Credit Scores and Your Mortgage

Owning a home is a long-standing dream for many Americans, and most prospective homebuyers are compelled to financing in order to buy. However, did you know that your credit score can determine your interest rate and payment terms with a mortgage lender? So the question now is, just how much of your credit score weighs in on your mortgage payment?

What Is A Credit Score?

A credit score is a number used by lenders to regulate how likely you are to pay back the loan. They are calculated by using the information contained within your credit reports. Scores can range from 300-850. Generally most lenders look at higher credit scores more favorably than lower scores as the key indicator to the likelihood of being paid back. So if you are looking to apply for a mortgage it would be in your best interest to increase your credit score before applying.

How Is Your Credit Score Calculated?

Your credit score is based off of whether or not you pay your bills on time (i.e. payment history), the total amount of dues owed (typically, a percentage of your outstanding credit), the length of your credit history, as well as the type of credit and how much is new.

How Does Your Credit Score Determine Your Mortgage Payment?

To put it more simply, the higher the score the lower your mortgage interest rate will be. So for example, if we take a borrower who has a credit score ranging from 760-850, this person qualifies for around 3.55% mortgage interest rate on a 30 year fixed rate mortgage, whereas a borrower with a low credit score would receive a higher interest rate. Needless to say, this was just an example for illustrative purposes only; the best way to find out your mortgage interest rate is to speak a mortgage lending professional.

How Can You Improve Your Score?

To get your credit score where you want it, it is crucial that you pay all your bills on time. Keep in mind that your payment history is the largest factor of your credit score; therefore, any late or missed payments will hurt your overall credit score.

Also, amounts owed on existing credit lines may factor into your score. So it is important that you pay off and lower your credit card balances. Note that a ‘’maxed out’’ credit card may reflect poorly on your score as well. So try to pay off any debts and not opening new credit cards to help improve your score.

The Point is…

Buying a home is possible, but it is a lot of responsibility that needs to be taken seriously. If you continue to take care of your credit cards your credit score will likely by high, and your mortgage terms are far more likely to be in your favor.

Guide to the Fed's Mortgage Settlement

A little over a month ago the federal government and 49 states revealed that they made a $25 billion settlement with five of the largest mortgage servicers to help homeowners who have lost their homes to foreclosure or need help making their payments on time. 

Much of the nitty-gritty part of the settlement is still being worked out. But the Center of Responsible Lending, a nonprofit group that supports the borrowers printed a summary and a preliminary guidebook to help consumers find out if they are eligible under the settlement. 

The guide is an overall outline of standards and conditions to help homeowners stay on top with their payments and determine if they qualify for benefits from the settlement. There are three categories by which the borrowers can determine the eligibility: 

Borrowers who lost their homes to foreclosure, from Jan. 1, 2008, through Dec. 31, 2011 may be eligible for cash payment of $1,800 to $2,000. The loans must be serviced and owned by one of: Bank of America, Citibank, Wells Fargo, JP Morgan Chase or Ally Financial (GMAC). 

Those who are currently underwater on their property—their home is worth less than they owe. Not only must your loan be serviced and owned by one of the five lenders listed above, the interest rate must be at least 5.25% or higher. 

For homeowners who are late or on the verge of missing payments you may be eligible to receive a modification of your home loan, which would reduce your monthly payments and lower your principal. Once again your loan must be serviced and owned by one of the five lenders.

Tips for Aspiring Young Homeowners

For anyone in a committed, long-term relationship that is thinking about marriage, the next step usually seems to be buying a home together. However, for many couples, investing in a home can lead to a potential breaking point in the relationship. Not only must the partners agree on a location, price range and size of the home, but they also have to figure out how to finance it. 

Any couples that are considering homeownership should be sure to go into the process with a well-laid plan that both partners agree upon in order to save themselves financial headaches in the future. The following are some tips that we’ve come up with to help budding, young homeowners on their journey into the housing market. 

1. Communication is key.

Before even looking for homes, you and your partner should have a clear understanding of what you both want vs. what you can afford. Although it may not be the most romantic of conversation topics, you will need to discuss what each of you is bringing in each month and how much of it you are willing to invest in your property. If one of you is making more than the other, you might want to delegate more financial responsibility to that person, such as being in charge of home repairs or property taxes. Once you understand where you both are financially, you can start to create a plan on how you will finance the home. 

2. Construct a financial road-map. 

It is normal for lenders to cover 80-90 percent of a home’s cost, the rest of which the buyer must pay upfront in the form of a down payment. First make sure you can afford the home’s down payment, then analyze you and your partners combined monthly income to determine what type of mortgage you should pursue. Typical mortgages are usually spread out over 15 or 30 years; with the former having lower interest rates and the latter having lower monthly payments. Keep in mind that to reduce stress in your relationship it is recommended that you dedicate no more than a quarter of your income toward your property, including the mortgage and other extraneous expenses. 

