.1. Late Payments Dated 01/08, 03/09, 04/09, and 05/09 with Credit Card Bank. CurrentBalance ZeroIn January 2008 there was a charge that appeared on my credit card bill that I did not authorize.I did not pay the bill because I did not order the product. That amount was removed from mybill the following month. From a period of March through May 2009 I made large payments tobring my student loan up to date and I was short of funds as a result. I should have balancedmy payments so that nothing else suffered. I know that paying my bills is important for myfuture and for the future of my family.2. Late Payments Dated 02/06 – 05/06 with Universal Bank Group. Current Balance ZeroThis is a mistake on my credit report. I have never had an account with this bank and I amdisputing the entry with the credit reporting agency.4. Medical Collection – ACME Collection Agency 07/09 – $196 paidThis medical bill was the result of a medical emergency in 06/07 when I was in a car accident. Inever received a bill for these services and assumed (incorrectly) that our medical insurancepaid the entire bill. Once we realized, via a phone call from a West Asset Managementcollection agent, that it had not been paid, we immediately paid this bill.I appreciate the opportunity to share information about the circumstances leading to someentries on my credit report. My credit rating is very important to me and I am striving to meetall of my financial obligations in a responsible manner. I am excited about owning my ownhouse and I look forward to building a strong relationship with you as a lender. You will see thatI will make all of my payments on time and I promise that you will be happy that you approvedthis loan.Sincerely,Suzy HomebuyerSuzy Homebuyer7 Source: Adapted from http://www.trulia.com/blog/frances_flynn_thorsen_srs_e-proa/2008/12/crafting_a_letter_of_exp
    • Know Your Rights8Consumer credit laws regulate creditors and the three major credit agenciesin order to protect you from discrimination or being treated unfairly.Equal Credit Opportunity Act & Fair Housing Act  You have the right to have your mortgage application reviewed fairly, without discrimination because of race, religion, age, national origin, sex or marital status, or because someone receives public assistance.  You have the right to know whether your application was accepted or rejected within 30 days of filing a completed application and why your application was rejected. The creditor must give you reasons for your rejection, if you ask, within 60 days.Truth in Lending Act  Gives you the right to be given details, before you sign a contract or loan agreements, on how much the credit is going to cost and payment information and due-dates.Fair Credit Billing Act  Covers dispute settlement procedures for open-end credit account billing errors, such as unauthorized charges, charges for services you didn’t accept, etc. The law limits your responsibility for unauthorized charges to $50.  To learn more about how to take advantage of this act, go to: http://ftc.gov/bcp/edu/pubs/consumer/credit/cre16.shtmFair Credit Reporting Act  You have the right to receive a free copy of your credit report from all three credit agencies once a year, if you are unemployed and plan to seek employment within 60 days, you are on welfare, your credit report is inaccurate due to fraud, or you were recently denied credit based on information in your credit report.  If you are denied credit, you have the right to receive the Disputing Errors name and address of the credit reporting agency who was contacted. For more information on  If you think any information in your credit report is correcting errors on your credit incomplete or inaccurate, you can file a dispute with the report, go to our Financial credit reporting agency, who must investigate the items Fitness class or go to: and provide you with a written report of the investigation and a free copy of your credit report if the dispute results http://www.ftc.gov/bcp/edu/p in achange within 30 days after you dispute them. ubs/consumer/credit/cre21.pdf8 Source: NeighborWorks America’s Realizing the American Dream, pp 112-115
    • Fair Debt Collection Practices Act  You have the right to be treated fairly by debt collectors.  Debt collectors must identify themselves to you on the phone.  Debt collectors may contact you only between 8 a.m. and 9 p.m.  Debt collectors must stop contacting you at home or work if you ask them to in writing.  Debt collectors may not harass, oppress or abuse you.  Debt collectors may not lie when collecting debts, such as falsely implying that you have committed a crime.  A collector may contact other people, but only to find out where you live, your phone number and where you work. Collectors usually cannot contact such third parties more than once, and in most cases, they cannot tell anyone other than you that you owe money.  If you have an attorney, debt collectors must contact the attorney rather than you.Sample Request to Cease Phone CallsYour NameAddressCity, State ZipDebt Collector’s NameAddressCity, State ZipRe: Account NumberDear Debt Collector:I have been receiving phone calls from you concerning my account #123456. Pursuant to myrights under 15 USCA 1692 c of the Fair Debt Collection Practices Act, this is my formal noticefor you to cease all telephone calls to me, as well as my family and friends, except thosepermitted by federal law.If you do not comply with this request, I will immediately file a complaint with the FederalTrade Commission and the California Attorney General’s office.Sincerely,Your Name
    •  Self-Assessment True or False 1. When you request a copy of your credit report from one of the three major True False credit reporting agencies, it lowers your credit score. 2. A bankruptcy can never be removed from your credit report. True False 3. Your payment history is generally the most important factor in determining True False your credit score. 4. Your payment history is generally the most important factor in determining True False your credit score. 5. There are no laws in place to protect your rights as a consumer who uses True False credit. Credit Scoring Fill in the blanks with the five main categories seen in the box to indicate how they break down for your credit score. 35 % _____________________________________ 25 % _____________________________________  Amounts owed  Length of credit history 15 % _____________________________________  New credit 10 % _____________________________________  Types of credit used  Payment history 10% _____________________________________