Real Estate News

Real Estate Newsletter September

September – Real Estate Newsletter

“Only at the bottom of the – 1981 and 1991 economic downturns were per-house- hold construction levels near what they are now.

The only period when the U.S. might have built fewer homes by population was during WWII.” Jordan Rappaport, Kansas City Federal Reserve Bank

TOP STORY: Knowing the Score

Not so long ago credit reporting was the black hole of lending. Most people knew they had a credit report but had no idea what it might contain. Unless of course they had to explain to a loan officer why five years ago their VISA bill payment had been 30 days late. Ask most people in 2000 about FICO scores and they would have had no clue what they were, let alone be able to recite their own.

While it was difficult for consumers to access their own credit files held by the three major credit bureaus, Experian, TransUnion, and Equifax, almost everyone else seemed able to do so and the use of reports expanded beyond lending. Employers pulled credit reports on both existing employees and potential hires; insurance companies used them as part of their risk calculation in setting premiums, credit card companies used them to market to new customers and check debt levels of existing ones. Complaints about the lack of transparency grew along with abuses as consumers sometimes found themselves denied loans, jobs, or insurance before they were aware of damaged credit whether through their own fault or inaccurate reporting.

The Veil Begins to Lift

In 1996 Congress recognized there were issues with credit reports and passed the Consumer Credit Reporting Reform (CCRR) Act. It made some changes in the ways in which credit reports could be used and began an ongoing process of making it easier for consumers to challenge information on their reports. But most important, it gave consumers the right to obtain a free credit report every year from each of the three major bureaus.

Meanwhile credit scores-pioneered by Fair Isaac Corporation (FICO) first for businesses but by the early 1970s for individuals as well-were becoming increasingly integral to lending. Access to these scores was not affected by the CCRR and the public remained pretty much unaware of them until a few companies began offering their own versions of scores through television ads, and then several major credit card companies began printing them on monthly bills

Today many people know their credit scores and know they are important but often don’t understand how their scores got to be good or bad, how the score affects their borrowing capacity, or how to improve them. Millions of other people don’t have scores, a significant handicap to applying for loans.

Viva la Difference

Even though the terms sometimes get bandied about as though they are the same, credit scores and credit reports are very different creatures. A credit report might better be called a credit history; a straight recounting of an individual’s use of credit. It contains a list of loans and other financial transactions the consumer has had, often going back many years. Typically, each record in the report has the date the account opened and, if relevant, closed, the highest amount the consumer ever owed, the most recent balance, current minimum payment and the performance of the loan. Did the consumer ever pay 30 or 60 days late? Was the loan charged off or the collateral repossessed? Many jurisdictions report tax liens and court judgments to the credit bureaus as well. There is also a history of requests for the report, an indication that the consumer is shopping for credit.

A credit score, while based on the credit reports, uses a single number to summarize a lot more than whether accounts were paid on time. The credit score has a powerful influence on lending, determining not only whether a borrower will get a loan but the interest rate that will accompany it and occasionally other loan terms as well.

While the name FICO is to credit scores what Kleenex is to facial tissue, in recent years all three of the major credit bureaus have developed proprietary models by which their own versions of a credit score is calculated. FICO has become quite open about their scoring so we will use that to explain how it all works.

What’s a Good Score?

FICO scores range from 300 to 850. Those with “excellent” scores over 800 are considered extremely credit worthy and are the borrowers who get the “golden” rates on any type of loan. A score in the 680 to 799 range is viewed as good to very good and those borrowers are most likely to be approved for credit and at very good rates.

The remaining categories descend from being considered OK (620 to 679), to poor, to bad and then very bad (under 500) and at each level the chance of getting a loan declines and the interest rate, should the loan be approved, rises.

Americans have surprisingly good credit scores. Thirteen percent are in the excellent category while 45% have scores that are very good. About 13% are at the other end of the spectrum, with bad or very bad scores.

There are also many people without scores, perhaps as many as 27 million. Sometimes they are unscorable because they have never used credit or it is outdated. Their lack of history and scores becomes a circular problem; without a credit history it is nearly impossible to get credit.

Your Score’s Affect on Loan Rates

FICO provides an illustration on its website of the importance of a good credit score with a hypothetical mortgage loan which a borrower with an excellent (800+) score would get with a 4.153% rate. With a score between 660-679 the rate would rise to 4.766% and at the lowest level where anyonecouldhopetobeapproved-620 or so-the rate would be another full point higher.

A bad credit score is destiny, but only short term; even the worst ones can be improved. FICO’s example above show that a little effort improving even a good score can save substantial money on a new loan or perhaps allow negotiation of existing credit card rates.

