Staten Island Mortgage Lending: Credit Scoring

Staten Island Mortgage Lending: Credit Scoring: "Credit Scoring Part I: Good Credit Translates into Lower Rates for the Consumer In the 1960s, Fair Isaac Corporation started working on a s..."

Credit Scoring

Credit Scoring
Part I: Good Credit Translates into Lower Rates for the Consumer

In the 1960s, Fair Isaac Corporation started working on a system lenders could use to evaluate the likelihood of receiving repayment on loans. Prior to that, it was really a matter of trusting an individual to be a "man of his word," so to speak. Fair Isaac sought to take human error out of the equation with a reliable system that could determine whether or not consumers were truly worthy of credit, and thus FICO was born. This evolved to become the standard for lenders by the 1980s.

Credit scoring has an enormous impact on a borrower's ability to purchase a home. It can mean the difference between getting a good interest rate and the home of their dreams, or whether they even qualify at all. For this reason, it is important for borrowers to understand the credit scoring process, and to know what their credit score is when they look to obtain mortgage financing.

What the credit scoring model seeks to quantify is how likely the consumer is to pay off their debt without being more than 90 days late on a payment at any time in the future. Credit scores can range between a low score of 350 and a high of 850. The higher the client's score is, the less likely they are to default on their loan. Only a rare one out of approximately 1300 people in the United States have a credit score above 800. These are the slam-dunk clients that walk away with the best interest rates. On the other hand, one out of eight prospective home buyers are faced with the possibility that they may not qualify for the loan they want because they have a score between 500 and 600.

Stay tuned for Credit Scoring, Part II: The Five Factors of Credit Scoring.

SONYMA MORTGAGES

Cash
Funds that can be verified as the borrower's own, the source of which can be: (a) monies from borrower's checking or savings account, or other similar time deposit account, which have been on deposit in the account for at least 2 months prior to loan application, (b) cash up to $1,000, (c) cash deposit towards property purchase, and (d) the market value of the lot owned by borrower, exclusive of any liens, on which the SONYMA financed home was or will be constructed, or the purchase price of the lot if it was purchased in the past 2 years, whichever is less. Other sources may be considered on a case-by-case basis.

Closing Costs
Expenses (over and above the price of the property) incurred by buyers and sellers in transferring ownership of a property. Closing costs normally include, but are not limited to, fees charged by lenders, attorney fees, taxes, insurance premiums (e.g. flood insurance, hazard insurance, PMI), escrow charges, title insurance costs and survey costs. Lenders or realtors can often provide estimates of closing costs to prospective home buyers.

Down payment
The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.

Existing Housing
A property that has been previously occupied as a residence.

First-Time Home Buyer
A person who (i) has not had any ownership interest in his/her primary residence at any time during the three years prior to the date of making an application for a SONYMA mortgage loan; and, (ii) at the time of making the loan application to SONYMA, does not own a vacation or investment home. This definition includes residences owned in the United States and abroad.

Home Buyer Education
A course given by a SONYMA approved organization (usually a PMI company) in which participants learn budgeting techniques relevant to home owners. This is required for all loans with LTVs over 95% or down payments less than 5%. It is also required for all applicants applying for the Achieving The Dream and Remodel New York Programs.

Household Income
The total combined income of all persons who are age 18 or older and who are expected to live in the SONYMA financed property regardless of whether they have signed or will sign the mortgage application.

Housing Expense
The monthly costs associated with a mortgage loan, specifically: Principal, Interest, Taxes, and Insurance (PITI). Monthly costs also include maintenance fees, where applicable (e.g. condominiums, cooperatives, Planned Unit Developments, or Homeowners Associations).

Income Limit
SONYMA finances mortgage loans for persons with low or moderate incomes. The maximum incomes of persons eligible to receive SONYMA financed mortgage loans are subject to the requirements of federal and state law. The maximum income allowable may vary by SONYMA program, region of the state, and household size. Click here for current income limits.

