My lender kept talking about the Four C’s of Lending. What does this mean and how does it affect my loan? Lenders don’t want to foreclose on a property. As Lender’s begin to consider a file for approval, they are looking at four areas of risk. Those four areas are Character, Capacity, Collateral, and Capital. So what do these Four C’s mean?
Character- What is the person’s willingness or desire to repay the loan. In today’s world, we look at a credit report to determine how the borrower has paid their accounts in the past, to predict how they will pay their debts in the future. Late payments, collections, repossessions, or even a bankruptcy make a lender have serious doubts about the borrowers intent to repay a new loan.
Capacity- Can the borrower afford to make the payments on the loan they desire? Employment history, income, debt to income ratios are all part of a borrower’s capacity to repay the loan. If someone wants a loan with monthly payments of $2,400 but only makes $2,300 a month they cannot afford the payment. Obviously, lender’s are not looking at whether you make at least more than the monthly payment you are requesting, but consider ratios that are in line with standards of living. Typically, a persons debt should not exceed 40%-45% of their total income. This allows them extra money for food, clothing, etc.
Collateral- What is the lender securing the debt against? The collateral, in our case a home, is the lender’s protection of the money they lend. In today’s market the value of a home has become a more integral part of the picture, since we have recently seen that housing prices can fall. East Tennessee has been fairly lucky with regard to home values, but states such as California, Arizona, and Florida have seen significant drops in home values. Home values become even more important if borrowers lose their jobs, the economy slows down, and foreclosures rise.
Capital- Cash is King. Lenders have always looked at cash reserves and down payments as compensating factors in loan approval. The more excess cash that a borrower has, the better ability for them to ride out the storm of a job lose or drop in income.
Now you know what lenders are referring to when they talk about the Four C’s of loan approval. If you know someone that is considering purchasing a home, send this blog to them. The more informed the borrower, the better their financing options become.
richard.swan@migonline.com
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
Tuesday, March 30, 2010
Wednesday, March 24, 2010
Private Mortgage Insurance: When Does It End?
When will the Private Mortgage Insurance (PMI) drop off of my home loan? A good friend of mine called me today to ask about a loan he had on a property in Florida. He financed the house with a 95% loan, but his value keeps dropping; probably below what he still owes for the house today. His question was, “At what point will my mortgage insurance drop off?”
Luckily for him, the mortgage insurance (MI) question really has to do with what you buy the home for, not what it is worth on the market today. PMI is an insurance policy to protect the lender should you default on your loan. If you were to quit making your payments and the house was foreclosed on, the MI Company would cover a certain percentage of the loss for the lender if they encountered trouble selling the property.
For you as the homeowner, once you pay down to 78% of the original purchase price (or appraised value whichever was lower at the time) then the mortgage insurance is required by federal law to drop off of your loan. In his case, he is paying about $280 per month in mortgage insurance. The MI will drop off when he pays about $3,000 additional to the principal on his loan. Since he has the cash available, it is better to pay $3,000 now on his loan, and eliminate the MI now, because that will save him $3,360 over the next 12 months.
If you have a question, send me an email: richard.swan@migonline.com and I will try to answer your question. Remember the First Time Homebuyer’s Tax Credit and the Long Time Homeowner’s Tax Credit end on April 30th. Make sure you have a contract to purchase by that time.
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
Luckily for him, the mortgage insurance (MI) question really has to do with what you buy the home for, not what it is worth on the market today. PMI is an insurance policy to protect the lender should you default on your loan. If you were to quit making your payments and the house was foreclosed on, the MI Company would cover a certain percentage of the loss for the lender if they encountered trouble selling the property.
For you as the homeowner, once you pay down to 78% of the original purchase price (or appraised value whichever was lower at the time) then the mortgage insurance is required by federal law to drop off of your loan. In his case, he is paying about $280 per month in mortgage insurance. The MI will drop off when he pays about $3,000 additional to the principal on his loan. Since he has the cash available, it is better to pay $3,000 now on his loan, and eliminate the MI now, because that will save him $3,360 over the next 12 months.
If you have a question, send me an email: richard.swan@migonline.com and I will try to answer your question. Remember the First Time Homebuyer’s Tax Credit and the Long Time Homeowner’s Tax Credit end on April 30th. Make sure you have a contract to purchase by that time.
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
Friday, March 19, 2010
What is a Credit Score?
I keep seeing all of these ads for free credit reports. What is a credit score?
Credit information is collected by three credit reporting agencies: Equifax, Experian, and Trans Union. From the information collected by these three reporting agencies, a score is generated, the purpose of which is to determine the likelihood that you as a borrower will repay a debt.
What affects your Credit Score and How Much?
