NewslettersAugust 2007
What is Going on with the Mortgage Market, and
What You Must Do About It
This is the most important thing you will read this year if you...
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Are in an ARM (adjustable rate mortgage)
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Have an interest only loan, or any other loan that is not a fixed rate mortgage
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Need to get money for home improvement or any other occasion
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Plan to purchase or sell a home in the next few years
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Want to consolidate debt
How Do Mortgages Work?
In the former days of mortgages, lenders collected money from investors in the community and paid interest to the investors for borrowing that money. These banks held on to their own loans and therefore could only lend out money they personally held in deposits. To be able to free up cash and lend to more people, lenders started selling their loans to other lenders or investors so that they could use their available funds to make more loans. To sum it up, most mortgage lenders lend money, sell the loan, and then they have more money to lend.
Note: when a loan is sold after closing, the rate and terms of that loan do not change; the only adjustment is who services the loan.
What started the recent mortgage crisis?
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Many lenders and investors lost money from the mortgages they held due to an increase in foreclosures. Foreclosure occurs when a borrower can't pay back the loan on a home and thus the lender seizes the property and tries to sell it to recover the loan amount. If the home doesn't sell for high enough then the lender loses money.
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The scare of future losses has led lenders to tighten underwriting guidelines and raise rates on riskier loans.
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For some loans, the losses have been so dramatic that the lenders are no longer willing to support that type of loan.
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It is now difficult or even impossible for some borrowers to refinance existing mortgages or purchase new homes.
Why are lenders going out of business or closing their branches?
Since most lenders these days lend money based on the hope that they will be able to sell that loan to an investor on the secondary market, what happens when the loan is not bought after it closes?
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1st result: the lender exhausts its funds and can no longer make additional loans since it does not have the money.
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2nd result: the lender must sell the loans at a discount since the investors are no longer willing to accept the loan. If the lender can't afford the cost to sell at a discount, the only other results are employee layoffs or bankruptcy.
Even Countrywide Financial Corp., the nation's largest mortgage banker, was forced to borrow $11.5 billion from a line of credit issued by a group of banks on August 16th so it could free up the funds to keep making home loans.
WHAT MUST YOU DO NOW?
If you are in an ARM or interest only loan you must refinance to a fixed rate now before rates go up or guidelines change again.
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Many of the foreclosures are occurring because people can no longer afford the new monthly payments of their ARMs and can't refinance anymore due to the new guidelines. Don't let that happen to you!
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You need to talk to a mortgage consultant who knows how to get you what you need and can provide the information necessary to know if it makes sense for you to refinance, or to pre-qualify you to purchase a new home.
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For those not in the market, we perform a free credit analysis to ensure you are able to purchase or refinance when you do become ready. Why don't we take a few minutes and make sure you are prepared, should the need arise? I am here to help and advise during these volatile times and welcome calls or e-mails from you, your friends, family, neighbors or coworkers. I look forward to working with you soon and always guarantee to have the best loans!
April 2007
What You Must Know About Credit Scores
When you apply for a mortgage, line of credit or even a department-store credit card, the lender will check your credit score. This figure, a measure of your past ability to make payments on time and manage your credit, will be somewhere between 300 and 850. This score was developed by Fair, Isaac & Company, Inc. (called a FICO score) for the three main credit Bureaus; Equifax (Beacon), Experian (formerly TRW), and Empirica (TransUnion).
Credit scores are based on five factors:
35% of the score is based on payment history
30% on the amount owed
15% on how long you've had credit
10% percent on new credit being sought and
10% on the types of credit you have.
How to improve your score:
- Pay your bills on time.
- Keep balances low on credit cards (under 35% of the credit limit).
- Check that your credit report information is accurate.
- Be conservative in applying for credit and make sure that your credit is only checked when necessary.
MYTH #1: The major bureaus use different formulas for calculating credit scores.
The three major credit bureaus -- Equifax, TransUnion and Experian -- sell their services under different names, but they all use the same formula to arrive at their numbers. Your score may vary slightly between the bureaus, however, because each has different information in your file. For example, one bureau's records may go back longer, or a previous lender may have shared its info with only one bureau and not the other two.
MYTH #2: Closing old accounts will boost my credit score.
Having too many credit accounts can negatively affect your credit score, but canceling them may not improve it. In fact, it could do harm. To measure your ability to manage debt, credit bureaus look at the amount of credit you're using compared with the total amount you have available. So closing unused accounts reduces your untapped credit and may make you appear overextended. Closing your oldest accounts is even worse because the longer a line of credit is open, the more history you've accumulated. If you do close an account, consider closing your newest one and transferring any balance to an older one.
MYTH #3: Shopping around for a mortgage or car loan will hurt my score.
When a lender makes an inquiry about your credit, your score may drop up to five points. For this reason, some borrowers are afraid that comparison-shopping will result in multiple deductions. This isn't the case. Credit scorers treat multiple inquiries for a mortgage or car loan as a single inquiry, as long as they all come within 14 days.
MYTH #4: Paying off my debts will instantly repair my credit score.
Your credit score is a measure of your past performance, not your current debt load. Paying off your credit cards and settling any outstanding loans will certainly help, but if you have a history of late or missed payments, it won't undo the damage overnight. Improving your credit score may take time and accurate advice from a professional.
MYTH #5: Requesting your own credit report will affect your score.
Credit bureaus do not penalize you for checking your own score, nor do they deduct points for inquiries from landlords or employers who may check your score with your permission.
*** Contact National Home Mortgage for a refinance or home purchase and receive a free credit analysis ***
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