Loan to Value
The relationship between the requested mortgage amount and the appraised value, or, sales price (whichever is lower) of the property. For example, a home valued and priced at $100,000 on which there is an $80,000 mortgage has an LTV of 80 percent.

Lock-In Fee
A fee equal to 1% of the requested loan amount, which is paid to the lender by the borrower within 14 days of loan reservation to hold ("lock") a specific interest rate for a specific period of time. In SONYMA programs the fee is non-refundable unless the mortgage application is denied by the Participating Lender or SONYMA.

Long-Term Lock-In
Type of interest rate lock that may only be used for properties under construction or rehabilitation as of the SONYMA loan application date. The lock-in period is 240 days from the application date.

Mortgage Servicer
The mortgage company that services your SONYMA loan after closing. All mortgage payments and inquiries should be made directly to the mortgage servicer.

Newly Constructed Housing
A property that has not been previously used for residential purposes.

One-Family Home
A building designed for occupancy by one family, which includes a condominium unit, cooperative unit, townhome, planned unit development (PUD) unit, or factory-made housing permanently attached to real property.

Origination Fee
A fee that is paid by the borrower to compensate the Participating Lender for assisting the borrower to obtain a SONYMA mortgage loan.

Participating Lender
A lending institution that has been approved by SONYMA to originate, close and sell mortgage loans to SONYMA. Participating Lenders are familiar with SONYMA loan programs and requirements. Click here for a list of participating lenders.

Payment Reserves
Funds required by some lenders to be retained in a borrower's bank account after loan closing in an amount equal to a specific number of monthly mortgage payments.

Point
One point equals 1% of the mortgage loan amount. Fees associated with mortgage loans are often calculated in points.

Pool Insurance
Mortgage insurance paid for by SONYMA that is required for all loans which provides protection in the event of a loss resulting from a borrower default.

Private Mortgage Insurance (PMI)
Mortgage insurance paid for by the borrower that SONYMA requires for all loans where the Loan to Value exceeds 80%. PMI protects the Participating Lender and SONYMA in the event of a loss resulting from borrower default.

Purchase Price Limits
SONYMA provides mortgage loans for moderately priced homes. The maximum sale price of homes eligible for SONYMA financed mortgage loans is subject to the requirements of federal and state law. The maximum sale price allowable may vary by SONYMA program, region of the state, and size of the home. Click here for current purchase price limits.

Seller Concession
An agreement specifically stated in the sales contract between the seller of the property and the buyer of the property in which the seller commits to pay a specific portion of the buyer's closing costs. SONYMA limits the amount of Seller Concessions allowed.

Short-Term Lock-In
Type of interest rate lock that must be used for all Existing Housing and completed new construction or rehabilitation properties. The SONYMA rate lock-in period is 100 days from the application date.

Target Area
An entire census tract or portion thereof which has been designated by the federal government as economically distressed. For borrowers who purchase in these areas, in accordance with federal law, SONYMA waives the First-Time Home Buyer requirement, applies higher income and purchase price limits, and will finance two-family homes that are less than 5 years old.

Total Monthly Expense
Expected monthly expenses of the borrower including, but not limited to, the Housing Expense, car lease payments, credit card payments, and, any installment debt with more than 10 monthly payments remaining (i.e., personal loans, car loans, student loans, 401K or pension loans, etc.).

Underwriting Ratios
The maximum debt burdens allowable to applicants for mortgage loans expressed as two separate ratios - Housing Expense to gross monthly income and Total Monthly Expense to gross monthly income. SONYMA requires that the Housing Expense not exceed 33% of the borrower's gross monthly income, and that the Total Monthly Expense not exceed 38% of the borrower's gross monthly income. These percentages are increased to 40% and 45%, respectively, for applicants having a downpayment of 3% or more.

Value of the Property
The lower of the purchase price being paid for the property or the property's market value as established by a qualified property appraiser.

