What is the Neighborhood Stabilization Program?
The Neighborhood Stabilization Program is part of HUD’s new Neighborhood Stabilization Program (NSP), offered through the Los Angeles Housing Department (LAHD). NSP provides down payment assistance to eligible homebuyers in the form of deferred payment second mortgages.
The goal of NSP is to “stabilize” communities that have suffered from foreclosures and abandonment. The funds loaned by NSP become part of the down payment needed to purchase a foreclosed or abandoned property. The NSP loan is recorded as a second mortgage on the purchased property. Payments on this second NSP mortgage are deferred.
NSP also provides deferred payment loans to repair blighted properties after the property has been purchased.
Need more information? Call Joe Elizondo of Northeast Financial at 323-256-7833 or email Joe at neast-financial @ sbcglobal.net. Northeast Financial is an approved NSP Lender.
For homebuyers with less than 10% down, FHA is the only financing available
With the conventional mortgage market disappearing from the financial market, FHA financing is the only option available for homebuyers with less than a 10% down payment. Where the conventional lender requires a FICO of 720 and a down payment of 10%, a borrower may qualify for FHA financing with a FICO in the 600’s and with a down payment of only 3.5%. An additional benefit of an FHA loan is it allows sellers to finance all of the buyer’s costs to close.
If you or someone you know is thinking about buying or refinancing a home, give me a call. A complimentary consultation will determine the right loan for your financial goals and needs.
Interest rates at the beginning of this week were at 5.00%. As of today, August 20, 2009, rates were at 4.75%. As long as inflation is kept under control, rates should stay within the range of 4.5% to 5.5% for the rest of the year. I would expect if rates drop under 4.75% we may see a small refinance boom for those who missed the last wave of low interest rates.
Need more information? Call Joe Elizondo of Northeast Financial at 323-256-7833 or email Joe at neast-financial @ sbcglobal.net.
Low Income Purchase Assistance (LIPA)
Los Angeles Housing Department (LAHD) has announced that the Low Income Purchase Assistance (LIPA) program has finally received funding and is effective August 18, 2009.
The program has received $4,142,164 this year and will assist homebuyers on a first come, first serve basis.
The LIPA program offers purchase assistance in the form of a deferred loan of up to $75,000 to low income households for down payment, closing costs, and acquisition financing.
The program is limited to first time buyers who have not had an ownership interest in any real property at any time during the last three (3) years. LIPA funds may be used to assist buyers who purchase a home in the NSP eligible areas only.
Eligible homes must be either approved short sales or conventional equity sales. Unapproved short sales are not eligible. Vacant foreclosed and REO properties are eligible under NSP.
Properties applying under the LIPA program will not be inspected by LAHD.
No rehabilitation/repair loan funds will be made available for properties applying under the LIPA program.
Rehabilitation/repair funds are still available under NSP.
Need more information? Call Joe Elizondo of Northeast Financial at 323-256-7833 or email Joe at neast-financial @ sbcglobal.net. Northeast Financial is an approved NSP Lender.
Understanding Your FICO Score
Credit Bureau Scores are one of the many elements that are reshaping today’s mortgage industry. Credit scoring has been around since the 1950′s, and Credit Bureau Scores–scores based solely on credit bureau data–became widely available in the 1980′s. Today, Credit Bureau Scores are used extensively in such industries as bankcard and auto lending. The following are answers to frequently asked questions.
What is a Credit Bureau Score, and how is it calculated?
Credit bureau scoring is a scientific way 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.
Fair, Isaac Credit Bureau Scores range from approximately 450 to 850 points, and are available through the three national credit data repositories (Equifax, Trans Union, and TRW). The scoring programs reside at these credit bureaus and are called:
- BEACON at Equifax (CBI)
- EMPIRICA at Trans Union
- The TRW/Fair, Isaac Model at TRW
This score is calculated at the repository, and is based solely on the data within that repository’s individual credit file.
A Fair, Isaac Credit Bureau Score, sometimes referred to as a FICO 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. Through this process, Fair, Isaac identifies distinctive credit patterns. 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. These can include:
- Payment history
- Public record and collection items
- Severity, recentness and frequency of delinquencies noted in trade line section Outstanding debt
- Number of balances recently reported
- Average balance across all trade lines
- Relationship between total balances and total credit limits on revolving trade lines Credit history
- Age of oldest trade line
- Inquiries and new account openings
- Number of inquiries and new account openings in the last year
- Amount of time since most recent inquiry Types of credit in use and number of trade lines reported for each type:
- Bankcard
- Travel and Entertainment cards
- Department store cards
- Personal finance company references
- Installment loans
- Other Fair, Isaac observes tens of thousands 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 each item should contribute to a credit decision.
