Category Archives: Credit Scoring

Fannie Mae adds Speed Bump Prior to Funding Your Mortgage

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photo compliments of veggiefrog via Flickr

photo compliments of veggiefrog via Flickr

Effective on loan applications taken on June 1, 2010 or later, Fannie Mae is requiring lenders to confirm that undisclosed liabilities are not present prior to funding a transaction as part of their Loan Quality Initiative (LQI).   Currently a credit report is pulled and is valid for a specific amount of time–as long as the transaction closes prior to the expiration of the credit report, it typically is not repulled.   Fannie Mae is now requiring the lender to make sure that there is no new or undisclosed credit at closing.   Relying on the original credit report pulled at application is no longer good enough.

Fannie Mae’s FAQs suggest these tips for lenders to help confirm there are no undisclosed liabilities:

  • Retrieving a refreshed credit report just prior to the closing date and reviewing it for additional credit lines.
  • Utilizing new vendor services to provide borrower credit report monitoring services between the time of loan application and closing.
  • Direct verification with a creditor that is listed on the credit report under recent inquiries to determine whether a prospective borrower did in fact obtain credit or enter into a financial arrangement that is not disclosed on the loan application.
  • Running a Mortgage Electronic Registration System (MERS) report to determine if the borrower has another mortgage that is being established simultaneously.

This means days before funding a Fannie Mae loan, the transactions are subject to being re-underwritten and if the borrower is “borderline” (which is a 620 mid-credit score in today’s climate and/or higher debt-to-income ratio) or decides to purchase their appliances for their new home before closing…they could potentially “kill” their deal and find themselves being “unapproved”.

Fannie Mae states that loans should be resubmitted to underwriting if:

  • additional debts have been incurred which would increase the debt-to-income ratios
  • if new derogatory information is detected
  • if the credit score has materially changed

Borrowers should understand that the loan application is intended to represent their financial scenario and whenever (even before LQI) changes are made to their application, their mortgage originator needs to know.   This is not new.   When changes occur and a borrower is aware (such as taking on more debt or changing their employment) and they hope they “won’t get caught” before closing, they’re committing fraud.   This is what Fannie Mae is trying to prevent with LQI.

Borrowers with conventional financing need to be extra mindful of LQI.   Using a credit card to fill your SUV full of gas could potentially ding your score if you’ve carry a balance of 30% or more of the available credit limit.   Even closing a credit card during or just before a transaction could drop your score low enough to where the lender may have to reconsider your loan approval AT CLOSING.

For mortgage companies and banks (anyone who sells loans to Fannie Mae)  it boils down to having to refresh, repull or face re-purchasing the loan if changes to the credit report are found between application and funding.    Fannie Mae is not specifically requiring credit reports be repulled prior to funding–they are holding the lender responsible for changes if they don’t.

Borrowers, real estate agents and originators need to be prepared for potential delays in closing, repricing of their mortgage loan (which would trigger another delay due to MDIA) or the loan potentially being denied.   It’s more important than ever that borrowers work closely with a qualified mortgage professional who can help guide them through the process.

How Does a Short Sale or Foreclosure Impact Your Credit

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Ardell posed a question on her last post about credit scoring that I’ve been meaning to address here at Rain City Guide on how credit scores are impacted by short sales or foreclosure.    When I was speaking at the Mortgage Girlfriends Mastermind Retreat in Scottsdale this summer, I had the opportunity to meet Linda Ferrari, a well known credit expert and author of “The Big Score – Getting It and Keeping It” (a book I highly recommend everyone read).   

According to Linda, “a foreclosure can drop a credit score 50-250 points (this includes points all ready lost to delinquent payments).   The difference in point loss depends on how many points someone has to lose in the payment history factor of his or her credit report.   Thus is someone has a 750 credit score and they opt to foreclose, their score could drop 250 points.  However if someone has a 500 credit score, they may only lose 50 points for the same derogatory.”

It hardly seems fair to me that someone who has established excellent credit and they are faced with a huge financial hardship, they’re penalized on a greater scale simply because they have “more to lose” (reminds me of our income tax system)!   With a foreclosure, you can expect to wait about 5-7 years to purchase your next home (based on current guidelines) assuming a mid-credit score of 680 and a 10% down payment for conventional financing.  