1. Payment History (35%)
What is your history of paying the credit accounts that you have? That is one of the first things that a lender will want to know. If others have trusted you with credit in the past, did you pay them back? Your credit history will reflect this for all types of accounts (revolving, installment, retail store accounts, car loans, mortgage loans, and finance company accounts).
Delinquencies occur when your account is not paid on time. Always make sure that you make at least the minimum monthly payment on your account. Late payments are recorded in 30 day increments. If your payment is due on the 20th of the month, it should not be recorded delinquent before 30 days have passed after the due date. A recent 30 day late on your account will affect your credit more than a 60-90 day late from 5 years ago.
Bankruptcies, tax liens, child support, judgments, and collections can stay on your credit for 7-10 years. Deal with these as they occur and work diligently to make sure that the information the credit agencies have is accurate.
Once these types of derogatory credit have occurred, it is even more important to work to re-establish your credit. Many people stop borrowing money after a bankruptcy for fear that they will not be able to get a loan. Work to re-establish your credit early. Open secured credit card accounts through your bank or credit union. Take out small loans and repay them quickly so that this information is reported on your credit.
2. Amounts Owed (30%)
The total amount owed on all of your accounts can be a factor in your score, but more specifically the amount owed on revolving accounts relative to the account limit. Balances on credit card accounts should be less than 50% of the credit limit for each account. Accounts that show more than a 50% balance can reduce your credit score; worse if the balance is above 75% of the credit limit.
3. Length of Credit History (15%)
How long have your accounts been open and how long since you used certain accounts? Installment loans should be opened and paid off. Paying them off early reduces your total debt, but does not necessarily improve your credit. Credit cards should be used every 3-4 months; this keeps them reporting accurate information and current credit information. Credit Scores look at the age of your oldest account and also the average age of all of your accounts. Closing long established accounts can lower your credit score. Leave your accounts open unless you are having an issue with a particular creditor.
4. New Credit (10%)
Are you taking on too much to handle? Credit Scores gauge the amount and types of new credit that you have and also look at credit inquiries. Accounts with less than a 12 month history can have a derogatory effect on your credit. Individuals, who roll balances from established credit cards to new accounts continually, can lower their credit scores by lowering the average age of their accounts and by not showing at least a 12 month history on existing accounts.
5. Types of Credit (10%)
You credit should have a mix of different types of credit. Installment loans (cars, boats, etc.), revolving accounts (Visa, MasterCard, Discover, etc.), mortgages, store accounts (Sears, Target, etc.) all factor in to your total score. If you have a mix of these types of accounts, with a clean payment history, that shows a good use of credit.
How to contact the credit bureaus to dispute information on your credit report:
Disputing an account can actually keep you from closing on a loan (at least with mortgages it can). People ask why, I don’t owe them anything? The lender doesn’t know what the outcome of the dispute will be. It could be that you owe more and they establish $200 to $300 per month as a payment. It could become a judgment that would be placed against your home. Disputes represent an unknown result. Be diligent when filing a dispute to resolve it quickly and make sure it gets report correctly to the three main bureaus.
Equifax: (800) 685-1111, www.equifax.com
Experian: (888) 397-3742, www.experian.com
TransUnion: (800) 888-4213, www.transunion.com
Remember that they report accurate information. Just because you say a debt is paid, doesn’t mean they will remove it from your credit file. It is important to report life events to the credit bureaus to make sure that information is reported accurately. Bankruptcies, divorces, child support, and tax liens often create situations where mistaken information is reported to the credit agencies. When you go through a bankruptcy, make sure that all of the accounts included were listed correctly on your credit. Tax liens almost always get reported delinquent, but rarely get changed to show them paid. This is your credit; make sure you monitor it yourself.
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
Credit information is collected by three credit reporting agencies: Equifax, Experian, and Trans Union. From the information collected by these three reporting agencies, a score is generated, the purpose of which is to determine the likelihood that you as a borrower will repay a debt.
What affects your Credit Score and How Much?
1. Payment History (35%)
What is your history of paying the credit accounts that you have? That is one of the first things that a lender will want to know. If others have trusted you with credit in the past, did you pay them back? Your credit history will reflect this for all types of accounts (revolving, installment, retail store accounts, car loans, mortgage loans, and finance company accounts).
Delinquencies occur when your account is not paid on time. Always make sure that you make at least the minimum monthly payment on your account. Late payments are recorded in 30 day increments. If your payment is due on the 20th of the month, it should not be recorded delinquent before 30 days have passed after the due date. A recent 30 day late on your account will affect your credit more than a 60-90 day late from 5 years ago.
Bankruptcies, tax liens, child support, judgments, and collections can stay on your credit for 7-10 years. Deal with these as they occur and work diligently to make sure that the information the credit agencies have is accurate.
Once these types of derogatory credit have occurred, it is even more important to work to re-establish your credit. Many people stop borrowing money after a bankruptcy for fear that they will not be able to get a loan. Work to re-establish your credit early. Open secured credit card accounts through your bank or credit union. Take out small loans and repay them quickly so that this information is reported on your credit.