Fair, Isaac Credit Bureau Scores do not use race, color, religion, national origin, sex, marital status, or age as predictive characteristics. Occupation and length of time in present house are also not used in the scorecards. Any information that is not present in a credit file is not used in creating a Credit Bureau Score.
What does a score mean?
A Fair, Isaac Credit Bureau Score is a means of rank-ordering potential borrowers based on the likelihood that they will pay their credit obligations as agreed. A higher score indicates better credit quality. If all other things are equal, borrowers with a score of 660 are less likely to default on a loan than borrowers with a score of 580.
The Fair, Isaac Credit Bureau Score models at each credit repository are of similar design and the scores are scaled to indicate a similar level of risk across all three bureaus. In other words, a score of 680 at one bureau will represent the same relative risk as a score of 680 from another bureau. This risk is defined in terms of the number of accounts that remain in good standing compared to those that default.
How can a borrower increase their FICO score?
Over time a borrower can improve the information in his or her credit report by paying credit obligations on time and using credit wisely. As derogatory data in the credit report gets older, it affects the score less. A missed payment from four years ago will not count as much as a missed payment from six months ago.
A credit score, like a credit report can be thought of as a snap shot of an individual’s changing credit record. If a request is made that another repository report be obtained to get an updated score, then the score is likely to change for many reasons; however, it is not possible to control how that score will change. The credit items on the report are updated often, so new items are likely to have been added since the previous report. Additionally, repeatedly requesting a borrower’s credit report may substantially increase the number of inquiries on the repository report, which may affect the score adversely.
Doesn’t using the score mean fewer people will get mortgage loans?
No, in fact, the opposite may be true. Credit Bureau scoring is just one of several ways that lenders and the secondary market decide whether to lend someone money, and under what terms. They set the underwriting Guidelines. The lender typically offers a mortgage product to the same number of borrowers irrespective of the use of scoring.
The lender uses the Credit Bureau Score to determine the acceptable level of risk for the product being offered. If the score on a borrower’s credit report is too low for a given product, that does not mean the score is too low for other products. In the past we have seen that once lenders are able to accurately identify the credit risk of all applicants, they can create products designed and priced for various market segments, ultimately extending credit to more people.
Suppose a score if affected by derogatory credit information that the borrower believes is not his or hers?
Consumers who want to address what they believe is erroneous information on a mortgage report should contact the reporting agency which developed the report. As you know, the Fair Credit Reporting Act (FCRA) allows the credit reporting agency a “reasonable period of time”, generally not to exceed 30 days, to reinvestigate consumer disputed items. A significant number of credit grantors use an automated system for investigating disputes and respond to the dispute within a few days. Most credit reporting agencies make a special effort to resolve disputed information affecting a mortgage decision. The lender can weigh these factors and documentation provided by the borrower.
If the derogatory information is removed, how much will the score increase?
Because the score uses all the credit-related data on the credit bureau report and takes into account compensating factors, removing or changing one specific derogatory item will not guarantee an increase in the Credit Bureau Score. In some cases a change in the credit bureau report would have little or not effect on the score. And because there are many scorecards using complex mathematical formulae at each of the repositories, it is not possible for us to estimate how much the score will change if specific derogatory information is removed from the single repository report.
What would happen if an applicant were to pay off balances and/or close some accounts?
It is not possible to ensure that scores would increase in this case. Such actions may upset the mix of available credit, and actually decrease the score. It is important to remember that the point of the scoring is not to calculate a debt ratio–the debt ratio is still considered by the lender independent of the score. The score reflects data available on the credit report to assess the consumer’s current payment patterns as well as payment history.
Need more information? Call Joe Elizondo of Northeast Financial at 323-256-7833 or email Joe at neast-financial @ sbcglobal.net.
Answers to questions about FICO credit scoring
Does credit scoring help me?
Yes. Scoring speeds and simplifies the credit application process. Scores can be delivered electronically in seconds and are easy for lenders to read and interpret. This means quicker answers on credit applications. Because scoring is objective, there is also less chance of lending discrimination. Applications can be evaluated fairly based on factors proven indicative of repayment performance.
Why do lenders use credit scores?
While not all lenders use scores, those who do, use them to help make fast, unbiased decisions on which applicants are likely to pay them back, and pay them back on time. Lenders want to extend credit to people who will repay and avoid lending to those who will not. A scoring model quickly and precisely evaluates your credit history and distills the likelihood that you will repay as agreed into one easy-to-understand number.