A deed in lieu of foreclosure may impact credit scores the same as a foreclosure depending on how it is reported to the credit bureaus–they don’t have to report it as a foreclosure…if they do, the credit will be scored as such.    Here’s what Linda recommends you try negotiating how the deed in lieu is reported on your credit with the lender in preferred order:

  • Paid As Agreed.  Credit scores will have already dropped over 100 points due to default in payments; however, if reported as Paid As Agreed, the borrower will be able to purchase another home in a shorter time period.
  • Paid Settlement.  Credit scores could drop 75-100 points in addition to the points already lost for delinquent payments.
  • Foreclosure.  Credit scores could drop 100-150 points in addition to the points already lost for delinquent payments.

    • One advantage of a deed in lieu of foreclsoure is you may be able to purchase a home, if you so desire, a minimum four years afterwards with 10% down payment, based on current guidelines.  

    A short sale is potentially the least damaging to your credit scores assuming you’ve been able to make mortgage payments on time.   According to Linda, credit scores may drop from 50-150 points (depending on what else is going on with your mortgage and credit history).    You may also be able to buy a home quicker using this route.   Linda Ferrari writes on her blog why you may not want to consider using a short sale as an option should you be in financial distress.  

    FHA may allow borrowers who have lost a home due to short sale, deed in lieu or foreclosure a little quicker than conventional financing–around three years depending on various factors.   Extreme extenuating circumstances may allow for a shorter time period.   Again, this is current guidelines.  I wouldn’t be one bit surprised to see FHA change this guideline to be more in line with conventional financing.

    You have to keep in mind that credit scoring is accumulative, everything is factored to come up with those three scores that are suppose to reflect your current credit.   The only real good news about credit scoring is that your scores are temporary–they are changing constantly.  Pay down a credit card, establish good payment history on your installment loan and your scores will improve over time.

    How much is your credit score damaged by ?

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    FICODid you know that if you have a credit score of 780 or higher, you might damage your score more from a single 30 day late payment, than a 680 score person might get dinged for a Foreclosure? Sad but true. Read it and weep.

    Hat Tip to Jay Thompson’s “The Phoenix Real Estate Guy”.I’m sure this chart will anger a lot of people with high FICO scores. Best I can attempt to explain this is Richard Gere will likely get a lot more flack if he spit on the pavement, than a homeless person might :). Or better yet, Tiger Woods will clearly get a lot more flack for his misbehavior than your next door neighbor.

    Personally I think the Country would be better served if someone CHANGED the system vs. simply requiring lenders to EXPLAIN how it works. I screamed aloud the day risk based pricing via credit scoring passed. But people looked at me like I had two heads. I wish more people were screaming with me that day…

    Lending Woes: A Deeper Consumer Analysis

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    This may seem like an odd analogy, but I remember this story about my Mom when she was having her 7th baby.  She was in “a ward” with only curtains drawn around each bed.  She overheard some people telling the lady in the bed next to her that she should have “her tubes tied”.  They were explaining the procedure to her.  My Mom jumped out of bed, ripped open the curtain of the woman next to her and yelled  “I want one of those!!!”  The people were embarassed and said, “I’m sorry but we’re only allowed to offer these to single women on welfare having their third child.  You weren’t supposed to hear that.”

    Yes…I’m suggesting that to some extent The Information Age is in part responsible for the Subprime Crisis.   Subprime loans did not come into being in late 2003.  2003 is the year more people said “I want one of those!!!”

    Couple that with the fact that the World as it IS has come to the conclusion that spinning words (like Death Tax vs. Estate Tax) is a persuasion tool. We used to say, “You can’t get a good loan, but we can find you a BAD loan, if that’s what you want.”  Most people said, “No, thank you…we’ll wait.”  Loans had letters that were easy to understand.  A Paper  = most lenders.  B through D Paper was a different lender for buyers with one or a few correctable issues over the short term.  Z Paper was basically the Mob with a license to lend.