3. Bring in a third party.

It is easy to be blinded by the thrill and excitement that comes with buying a new home, which is why we recommend bringing in a neutral third party to help you weigh your options. This is a helpful tip that many couples tend to overlook, but mediators, financial planners and attorneys work with soon-to-be homeowners all of the time. Bringing in a third party can help to ease any tensions that may arise during the home-buying process and also help shed light on some financing options that maybe you wouldn’t have thought of on your own. 

At The Mortgage Law Group, we’re dedicated to helping homeowners save their American Dream. That starts by taking a proactive approach on homeownership and educating potential buyers now, so they won’t find themselves in hot water later on. If you have helpful tips for first time homeowners, please share them in the comments section of our blog.

Top Ten Underwater States

Does owing more on your home than the house is actually worth sound familiar? As home prices continue to slide more and more homeowners find themselves underwater. After last year’s foreclosure activity it is no surprise that so many homes are in trouble. 

According to a report by Corelogic, the number of underwater mortgages as a percentage of all mortgaged homes in the US rose in the fourth quarter of last year. Corelogic’s Negative Equity report suggests that mortgages 11.1 million homes out of the 48.7 million mortgaged homes are underwater. Based on this report we were able to identify the ten states with the top percentage of underwater homes. 

Some of the states on the list had been dealing with economic problems long before the current recession. States like Rhode Island and Michigan have been dealing with long term industrial declines for quite some time, therefore, drops for their home values are only accelerated by recession that the rest of the country went through. 

For the majority of the states on the list below, a decline in the housing market is the sole reason homeowners find themselves owing more than their house is worth. Check out the 10 states depressed by underwater mortgages:

10. Virginia

Pct. homes underwater: 23%

Total property value: $428.46 billion

Mortgage debt outstanding: $307.48 billion

Median home value drop from peak: 16.7% (21st-biggest decline)

Homes in foreclosure or 90+ days delinquent: 4.1% (ninth-smallest percentage)

9. Ohio

Pct. homes underwater: 23.9%

Total property value: $310.62 billion

Mortgage debt outstanding: $238.20 billion

Median home value drop from peak: 14.4% (23rd-biggest decline)

Homes in foreclosure or 90+ days delinquent: 6.9% (14th-largest percentage)

8. Maryland

Pct. homes underwater: 24.3%

Total property value: $418.34 billion

Mortgage debt outstanding: $296.81 billion

Median home value drop from peak: 23.7% (12th-biggest decline)

Homes in foreclosure or 90+ days delinquent: 8.0% (tied for fifth-largest percentage)

7. Idaho

Pct. homes underwater: 25.0%

Total property value: $49.76 billion

Mortgage debt outstanding: $36.58 billion

Median home value drop from peak: 29.3% (sixth-biggest decline)

Homes in foreclosure or 90+ days delinquent: 5.2% (20th-smallest percentage)

6. California

Pct. homes underwater: 29.9%

Total property value: $2.73 trillion

Mortgage debt outstanding: $1.94 trillion

Median home value drop from peak: 46.7% (third-biggest decline)

Homes in foreclosure or 90+ days delinquent: 7.0% (12th-largest percentage)

5. Georgia

Pct. homes underwater: 33.0%

Total property value: $306.59 billion

Mortgage debt outstanding: $252.81 billion

Median home value drop from peak: 26% (10th-biggest decline)

Homes in foreclosure or 90+ days delinquent: 8.0% (tied for fifth-largest percentage)

4. Michigan

Pct. homes underwater: 34.7%

Total property value: $198.05 billion

Mortgage debt outstanding: $165.45 billion

Median home value drop from peak: 30.1% (fifth-biggest decline)

Homes in foreclosure or 90+ days delinquent: 6.5% (19th-largest percentage)

3. Florida

Pct. homes underwater: 44.2%

Total property value: $809.95 billion

Mortgage debt outstanding: $706.00 billion

Median home value drop from peak: 44.8% (fourth-biggest decline)

Homes in foreclosure or 90+ days delinquent: 17.4% (the largest percentage)

2. Arizona

Pct. homes underwater: 48.3%

Total property value: $243.02 billion

Mortgage debt outstanding: $226.22 billion

Median home value drop from peak: 47.9% (second-biggest decline)

Homes in foreclosure or 90+ days delinquent: 7.1% (11th-largest percentage)

1. Nevada

Pct. homes underwater: 61.1%

Total property value: $96.57 billion

Mortgage debt outstanding: $109.94 billion

Median home value drop from peak: 60% (the biggest decline)

Homes in foreclosure or 90+ days delinquent: 13.4% (second-largest percentage)

As 2011 wrapped up, 13.4% of mortgages are either 90 days delinquent or in the foreclosure process. So now that 2012 is upon us, let’s see what numbers will change. What do you predict?