Home buyers face unprecedented hurdles in qualifying for a mortgage in today’s market, but getting a loan is possible for those who know how to overcome the obstacles, according to a presentation on Cracking the Credit Code at the 2011 Realtors® Conference & Expo.
Data from the National Association of Realtors® shows that 18 percent of NAR members reported contract failures in recent months, which are double the levels of a year earlier. Contract failures are cancellations caused by declined mortgage applications, failures in loan underwriting from appraised values coming in below the negotiated price, or other problems. In many cases, understanding how the credit system works would help buyers avoid problems.
“We need to get back to reasonable lending standards,” said NAR President Ron Phipps, broker-president of Phipps Realty in Warwick, R.I. “That’s why NAR, as the leading advocate for homeownership and real estate issues, is working closely with policymakers and lenders to ensure that mortgages are available and accessible for qualified buyers and real estate investors.”
During the session, Chandra Hall, a Realtor® and real estate instructor from Colorado Springs, Colo., explained that an individual’s credit score is the key to his or her personal economic health. “Your credit score can affect where you work, what car you can drive, how much you pay for insurance and where you live,” Hall said. “It’s imperative to know how credit scoring works and how to achieve the highest possible score.”
Even so, Hall said that many home buyers with good credit are challenged by tight lending restrictions.
Credit scores are derived from payment histories using a wide range of creditors, including credit card companies, home loans, car loans, and department stores. Information also is obtained from court records, which can include bankruptcy filings, tax liens and judgments. “A credit score is simply a numerical representation of your statistical likelihood to repay credit that has been extended to you,” Hall said.
The most widely used model for assigning the statistical probability of repaying debt was developed by Fair Isaac & Company, and is called a FICO score. The scores range from 300 to 850; the higher the score, the better the credit rating. A newer system called VantageScore, developed by the credit reporting bureaus, has gained traction in recent years, with scores ranging from 501 to 990.
NAR analysis shows the average credit score for home buyers using conventional mortgages rose to 760 in 2010 from 717 in 2007. A score of 640 is considered to be a minimum score to get a mortgage, but varies among lenders.
Weighted average FICO scores for conventional loans purchased by Fannie Mae and Freddie Mac eased a bit in the second quarter of 2011, declining to 755, but remain well above historic norms. Less than one percent of loans were offered to buyers with credit scores of 620 or below, and 70 percent of loans were provided to borrowers with credit scores of 740 or higher.
Twenty-five percent Americans have credit scores below 599, almost double the level of two years ago.
Homeowners who have experienced a foreclosure on a conventional loan can expect to have a negative credit score for at least seven years, while a foreclosure on an FHA loan can have a three-year impact. The impact for an owner in a short sale can vary widely, but is much less severe if the owner was current on the mortgage payments.
Realtors® can help educate buyers on how to improve their credit score, including things to do and avoid, such as paying all bills on time and not taking on new sources of debt before applying for a mortgage, such as buying a car or making any other installment purchase.
The Fair Credit Reporting Act protects consumers from unfair treatment as a result of inaccurate information in personal credit files. Individuals may obtain a free copy of their report and have the right to examine, revise, delete old information, inform others of a dispute, or trace who pulled or issued a report. Consumers may check their credit score with one of three credit reporting companies: Equifax, Experian or TransUnion.
“Many credit reports have detrimental errors, such as duplicate items or incorrect credit limits, so it’s important to check yours,” Hall said. “If you’re planning to apply for a mortgage, don’t close an account within six to 12 months in advance. Keep older accounts, even if they’re unused, because the average age of credit accounts is a factor in scoring performance over time.”
There are a number of online resources available, including www.myfico.com/crediteducation, which provides basic credit education; www.annualcreditreport.com, where consumers can get free credit reports with no strings attached; and NAR’s Field Guide to Credit Scoring at www.realtor.org/library/library/fg706a.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.
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Copyright National Association of Realtors. reprinted with permission