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INFORMATION THAT WILL BE ADDED TO THE 4th EDITION CREDIT SCORES In any credit transaction today, a borrower will be judged by his credit score. Credit scores range from under 500 to 850. Those borrowers expecting to receive the best rates will need a good credit score, probably 670 and above. Credit scores of 650 and higher are held by two-thirds of borrowers. Credit scores allow the underwriter to make use of advanced analytics in evaluating the borrower and his ability to pay back the loan. Scores reported by three major credit reporting agencies, Equifax, Experian and TransUnion, are used. Many things will affect a borrower’s credit score. The borrower’s payment history and the amounts owed (especially the percentage credit used of the available credit limit) will have major impacts on the credit score. The credit scores will also be affected by the length of the consumer’s credit history, new credit and new credit inquiries. A consumer’s credit score is not stagnant and can change monthly. Consumer’s paying their bills on time, keeping their balances low, pay down debt, can increase their credit scores. If a consumer is going to close accounts, the consumer should close the newly opened accounts first. Keeping older accounts in good standing open will prove more beneficial to obtaining a good score because of the accounts longer credit history. Old credit problems? A consumer’s credit over the past two years will contribute be more heavily in the development of a credit score. --------------- PUTTING IT TO WORK Throughout this chapter, we refer to two ratios; a monthly housing expense to income ratio and a total payment obligation. The ratios used in the examples are the stated ratios for conventional, VA and FHA loans. These ratios, however, can be extended under certain circumstances. A lender may look at a borrower’s credit score, what lenders call the borrower’s trade lines (credit lines the borrower has had ideally for over two years) and the borrower’s reserves (cash and assets the borrower will still have after the transaction). If the credit score, trade lines and reserve position of the borrower are favorable, the lender might decide to accept increased ratios. --------------- The borrower can receive the funds from the lender either in payments, in a lump sum, or as a line of credit. --------------- Since no payments are made to the lender, no credit check or income is required. --------------- The interest rate charged on a 15 year loan should be lower then the interest rate on a 30 year loan. The loan term being 15 years shorter removes some of the risk to the lender if rates rise. The likelihood of being stuck with a low yielding loan is not as great.. --------------- Interest Only In an interest only loan, the borrower is responsible for only the payment of interest each month. No principal is paid. These loans are usually an adjustable rate loan, adjusting every 3 or possibly every 5 years. The frequency of adjustments is determined by the particular loan program. --------------- Choice Mortgage What is generally referred to as a choice mortgage, is a loan that usually has a monthly payment that does not cover the monthly interest owed (negative amortization). The borrower may, if he desires, pay the amount of negative amortization due each month. These loans have been popular with investors in markets where real estate prices have been rapidly rising. The lower mortgage payment increases the cash flow on a property while the negative amortization would be made up by the rapid appreciation. It remains to be seen, how these investors will fare in a slowing market. The fear is that many investors may be over extended. --------------- 1. Credit Score One of the most important factors in being able to borrow money in todays financial marketplace is having a good credit score. A borrower with a good credit score will be entitled to the best rates. A borrower with a poor credit score will be offered only significantly higher rates. Credit scores range up to 850. Generally, to obtain the better rates a lender will be looking for a credit score of 670 and above. There are other factors besides just a credit score that will affect the approval of a loan. --------------- This should be reflected by a consistently improving credit score. --------------- PUTTING IT TO WORK Real estate licensees involved in a real estate transaction where a mortgage is involved should obtain a copy of the HUD- 1. Their commissions and any other items that the broker might have pre-paid or ordered and incurred an expense for should be listed on the HUD-1. Anyone that you would expect to be attending a real estate closing, borrower, lender, seller, title company, attorneys, should receive a copy of the HUD-1 for their files. ---------------
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