Q.   What’s really happening with major lenders – have we seen the last of the 100% financing options?

A. 100% financing is likely to be available only to those borrowers with above average credit, which will impact affordability in our area as potential borrowers diminish. That means credit remediation is more important than ever for those who want to become borrowers. But in my experience consumers don’t really understand what impacts their credit scores. They don’t know there are some straightforward ways that their mortgage advisor can help to increase those all-important credit scores.

Q. What is considered a risky loan by today’s lending standards?

A. Borrowers with credit scores below 620 have proven to bring more risk to the table than those with higher scores. That doesn’t mean they can’t get a loan – but the days of the easy subprime loan are over. Here’s what consumers with less than perfect credit in our area may want to consider: Expanded approval loans. Backed by Fannie Mae, these loans reward borrowers by lowering the interest rate after 24 consecutive months of timely payments. FHA loans. Borrowers should ask their mortgage advisor about these tried-and-true loans, which have been overshadowed in recent years by more exotic mortgage products on the market. Tougher documentation standards. Borrowers will be asked to at least state their income and in many cases they will also be required to provide the documentation to support it.

Q. Are home values going to be affected by rising defaults?

A. Depending on the severity of the rate of loan defaults, it may have a significant impact on our local housing valuations. Consider this: Banks don’t want to hold on to properties – they want to get them off their books. That means they will sell at a discount. We saw this in the early 1990s when there was a rise in foreclosures and a subsequent decline in property values.

Summary:

As an eternal optimist, I am always looking for the positive spin to any story. As a mortgage professional, I need to find the opportunities in a changing market. So, here is my take on things. There are a lot of people who got subprime loans that were fixed for 2 or 3 years and would adjust upward at the end of that period. The margins on these loans are quite high which means that the new payment will likely be 150 to 200% of their current monthly payment (a $2,000 payment will adjust to $3,000 to $4,000). Most people expected that property values would rise and they would refinance into a better loan. Some of these people actually owe more than the home is worth and they are looking at simply walking away and renting again. Most analysts are predicting that foreclosures will peak later in the year so we have not seen the end of this trend.

So…… interest rates are still low, the inventory of available houses is increasing and there are fewer rentals available. I am going to go out on a limb here and say that buying investment property just might make sense right now.

Potential investors need to be very wary and speak with a seasoned mortgage professional. With the easier guidelines and the lower rates of the past 4 years, there are a lot more loan officers in the business today. Over the last 19 years, I have seen them come flooding in when markets are hot and then go right back out again when markets soften. Just to make sure, read my article about how to pick a mortgage professional so that you can get advice that will help you prosper in any market.

I want to give you the basics of credit scoring and how to maintain healthy credit.

Your credit score or FICO score is based on a computer model. All 3 credit bureaus currently use a variation of the FICO model.

Payment History - 35% of your score

Pay your bills on time! This is the biggest portion of your credit score. If your minimum payment is $35 on a credit card, pay at least $35 on time. You can pay more later if need be. Your creditors will report you when you are 30, 60, 90 or 120 days late. The longer the late payment and the more recent, the harder it hits your score. This is just plain common sense.

Outstanding Credit Balances - 30% of your score

This part is not completely obvious but your credit score will be higher if you keep a lower balance on your revolving credit such as credit cards and store cards etc. Your credit score will be helped the most if you keep it at 0% to 30% of the limit. If you carry a balance between 30% and 50% of the limit, it won't be helping your score, but it won't be helping it either. Once you get above 50% usage on any revolving debt, it starts to bring your score down. Installment loans (car loans, mortgages etc.) are not looked at in the same way.

The bottom line here is that if you have a credit card with $1,000 limit and you owe $980, you can help your score a bit by paying it down below $500 and you can really boost your score by paying it down below $300 balance.

So..... when you have 5 cards with a $10,000 limit on each of them and you owe $2,000 on each card, you are better off than if you consolidate them to 1 card and use the entire credit balance on that card. If you have a lot of cards and a long credit history, this will hurt you less than if you only have a few credit cards.

Credit History - 15% of your score

As a general rule, don't close those credit cards. How long you have had your cards does affect your score. Car loans look better when they are paid in full. If you get a 60 month car loan and pay it off in 6 months it doesn't help you much. If you have a long term credit account that is open and you just don't use it that much, keep it open anyway, it will help your credit score.

Type of Credit - 10% of your score

Having a healthy mix of credit does help your score. Credit cards really drive the credit score but car loans, mortgages add to the depth of your credit. One type of credit which is basically frowned upon by the scoring model are finance companies.

Finance companies usually are high interest, high risk loans like a personal line of credit with no collateral. You want to try and avoid finance companies if you can. Sometimes you are getting credit from a finance company without knowing it. If you want to buy something with "NO PAYMENTS FOR 12 MONTHS!" that is usually a finance company. Smaller store cards like electronics stores and jewelery stores are usually finance company credit cards. Larger store cards are OK like Macy's and Sears and Nordstroms. Again, if you have a long history and a lot of good credit, taking advantage of a 12 month no interest transaction or an instant 10% off while shopping may not hurt you. Just think before you apply for credit.

Inquiries into your credit - 10% of your score

Inquiries seem to be the hot button these days. Everyone seems to be learning that too many inquiries can hurt your credit and that is true to a certain extent. If you go to 8 car dealers and let all 8 run your credit then it will negatively affect your credit score. Just think before you apply for credit. If you are lloking into getting a mortgage, then you are allowed multiple "mortgage" inquiries within 30 days to count as 1 single inquiry. It seems likely that you will get only 1 mortgage. It seems likely that you would only get 1 car too...... The maximum number of inquiries that count against your score is 10 within a 6 month period. Any more than 10 just don't count.

Those pre-approved offers you get in the mailbox have looked at your credit but it does not count as an inquiry until you ask for that credit and then they will run your credit again and this time it is a "hard" inquiry. Also, when you pull your own credit, this is known as a self inquiry and does not count against you either.

General notes and things to think about:

Bad credit will show for a period of 7 years on your credit report.

A bankruptcy will negatively impact your credit score and will stay on your record for 10 years before dropping off.

Collection accounts will hurt your score. They hurt more if they are 1-6 months old. Less if they are 7-12 months old and still less when they are 13-24 months old. They really have a small impact afetr they are over 24 months old (even if there is a balance) BUT!..... if you pay off an old collection, that is looked at as new activity and it will actuallly hurt your credit score. Once the collection is paid off, your score will rebound more quickly than if it had not been paid.

I hope that this was helpful to you. If you want any more information on the loan process and credit, you can request free booklets on hundreds of topics at http://www.anyCAloan.com/FreeReports