2. Amounts Owed (30%)
The total amount owed on all of your accounts can be a factor in your score, but more specifically the amount owed on revolving accounts relative to the account limit. Balances on credit card accounts should be less than 50% of the credit limit for each account. Accounts that show more than a 50% balance can reduce your credit score; worse if the balance is above 75% of the credit limit.
3. Length of Credit History (15%)
How long have your accounts been open and how long since you used certain accounts? Installment loans should be opened and paid off. Paying them off early reduces your total debt, but does not necessarily improve your credit. Credit cards should be used every 3-4 months; this keeps them reporting accurate information and current credit information. Credit Scores look at the age of your oldest account and also the average age of all of your accounts. Closing long established accounts can lower your credit score. Leave your accounts open unless you are having an issue with a particular creditor.
4. New Credit (10%)
Are you taking on too much to handle? Credit Scores gauge the amount and types of new credit that you have and also look at credit inquiries. Accounts with less than a 12 month history can have a derogatory effect on your credit. Individuals, who roll balances from established credit cards to new accounts continually, can lower their credit scores by lowering the average age of their accounts and by not showing at least a 12 month history on existing accounts.
5. Types of Credit (10%)
You credit should have a mix of different types of credit. Installment loans (cars, boats, etc.), revolving accounts (Visa, MasterCard, Discover, etc.), mortgages, store accounts (Sears, Target, etc.) all factor in to your total score. If you have a mix of these types of accounts, with a clean payment history, that shows a good use of credit.
How to contact the credit bureaus to dispute information on your credit report:
Disputing an account can actually keep you from closing on a loan (at least with mortgages it can). People ask why, I don’t owe them anything? The lender doesn’t know what the outcome of the dispute will be. It could be that you owe more and they establish $200 to $300 per month as a payment. It could become a judgment that would be placed against your home. Disputes represent an unknown result. Be diligent when filing a dispute to resolve it quickly and make sure it gets report correctly to the three main bureaus.
Equifax: (800) 685-1111, www.equifax.com
Experian: (888) 397-3742, www.experian.com
TransUnion: (800) 888-4213, www.transunion.com
Remember that they report accurate information. Just because you say a debt is paid, doesn’t mean they will remove it from your credit file. It is important to report life events to the credit bureaus to make sure that information is reported accurately. Bankruptcies, divorces, child support, and tax liens often create situations where mistaken information is reported to the credit agencies. When you go through a bankruptcy, make sure that all of the accounts included were listed correctly on your credit. Tax liens almost always get reported delinquent, but rarely get changed to show them paid. This is your credit; make sure you monitor it yourself.
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
Monday, March 8, 2010
Thinking About a Second Home?
We would like to buy a cabin, but our neighbor said it was very hard to get financing; what are our options? Second homes are generally treated the same as your primary residence. You can finance them with a low down payment, and the rates and closing costs are reasonable. The biggest hurdle is proving that the property will actually be a second home.
Second homes are considered vacation homes and you must prove it will not be a rental property. Typically, it must be at least 50 miles from your primary residence, and located in a resort type area. A mountain cabin or lake home would be a good example of a second home. In some cases, you may be able to claim a second home less than 50 miles away, if you meet this “resort” designation.
The second requirement deals with any lease or other agreement that you have regarding the property. If you have a lease that prevents you from access to your home, then it may require that you treat the home as an investment (rental) property instead of a second home. Typically, investment property requires a 20-25% down payment and would have higher closing costs, or a higher rate.
You can rent the property, but cannot have an agreement with a rental company that gives them exclusive rights to the property and prohibits you access.
Take the time to understand the loan guidelines and make sure that you are upfront with your intent. In most cases, mortgage fraud is a felony; not just for the lender, but for you as an individual.
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
Second homes are considered vacation homes and you must prove it will not be a rental property. Typically, it must be at least 50 miles from your primary residence, and located in a resort type area. A mountain cabin or lake home would be a good example of a second home. In some cases, you may be able to claim a second home less than 50 miles away, if you meet this “resort” designation.
The second requirement deals with any lease or other agreement that you have regarding the property. If you have a lease that prevents you from access to your home, then it may require that you treat the home as an investment (rental) property instead of a second home. Typically, investment property requires a 20-25% down payment and would have higher closing costs, or a higher rate.
You can rent the property, but cannot have an agreement with a rental company that gives them exclusive rights to the property and prohibits you access.
Take the time to understand the loan guidelines and make sure that you are upfront with your intent. In most cases, mortgage fraud is a felony; not just for the lender, but for you as an individual.
This blog is for informational purposes and is the opinion of the writer. In financial matters always solicit professional advice and legal counsel if necessary.
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