    People understood the alphabet, and they knew that a C-Mortgage was not as good as an A-Mortgage.  Life was more Transparent back then.  The need for Transparency today is largely due to the fact that professionals hide truth behind more persuasive language.  Don’t get me started on Listing Agent vs. Agent for the Seller.  Everytime I hear a buyer say “The listing agent was MY agent, looking out for me (and I heard it twice in the last 4 days) I want to scream. How the heck can you believe that “the agent for the seller” is looking out for you, the buyer? Maybe because they use the words “listing agent” for that reason. But that’s a different, though related, subject.

    Couple that with small businesses (who only offered Sub-Prime loans) getting gobbled up by larger “one stop shops”.  All of a sudden the lender could give you an A Paper loan or a C Paper loan without a loan denial in between. When there was a loan denial in between, the buyer had a legal out with the Finance Contingency.  When the approval came…but it was for “a bad loan”, the buyer was locked into the transaction with no legal out.

    Couple that with Real Estate Agents only caring if the buyer could get a loan, period…without caring on what basis.  Couple all of THAT with the fact that many Finance Contingencies did not give a buyer “a legal out” if they could not get a conservative “A Paper” loan, but could qualify for a SubPrime loan.

    There are many factors that contributed to this mess.  Perhaps a fuller understanding of how the world changing in many and small ways led do the catostrophic consequence, will help all people who played a small part in the Country’s demise, change their small part in The Crime of the Decade.  In the end it was mostly No victims; no villains, just a lot of small tweaks and changes that snowballed into a Crisis Situation.

    Let’s go back to the world as it was for a minute. 

    1) Conventional Loan = 20% downpayment, 28% of gross income for housing payment, 36% of gross income for total recurring debt including the housing payment.  An 8% spread for debt payments.  If debt payments equalled 10%, then the housing portion was reduced to 26%.  There were no Credit Scores.  All credit issues were underwritten by hand and each and every negative item was explained by the buyer, in writing.  A separate letter for each negative item.

    2) FHA Loan = slightly more lenient terms and dramatically reduced downpayment requirement.  The biggest reason to use FHA vs. Convential being the downpayment requirement, not the looser standards as to ratio and credit issues.  Almost no downpayment – 3% vs. 20% at the time. 

    The first change was a long time ago! It started as a quiet whisper, like the people talking behind the curtain in the next bed from my Mom.  Some people were getting loans with only 5% downpayment, conventional.  When I started in real estate in 1990, most people’s perception was that they needed 20% downpayment or FHA.  Few knew that they could get a 5% down conventional.

    The beginning of all of these problems goes all the way back to there.  Conventional lending guidelines made FHA less desirable.  The primary purpose of FHA was low downpayment…no longer a big spread between the two.

    THEN in the early 90s, the lenders started stretching ratios from 28% to 33% of gross income on “the front end”  BUT the back end was only stretched to 38%, at first.  Stretched ratios entered the scene ONLY for people with little or no debt payments (just like tubal ligations being only for single women on welfare).  It had a stated and targeted “appropriate” audience.

    When cars started costing more, lenders had to start figuring out a way for people to buy a house who already owned a car.  In many cases in the early nineties (before car leasing became popular, and probably why car leasing became popular) most young couples who each owned a car, could not buy a house.  The two car payments sucked up their whole back end ratio and subtracted from their front end ratio.  “I thought we could get a mortgage for 28% of our gross income or 33% of our gross income?”  “Well, yes…but the combined value of your two new cars is almost as much as the house you are trying to purchase!”

    Everyone agreed that people needed both cars and houses…so ratios grew and grew and grew.  So, Sniglet, the changes in FHA are NOT fascinating at all. In fact FHA hasn’t changed all that much.  What’s happening is that lending standards on the Conventional side are creeping back to “The Way We Were”, putting the spotlight back on FHA, which is closer to the way IT was IF you cut out “automated” approvals.

    Before you even think about buying a house, get your “other debt” issues down to no more than 10% of your gross income.  If you make $45,000 a year and your wife makes $25,000 a year, and you each have a car with a $400 monthly payment, you are spending 14% of your gross income on car payments!