Seven Good Reasons To Re-finance

Why refi? There are at least seven reasons to refinance a mortgage. You probably can think of the first one -- to get a lower mortgage rate.

The average interest rate on an outstanding mortgage at the beginning of 2010 was 5.979 percent, according to the Bureau of Economic Analysis. However, lenders today are offering rates well below that benchmark, making a refinance a no-brainer for many.

But low rates are not the only motive for refinancing a home loan nowadays. The following are good reasons to consider a new
The No. 1 reason to refi is to get a lower mortgage rate. Despite sinking rates, a lot of people haven't refinanced.

Many homeowners would like to refinance but can't because they have little or no equity due to falling home values. Jim Sahnger, mortgage consultant for Palm Beach Financial Network in Stuart, Fla., says too many of his clients can't refi for this reason.

"But there are people who can, and some people who get so into whatever they're doing that they don't pay attention to the news and don't pay attention to where rates are at," Sahnger says.

So Sahnger will call to tell them that rates are near record lows.
Stability-hungry borrowers are ditching adjustable-rate mortgages and refinancing into fixed-rate loans.

"Everybody's frightened about inflation, so if they have an adjustable loan, that's the No. 1 reason they're getting out of them," says Jeff Lazerson, president of Mortgage Grader, a lender based in Laguna Niguel, Calif. "It's not because you can get them at a better rate, but because you can get them at a stable rate."

Other borrowers swing from one hybrid ARM to another, says Matt Hackett, underwriting manager for Equity Now, a direct mortgage lender based in New York City.

"We've done a few of those for people who were in a five-year ARM that they originated four years ago, that was getting ready to adjust," Hackett says.

Even though the rates were about to adjust downward, they got new 5/1 ARMs to extend low rates another five years.
This isn't, technically, a refi, but it's close. Mortgage-free homeowners sometimes get mortgages to put cash in their pockets.

"There's a lot of people who don't have a mortgage," Hackett says. "Maybe they want to go to Florida, buy a second home with cash. So they cash out their first home and take the cash and go down there and don't need a financing contingency, and they're in a better position to bargain."

They could also take out a mortgage on a paid-off property to start a business or for other reasons.
When house prices were rising by 10 percent or more a year, millions of borrowers got cash-out refinances. They refinanced for more than they owed, got cash, and spent or invested it.

The cash-out refi craze ended when the housing bust began. But there are still a few cash-out refis.

"We're still in the business of cashing out people -- paying off credit cards, for example," says Michael Moskowitz, president of Equity Now.

Michael Becker, mortgage banker at Happy Mortgage in Lutherville, Md., says: "It's not like it was years ago, when people took cash out to buy things, like a pool, a car or an RV. It seems more to be paying down debt, lowering their debt service, trying to save money."
Lately, Lazerson has noticed an interesting refinancing trend.

"One thing that's a trend now is that people are taking money out to purchase other properties," he says.

Often, it's to buy investment properties.

Refinancing to buy property can bring up unexpected tax and mortgage underwriting issues. A lot depends upon how the refinanced house and the new property will be used.

For example, which property will be the primary residence? Will the other property be rented out? Those are issues for a financial adviser or tax professional to untangle.
Some homeowners want to combine their first mortgage with the home equity line of credit.

"I'm seeing a lot of people, even if their rates on their home equity line of credit is 3 percent, refinancing to get rid of them," Becker says.

Why get rid of a loan with such a low rate?

"Because they're worried if five years from now, what if that rate jumps up to 12 (percent), 11 (percent), 13 percent?" Becker says.


Divorces often lead to refis as a means of removing the absent former spouse from the note.

"That has less to do with rates and is more about timing," Lazerson says.

Moskowitz says he recently did a $110,000 cash-out refi from a woman who used the money to bail out a son facing foreclosure on his own house.

That's not how Moskowitz would spend his money from a cash-out refi. But to anyone who agrees with him, he says, "You're clearly not a mother."