Before the widespread use of credit scoring, a loan officer could make a subjective interpretation of how likely you were to repay as agreed. Personal judgment could (and often did) influence whether or not people got the credit they applied for.
The availability of credit scores has changed that. Scoring models are objective evaluators, a real plus for consumers.
If one lender turned down my request for credit, will all the others? No necessarily. If you’ve ever shopped for an auto loan, you know that you may qualify at one bank or credit union, yet be turned down somewhere else. Lenders set credit policies for their loan and credit portfolios. They determine the level of risk they can take on for a particular loan product and what interest rate and/or fees to charge to compensate for that risk.
Scores by themselves do not identify individuals as “acceptable” or “unacceptable” customers. They are just one of the factors lenders use when deciding whom to loan to. How big a role the score plays in the final decision depends on the individual lender.
Where do scores come from?
Statistical models located at the major credit bureaus weigh and measure many pieces of information in order to generate a score. A credit score is a composite based on a large number of complex calculations. Scoring models can weigh and balance these varying factors much more quickly and precisely than a human trying to evaluate the same information without the benefit of computerized models.
What’s a good score to get?
Sounds like an easy question to answer, but it’s not. Individual lending institutions decide for themselves which scores are acceptable and which are not for different types of loans or credit. The score is a number, not a recommendation. The scoring user–the lender–makes the decision. That decision may be to offer people with scores indicating higher risk, a higher interest rate rather than turning them down altogether. Or a lender might decide to lower the interest rate for someone who presents minimal risk.
How can I improve my score?
The key to improving your score is to consistently pay bills on time. Credit scores are based on general repayment “patterns,” the mix of credit cards and loans you have, and any indications that you are actively looking for more credit. Your score will improve, as you continue to handle your credit obligations responsibly.
Think of a score as a “snapshot” of credit risk– it reflects your risk picture at a specific point in time. A snapshot doesn’t change, but when you take another one, you will probably look a little different. Similarly, when your credit information changes, your score changes to reflect that. That’s why lenders obtain your most recent score whenever you apply for credit.
What is my score?
And how do I know it’s correct? Your score changes every time information is added to your credit bureau file, so you don’t have one single score. Your score may change when you pay a credit card bill, make a loan payment, or open a new line of credit.
Another reason you don’t have just one score is that there are a variety of scoring systems in use, and they vary widely in their numbering. A 475 from one type of system may not indicate the same level of risk as a 475 from another system.
You can ask your lender to tell you whether a credit score was used as part of the decision. If you were denied credit, you should be told the reasons for denial (called adverse action notification), so you can understand your own credit risk snapshot.
If you think your credit report contains mistakes that may have affected your credit score, you may be right. Request a copy of your credit report. An error in a credit report may well affect your score. The three major U.S. bureaus–Equifax, Trans Union and Experian (formerly TRW)–all have procedures in place for correcting information promptly.
How do I obtain a copy of my credit bureau report?
If you’re turned down for credit, you’re entitled to a free copy of your credit report. Even if you are not turned down, it’s a good idea to review your credit report from each bureau before making a major purchase or at least once a year to make sure the information is correct. Your request for a copy of your credit bureau report will not affect your credit score in any way. Should you find an error in the report, the credit bureau will investigate the item and respond to you within 30 days. Credit bureaus are required by law to follow up on disputes in a timely manner.
Equifax: (800) 685-1111
Trans Union: (610) 690-4909
Experian (formerly TRW): (800) 682-7654
WHAT’S IN A SCORING MODEL?
- Recent payment history
- The amount of credit you have access to and are using
- How long a credit history you have
- Whether you’ve been shopping for credit
- Notification of collection and public record items such as liens and bankruptcies
WHAT’S NOT?
By law, lenders–and scoring models–are prohibited from considering factors such as:
- Your race – Your religion – Your gender
- Whether you’re married, single or divorced
- Where you were born
Need more information? Call Joe Elizondo of Northeast Financial at 323-256-7833 or email Joe at neast-financial @ sbcglobal.net.
Mortgage Loan Application Checklist
The essential first step in the home buying process is a “prequalification” interview with a knowledgeable and experienced loan agent. This important first step will help you set the perimeters of purchase price and monthly costs. You can then make your home buying decision from a position of financial strength, with confidence that you have the ability to complete the purchase.
To expedite the process, you’ll want to collect the as many of the following documents as possible to bring to your “prequalification” interview.