    Of course this Rise and Fall story would clearly fill a book.  But until everyone understands that a bailout or bandaid in ONE area only (or two) is not going to fix what ails this Country, we cannot have HOPE…and HOPE is what we need more than bailouts and fixes.

    As I said in one of my previous posts: “2009 will not be a year of great change.  It will be a year of Great Hope for Change, one small step at a time, via you and me acting the best we can in each moment.”  Falsely creating hope with “Talking Points” and “Good News” articles is NOT the solution.  Expecting any one source to be the Messiah, is NOT the solution.  Every single person doing their part to improve the situation…is the only long term solution.  That means YOU!

    Stop looking for someone else to come up with an answer.  Get out your teacup, and start emptying out your own little piece of the ocean.

    I kissed a girl once. I was almost 50 years old and was in the middle of a divorce from a 20 year marriage.  I just wanted to make sure before I started over again, that I wasn’t starting out on a faulty premise that had been “fed” to me.  2009 is the year to test your foundations…so that when “The Rocovery” does come…it isn’t the old mess wrapped up in a bright shiny red bow.

    Don't Pay Off Bad Credit

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    Step three in the “Should I Buy a House Now” series is somewhat of a sidetrack.  In Step 1 people learned the difference in calculating your current gross income, especially if any part of your income is not guaranteed “salary”.  In Step 2 you were sent off on a long project of accounting for your past practices of spending that gross income.  By finding the money you wasted, and taking steps to waste less of your earnings, you were able to find additional monies to put towards housing payments.

    Step 3) Start Improving Your Credit Rating This can take a long time, as does Step 2.  I am suggesting you do these simultaneously.  Don’t think that because you pay your bills on time, that you have good credit.  Paying your bills on time only accounts for 30% to 35% of your credit standing.

    Get all copies of your credit history.  Generally there are three sources (or more) and you don’t want to get your credit score, you want full copies of your credit report.  Go through the reports and make sure the history pertains to you.  The more comon your name, the more likely you will have something of someone else’s on your report.  If you are divorced, you want to remove things that you are no longer legally responsible for by divorce decree, even if the item has a high rating.

    Let’s assume you have at least one item that you didn’t pay well.  Don’t pay it off!  This is the biggest mistake I see people making.  You need to turn bad credit into good credit.  Paying it off does not remove it from your credit history, so paying it off simply locks in a bad credit item.  You want to “pay it as agreed”.  Sometimes you do that by agreeing to a new payment schedule and then paying the new payments on time for a year.  Sometimes you pay off the balance, but leave the card open, and charge one small item every month and pay that item off every month.  I’m not a credit expert for sure, but this issue goes back long before scoring was used.  All too often people pay off the balance on a bad credit item thinking they made it good.  No.  You locked in the bad long term.

    Here’s a story from back when I was 25ish.  My Mom needed me to co-sign on a house.  I had a bad charge card at a department store that was charging me 3% of the balance due until it reached near the max, and then wanted 20% of the now higher balance each month.  There was no way on my income that I could pay 20% of the balance, so it got behind.  It was a ding that was potentially going to cause my Mom to not get the house and everyone panicked. 

    I went to the store with the full balance due in my hand, and after a lengthy conversation with the credit manager, I was very angry and said I hated the store and would never buy anything there again.  The Manager said to me, “You can’t hate us.  In fact you have to buy from us.  You can’t just pay off the balance to restore your credit.  If you never buy from us again, that bad rating will sit on your report for years.  The only way for you to improve your credit is to buy more from us and pay off that more well.”  That made me angrier and I started to leave when a lightbulb went on.  I turned around and said, “Are you telling me that I can go downstairs right now and buy something on this card?  He said absolutely, please do.  I said can you give me a letter to that effect.  He said sure.  I took that letter to the mortgage company and said how can you deny my Mom a mortgage based on a bad credit item, when the bad credit item doesn’t think it’s so bad, in fact they invite me to continue shopping there on credit.  I handed them the letter from the Credit Manager on the store letterhead, they agreed and my Mom got the house.

