What is a Credit Bureau Score, and how is it calculated?

Credit bureau scoring is a statistical means of assessing how likely a borrower is to pay back a loan.  A Credit Bureau Score is based on the data available in the borrower’s credit report.  The score measures the relative degree of risk a potential borrower represents to the lender or investor.  It is not a measure of a borrower’s income, assets, or bank account, although those and other factors are still considered by lenders and investors, independent of the score.  A Credit Bureau Score does not include any of the following in the score calculation as this would be discrimination by FCRA guidelines: gender, race, age, or Zip Code. 

Fair, Isaac Credit Bureau Scores range from approximately 300 to 850 points, and are available through the three national credit data repositories:  

Equifax            (800) 685-1111

Trans Union    (800) 888-4213

Experian         (800) 397-3742 

Each bureau calculates its own score, based solely on data within its individual credit file.

 

A Fair, Isaac Credit Bureau Score, sometimes referred to as a FICO^SM  score, is calculated by a system of scorecards.  In developing these scorecards, Fair, Isaac uses actual credit data on millions of consumers, and applies complex mathematical methods to perform extensive research into credit patterns that forecast credit performance.  Each pattern corresponds to a likelihood that a consumer will make his or her loan payments as agreed in the future.  The score is based on all the credit-related data in the credit bureau report – not just negative data such as missed mortgage payments or bankruptcies.                       

The types of credit information used in the credit bureau scorecards are typically the same items an underwriter would use to make a credit decision.  The final score is based on the following factors: 

Payment History (35%)

·        Public record and collection items

·        Frequency: indicator of 90 day later

·        Severity: accounts over 30 and 60 days past due

o   0-6 months: Major effect

o   7-12 months: significant effect

o   13-24 months: lesser effect 

Outstanding debt (30%)

·        Number of balances recently reported

·        Average balance across all trade lines

·        Current Balance versus Credit Line Limit:

o   Over 75%: Major effect

o   Over 75%: significant effect

     Note: Accounts with small balances score better than zero balances. 

Credit History (15%)

·        Age of oldest trade line

·        Number of new trade lines 

Pursuit of New Credit (10%)

·        Number of inquiries and new account openings in the last year

·        Amount of time since most recent inquiry

·        Multiple inquiries for mortgages and auto loans within 30 days

are lumped as one single inquiry.           

Type of Credit (10%)

            The credit engine looks for a good mix of the following types:

·        Bankcard

·        Gas, travel and entertainment cards

·        Department store cards

·        Installment Loans

·        Finance Companies:  these often are given a negative score, since they are

Commonly provided to people with substandard credit. 

Fair, Isaac observes a very large number of credit report histories of mortgage borrowers to determine which credit report items or combination of items are the most predictive of future risk:  this data indicates the amount of each item contributes to an accurate assessment of credit risk. Fair, Isaac does not use race, color, religion, national origin, sex, marital status, or age as predictive characteristics.  Occupation and length of time in present residence are also not used in the Credit Bureau Score.  Also, any information that is not present in a repository credit file is not used in creating a Credit Bureau Score.

What Will Lower Your Score?

- Consumers who consistently mess up
- Spending near the limit of your total available credit
- 90 days late and you have other delinquent accounts
- Being an authorized user on someone else's account with good credit will no longer help your score

What Will Not Lower Your Score? 

+ Mess up every so often

+ Won't get dinged as hard when you apply for credit from multiple sources

+ Having a mix of credit types, like having a credit card, mortgage, and auto loan at the same time

+ If you're 90 days late on payments on one account and your other credit accounts are in good standing

The Lower Your Score, The Higher Your Costs of Borrowing

 

Fannie Mae and Freddie Mac, for example, charge higher up-front fees to borrowers with credit scores below 740. For a buyer with a credit score between 680 and 700, the fee comes to 1.5% of the mortgage principal. On a $400,000 mortgage, that adds up to $6,000. Someone with a 740 score pays nothing. Lower-score borrowers also get saddled with higher interest rates, about a 0.4 percentage point more for the below 700 borrower. That costs an extra $124 a month — $1,488 a year — on a $400,000, 30-year, fixed rate loan.

 

Mike Ervin

Senior Mortgage Banker

PH: 650-735-5261

NMLS # 282715
mike@mikeervin.com

 

Frequently Asked Questions Regarding the Home Buying Process

I have always strived to make the process easier for my clients. Purchasing a home is the most important financial investment you will make in a lifetime. Achieving the American Dream of Homeownership should be one in which we carefully guide you through the process so that it is a positive experience that you will remember. Here are a few questions that first-time buyers typically have…

1. At what point in the process should I apply for a mortgage? The best time to apply is before you purchase a home. Getting an actual pre-approval will give you more negotiating power with the seller as well as make the process smoother because you will know within what price range to be shopping.

2. How long will it take for our loan to be approved? After you have submitted your application, loan approval typically takes just a few days if the documentation we ask to be provided (see form attached) is complete. The more complete the information, the more quickly we can act.