- YOUR IDENTITY
- Copy of Driver’s License or State ID
- Copy of Social Security Card
- Copy of Resident Alien Card
- YOUR INCOME
- 2 current paystubs (most recent)
- 2 years W-2s (most recent)
- 2 years tax returns (most recent)
- If self-employed – current Profet and Loss Statement
- YOUR ASSETS
- Bank accounts: Name of bank, address, account number, balance
- Copies of 3 months bank statements (most recent)
- Stock and bonds, IRAs, Mutual funds (copies of most recent statements)
- If down payment is a gift – gift letter from donor
- YOUR CURRENT DEBTS
- Creditor’s names, addresses, account numbers, balances due
- Name, address, account number, and phone of landlord or current mortgage
- 12 months canceled checks for rent or current mortgage
- If negative items on credit report, letter of explanation
- OTHER REAL ESTATE OWNED
- Present value
- Balance due on mortgage: Name, address, account number of mortgage holder
Need more information? Call Joe Elizondo of Northeast Financial at 323-256-7833 or email Joe at neast-financial @ sbcglobal.net.
What are points?
Points are a one-time, up-front fee charged by the lender to originate the loan. 1 point equals 1 percent of the loan amount.
So, if you need a $300,000 mortgage and you have to pay one point in fees, that charge equals $3,000. Lenders sometimes refer to points as loan-origination fees, discount fees or buy-down fees.
Just like the interest you’ll pay each month, points are essentially finance charges — only you pay them up front.
Paying higher points up front can buy you a lower interest rate over the course of the loan. Paying points lowers your interest rate because the lender is getting a prepaid portion of that interest upfront rather than collecting it in payments across the term of the loan.
Is it better to pay higher points up front or is it better to pay a higher interest rate over the life of the loan? That answer is different for each individual home buyer and depends on many factors including how many years you intend to live in the home and your long term financial goals.
Need more information? Call Joe Elizondo of Northeast Financial at 323-256-7833 or email Joe at neast-financial @ sbcglobal.net.
What does APR (Annual Percentage Rate) mean?
What does APR mean?
Annual Percentage Rate (APR) — Represents the actual note rate of the borrower’s loan at the time of the application plus points and certain closing fees added and re-calculated as if they were interest, and were computed on an annual basis. The APR is i ntended to give consumers a standardized basis to compare the costs of borrowing from different lenders. It is not the actual note rate that will be used to determine the borrower’s monthly principal and interest payment.
How to use APR for comparison:
Is there a wide spread between the APR and the actual note rate? Has a lender has quoted an unusually low note rate, but the APR on the truth in lending statement is equal or higher than the APR stated by competing lenders? Either of these scenarios indicate that a lender might be charging higher points and closing fees to offset a lower note rate.
Need more information? Call Joe Elizondo of Northeast Financial at 323-256-7833 or email Joe at neast-financial @ sbcglobal.net.
What is a mortgage?
A mortgage requires you to pledge your home as the lender’s security for repayment of your loan. The lender agrees to hold a lien on your title until you have paid back your loan plus interest. If you do not repay your mortgage loan, the lender has the right to take possession of your house and sell it in order to satisfy the mortgage debt.
All mortgages have two features in common. The first feature is the mortgage principal, which is the actual amount of money you borrow. So, if you take out a $300,000 mortgage, your mortgage principal is $300,000.
The second feature is the mortgage interest, which is the money you pay for use of the money you borrow. How much interest you pay over the life of your loan depends on a number of factors. The interest you pay on your mortgage can be deducted from your income taxes, which is one of the benefits of homeownership.
Over time, you will repay your mortgage gradually through regular, monthly payments of principal and interest. The amounts of these payments are calculated to let you own your home debt-free at the end of a fixed period of time. During the first few years, most of your payments will be applied toward the interest you owe. During the final years of your loan, your payment amounts will be applied almost exclusively to the remaining principal. This type of repayment method is called amortization.
When you sell your home, you will be required to pay back any remaining principal balance due on your mortgage loan to your lender.
Need more information? Call Joe Elizondo of Northeast Financial at 323-256-7833 or email Joe at neast-financial @ sbcglobal.net.
What is Amortization?
Amortization is the process of paying off a debt by making periodic payments throughout the term of the loan.
Because your monthly mortgage payment is comprised of both Principal and Interest, although the payment amount may stay the same every month, each monthly payment is allocated differently between principal and interest.
At the beginning, each month you are paying mostly interest on the loan, with a small amount going towards payoff of the principal.
As time goes on, that small monthly amount allocated to principal, gradually reduces the principal; and as time goes on less of the payment is allocated to interest, and more is allocated to the principal.
The lender will give you a statement each year showing how much interest you have paid, and your principal balance at the end of the year.
Need more information? Call Joe Elizondo of Northeast Financial at 323-256-7833 or email Joe at neast-financial @ sbcglobal.net.