    Lesson learned:  Turning Bad credit into Good credit involves not simply paying off balances, but continuing to charge and pay as agreed until the credit rating for that item improves.  Then you can close it after it has a good rating.

    I have to meet someone at a house shortly, so I’m going to end here though this post could be a 20 page short story, if I highlighted all the ways to good credit.  The point is EARLY in the process, here at Step 3, know your credit score, review your credit history from 3 credit bureaus, and improve as needed.  Even if your score is high, go through the detail and make sure you correct anything that needs correcting.  It takes a long time for the credit bureaus to reflect change…so don’t wait until the last minute to work on this step in the series.

    Understanding Credit Score and Credit Repair

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    Credit remediation is a subject consumers often face with fear and trepidation, and for good reason. With the exception of recognizing that the best score wins, the average home shopper knows very little about the whole credit scoring process. Sub-prime borrowers who are eager to move into A-Paper territory often find themselves at a loss when trying to find ways to upgrade their credit history. The good news is there are ways to improve less-than-perfect credit scores and obtain a loan for the home you really want.

    The first step in the process is making sure that you have a current copy of your credit report. Congress recently amended the Fair Credit Reporting Act so that consumers may now receive one free credit report annually. There are three major credit bureaus: Equifax, Experian, and Transunion. Since entries can vary across bureaus, you’ll want to request a free report from each of the three companies. (Go to www.annualcreditreport.com)


    It’s also important to know just what a good credit score is. Most A-Paper scores generally begin around 680, although this number may differ slightly among lenders. Don’t despair if you come up shy, there is always room for improvement. Increasing your score just 5 points can save a significant amount of money. For example, if your score is 698 and you increase it to 703, then you could save yourself thousands of dollars over time as a result of a slight improvement to your loan’s interest rate.

    While credit repair is necessary for some, it’s not the only way to increase your credit score. Even if you have stellar credit, you can enhance your score through these steps:

    • Evenly distribute your credit card debt to change the ratio of debt to available credit. Let’s say you have a credit score of 665. If you have debt on only one card, and four additional credit cards with zero balances, evenly distributing the debt of the first card could move you closer, and possibly into, that ideal bracket.
    • Keep your existing accounts open and active. The average consumer is usually anxious to close credit card accounts that have zero balances, but doing this can cause them to lose the benefits of a long-term credit history and increase their ratio of debt-to-available credit. The bottom line is don’t close those old accounts!
    • Keep credit inquiries to a minimum. Each inquiry into your credit history can impact your score anywhere from 2-50 points. When it comes to mortgage and auto loans, even though you’re only looking for one loan, multiple lenders may request your credit report. To compensate for this, the score counts multiple auto or mortgage inquiries in any 14-day period as just one inquiry, so try and stay within that time frame.

    Remember, credit scores don’t change overnight. Improving them requires time and diligent effort on your part, so it’s a good idea to get the ball rolling at least three to six months prior to submitting your application for home financing.

    If credit repair is what you need, you can either begin the process yourself or seek out a repair service. If you decide to make your own improvements, visit as many websites as possible to get information regarding credit laws and consumer rights. Diligently search through them and educate yourself to ensure that you don’t sustain any self-inflicted wounds. A good place to start would be the Federal Trade Commission’s website, which contains a wealth of helpful literature.

    If you’re facing severe or complicated credit issues, then you’ll probably want to enlist the assistance of a professional credit repair company. Before you do, be sure to familiarize yourself with the FTC’s regulations on credit repair. With over 1100 credit repair companies to choose from, it’s important to be certain you are dealing with a reputable firm. Examine the FTC’s information on fraudulent practices to avoid falling prey to credit repair scams.

    Addressing credit issues can be uncomfortable to say the least. But by taking these steps now, you’ll be that much closer to obtaining the home of your dreams.

    Additional Resources:

    To order your free credit report, go to:
    www.annualcreditreport.com

    To read the Fair Credit Reporting Act, go to:
    www.ftc.gov/os/statutes/frca.htm

    For the Federal Trade Commission’s information on consumer credit, go to:
    www.ftc.gov/bcp/conline/edcams/credit/index.html