3. What is the process after the loan is approved? Assuming you have a sales contract signed for a new home, the next step is to make sure all conditions are clear. Many of these conditions are standard and are provided by third parties, such as obtaining an appraisal and clear title. The quicker these conditions are received, the smoother the settlement process.

4. What is the difference between a pre-approval and pre-qualification? A pre-qualification is an opinion on whether you are qualified for the mortgage and does not mean that the information provided has been verified or the file has been underwritten. A pre-approval means that the relevant information has been verified and the file has been underwritten and approved. The file typically would be approved subject to writing and submitting a sales contract, satisfactory appraisal on the property selected and locking in a rate and loan program. We are one of the few lenders that provide actual underwritten pre-approvals.

5. When can I lock in a rate on the loan? Typically you can lock in the rate after the application is complete and after a sales contract is ratified. Rates change daily and sometimes more than one time per day and we can keep you informed as to how the markets are changing.

6. How much money will I need at closing? You will need money to cover the down payment and closing costs and escrows. The closing costs are itemized on the Good Faith Estimate of Closing Costs, a government required form we will provide. From this number, you can subtract your deposit that is being held by the Realtors and any closing cost credit paid for by the seller.

7. Can I borrow the money I need for closing, for example, place a charge on my credit card? We advise you not to borrow any money until you close on your home, at least not without talking to us first. A car or furniture purchase could change your qualification status.

8. What is included in my mortgage payment? We refer to the payment as the “PITI.” This stands for Principal, Interest, Taxes and Insurance. Principal and interest refers to the payment on the loan and taxes and insurance is payment for bills that will be due each year. We refer to these as escrows, or money you put aside (or escrow) for bills to pay due. Insurance is typically for a “homeowner’s policy” to protect your house but there may also be monthly mortgage insurance charged by FHA or conventional lenders. Also many homes have homeowner association fees that cover charges for common areas such as pools and tennis courts.

9. Will I get a copy of the appraisal of the property? Yes, you will be provided with a copy. If there is a “problem” with the appraisal, for example, if the value is less than the sales prices, you will be notified promptly.

10. Will I get a copy of my credit report? Yes, we will be able to provide you with a copy of your credit report. The Fair Credit Reporting Act requires that this information cannot be shared with other parties to the transaction and therefore it must be provided to you directly.

11. If I have a question, how do I contact you? While most of our correspondence would be by e-mail. It is important that you get all your questions answered, so please to do hesitate to give me a call.

Our mission is your satisfaction!

Mike Ervin

Senior Mortgage Banker

PH: 650-735-5261

NMLS # 282715
mike@mikeervin.com

Are You An Employee, Or…The CEO Of Your Company?

Do you view yourself as a salesperson? Or do you view yourself as the CEO of your own business? If you really want to lead the industry, you must view this as your company. This is true whether you work as a sole-proprietor out of your car or whether you work for a national company. That also means you must invest significant amounts of your money, time and energy in your business. And you must make this investment up front, not some time in the future.

For example, I can’t tell you how many sales people contact training companies and say—I know I need this training but I need to close a few transactions first. Then they go months or years without the training they need. They are running businesses that are always going to struggle. And most of them will eventually fail because companies that are under funded do not do well. If you have worked for such a company, you know what we mean in this regard. Those who are on “pay as you go” status never seem to reach the top. So here is the basic question:

Are you investing what you need to in your business?

Imagine if you were opening a retail store or restaurant. You would invest many thousands of dollars and hours before you rang up the first sale. This would include hundreds of hours of research and setting up the location. You would purchase equipment and inventory. You may pay a multi-thousand dollar franchise fee. And when it was opened, the hours needed to run the business would increase substantially. In the end, you would still be in a situation that poses a major risk because start-up businesses tend to have a high rate of failure in the first few years. Obviously the research and investment should help mitigate some of these risks.

Sales personnel don’t necessarily have to invest as many hours or as many dollars as one might starting a restaurant. But the concept is much the same. What do you need to invest in? Marketing, education, technology and more. Perhaps it is a laptop. Or it is the time to learn how to use a software program you have purchased for your laptop. Have you ever purchased a software program and not learned how to use it? In this case you have invested the money but not the time. You must make an investment of all available resources. Imagine running a store without the technology you need. Imagine running a doctor’s office without the knowledge you need!

The investment needed would vary for each person. For example, an insurance veteran of eight years moving into the real estate industry would not need to learn about available insurance coverage. On the other hand, someone moving from government should spend the time to learn this aspect of the industry. After all, if you are serving homeowners and prospective homeowners, you will need to become an expert in all aspects of the real estate process so that you can deliver maximum value to your clientele.

Some will need a home office. Others will need a marketing assistant. It is this needs analysis that is an all-important research step. For example, within the education category some may need to learn how to better utilize a computer. Others may need help learning how to communicate verbally or in writing. Still others may need public speaking training. Note—we have not even touched upon training specific to your particular industry.

Those who wait for their employers to give them the resources to be successful will typically have a long wait—forever. Success comes from within. And the key to this success is finding the right elements of investment that are needed for each individual. These elements include time, money and energy. You can’t make it with just two out of three. Our question is…have you made the investment that is necessary to sustain and grow your business as the reigning CEO? There certainly is a big difference between an employee and a CEO!

 

Mike Ervin

Mortgage Banker

NMLS # 282715
(650) 735-5261

mike@mikeervin.com

 

Paying 50 To 500% Interest On Your Taxes?

During tax time I see all kinds of companies that advertise paying you in advance for your income tax refund. It seems like these are OK deals until you get out your calculator.

Several of the well-known income tax preparation services offer these advance loans, so they seem legitimate. However, the amount charged to receive your loan back a few days sooner is outrageous. According to a report by the National Consumer Law Center, refund loans cost the average person using them anywhere from 50% to 500% interest!

Mike Ervin, Mortgage Banker

NMLS # 282715

(650) 735-5261

www.mikeervin.com

Biggest Mistakes Homebuyers Make

Buying a home is the biggest purchase most people will ever make, yet many go into it blind. Here are the most common, and costly, mistakes homebuyers make:

Not knowing your credit score. If you’re even toying with the idea of buying a home, you must find out exactly what your FICO score is. If you find it is less than ideal, wage a systematic campaign to raise it. Too many borrowers ignore this step and get surprised when they get interest rate quotes. Once you’ve pored over your credit history and corrected any errors, your next step is to pay down revolving debt balances to no more than 30% usage. That will help raise your score significantly.

The lower your score, the higher your costs of borrowing. Fannie Mae and Freddie Mac, for example, charge higher up-front fees to borrowers with credit scores below 740. For a buyer with a credit score between 680 and 700, the fee comes to 1.5% of the mortgage principal. On a $400,000 mortgage, that adds up to $6,000. Someone with a 740 score pays nothing. Lower-score borrowers also get saddled with higher interest rates, about a 0.4 percentage point more for the below 700 borrower. That costs an extra $124 a month — $1,488 a year — on a $400,000, 30-year, fixed rate loan.

Buying a car before a house. Anytime consumers open new credit accounts — credit card, auto loan, etc. — their FICO score could drop, according to Craig Watts, a spokesman for Fair Isaac, the creator of FICO scores. “Hence the admonition to not open other new accounts while your mortgage application is in process,” he said.

A big purchase would use up a considerable proportion of a borrower’s total credit limit, which results in a drop in the score. Lenders often continue to check credit scores in the weeks before closing. “The lender will likely slam on the brakes if the applicant’s credit scores have suddenly dropped below the minimum required for the requested loan rate,” Watts said.

Skimping on the home inspection. Buying a pig in a poke can cost buyers big bucks, just when they can least afford it. So it’s vital to find all the costly flaws before you buy. Many homes on the market today are distressed properties — foreclosures and short sales — and that only increases the importance of good inspections, according to David Tamny, president of the American Society of Home Inspectors. “The owners usually didn’t have the money to keep up these homes,” he said. “There’s a lot of deferred maintenance.”

A home inspection can find problems with the foundation, electrical, plumbing, roof, attic insulation, and heating and air conditioning. In some states, separate licensed inspectors offer mold or termite inspections. Often homebuyers, who may be strapped for cash, stint on inspections and look for the cheapest way to go. That can lead to disaster. The cost of repairs far exceeds the cost of inspection,” said Tamny.

No contingencies. When signing a sales contract, buyers usually have to put up 1% to 3% in “earnest money,” which they don’t get back if they pull out of the deal except under certain conditions spelled out in the contract. Sellers try to limit the grounds for canceling, and inexperienced buyers may sign contracts that don’t include common exceptions, such as uncovering major problems during the home inspection, failing to obtain financing and failure of the house to appraise. Failure to obtain financing is common these days because lenders have become very picky; underwriting is very strict.

Not budgeting for insurance. Don’t underestimate insurance costs and fail to budget for them. Many homebuyers don’t understand just what is — and what is not — covered. Standard policies pay for theft and wind, fire, lightning, hail and explosion damage. Not covered is flooding, earthquake damage or problems caused by neglect of routine maintenance, according to Jeanne Salvatore, spokeswoman for the Insurance Information Institute, an industry-sponsored educational group. “The most important thing before you buy a home is to! find out what it will cost to insure it,” she said. “Insurance needs to be calculated into the cost of owning a home. Unlike a mortgage you can pay off, you’ll be responsible for insurance costs forever.”

For flood insurance, most buyers use the National Flood Insurance Program. Earthquake coverage may be available through a state authority or some private companies. Depending on location, flood insurance can run into a lot of money. The cost of $250,000 worth of government flood coverage on the building and $100,000 of its contents can go as high as $5,714 in high-risk, coastal areas.

Source: CNN/Money.com

 

Mike Ervin, Mortgage Banker

NMLS # 282715

(650) 735-5261

www.mikeervin.com