Anyone can improve their own score (avoid companies that offer to help) but it does take time. Dings stay on a report for seven years or longer but become less weighty with time.

FREE CREDIT REPORTS

You are entitled to a free credit report from each of the three credit reporting agencies (Equifax, Experian, and TransUnion) once every 12 months. You can request all three reports at once, or space them out throughout the year.

To request your free credit report online: Visit AnnualCreditReport.com

By Phone: Call 1-877-322-8228. Deaf and hard of hearing consumers can access the TTY service by calling 711 and referring the Relay Operator to 1-800- 821-7232.

By Mail: Complete the Annual Credit Report Request Form (PDF, Download Adobe Reader) and mail it to:

Annual Credit Report Request Service, PO Box 105281, Atlanta, GA 30348-5281

What Accounts for Your Score?

Knowing what goes into your score makes it easier to picture how to improve it. Not surprisingly FICO’s scoring model puts the greatest emphasis on loan performance which accounts for 35% of the total score. The company says however that a few late payments are not an automatic score killer. An overall good credit picture can offset a few instances of late payments.

Thirty percent of the score is based on total debt. FICO actually doesn’t care so much about the dollar amount you owe as they do about your credit utilization. For example, a borrower who has two credit cards with a limit of $1,000 and has maxed out both will score lower than one with a total balance of $3,000 on one or more cards that have combined credit limits of $7,000.

The length of your credit history counts for 15% and new credit for 10%. Older accounts that have been managed responsibly weigh heavily in your favor while a lot of recently acquired credit or numerous inquiries from lenders makes credit scorers nervous.

The final 10% is based on the borrower’s credit mix. FICO weighs different types of loans in different ways-revolving credit is riskier than installment credit for example because the latter has an end date. Mortgage debt is viewed more favorably than a loan from a finance company.

ALL STATES SHOWING ANNUAL PRICE GAINS

National home prices increased 7.1 percent year over year in May 2018, and are forecast to increase 5.1 percent from May 2018 to May 2019. Further, an analysis of the market by price tiers indicates that lower-priced homes experienced significantly higher gains, according to the latest CoreLogic Home Price Index (HPI®) Report. – Molly Boesel, CoreLogic

First: Get Your Report

The obvious first step in raising your score is to pull one of those free credit reports (www.annualcreditreport.com will link you to the source) and look for errors; accounts can be reported under the wrong name, identity theft is a growing problem, and sometimes old problems don’t disappear off of reports when they should. Each of the three major credit bureaus posts details on its website outlining how to correct errors or explain the reason for problems.

You are probably already very aware if you are behind on your mortgage or auto loan but you may spot a negative report from a totally unexpected source such as delinquent library materials (we do not kid) or unpaid traffic tickets. Medical bills not paid by insurance in a timely manner (within 180 days) are a frequent problem. Bring everything up to date or contact the creditor and work out a payment plan.

Once any current problems are on the mend make sure you don’t add new ones. Set up a reminder system with payment deadlines for recurring debt or arrange for automatic payments through your bank. Many creditors now offer flexible closing dates which may allow you to consolidate payments into fewer due dates.

Improving Your Score

Next start working toward improving the rest of your score. The quickest way to do this (debt is 30% of the score) is to reduce debt. Of course this is easier said than done but paying only a bit more than the minimum due each month will knock a surprising amount of time off of the repayment period. Concentrate on those accounts with the highest interest rates and, in addition to stepping up payments, call their account retention department and ask for a break on the rate. Then stop using the plastic at least until debt is under control.

Be judicious about opening new credit accounts. A couple of new credit cards might lower your utilization rate but the 10% part of your credit score concerned with new credit will tilt unfavorably if it appears you are about to go on a spending spree or are already anticipating financial difficulties. This is especially important if you are a new credit user as new accounts will lower your average account age and will have a larger effect on the score without a lot of other information for balance. Do all of your shopping for credit within a limited time frame. Credit scoring can differentiate between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.

By the same token, don’t close accounts willy-nilly. A zero balance on an unused card looks good to the credit scorer and if it is an account you have had for a while, closing the account will cut time off of your average credit history.

LOOKING MORE ROSY

“The run-up in mortgage rates earlier this year represented not just a rise in risk-free borrowing costs, but for investors; the mortgage spread also rose back to more normal levels by about 20 basis points. What that means for buyers is good news. Mortgage rates may have a little more room to decline over the very short term.”

“Although the current economic expansion is in its 10th year, residential single family real estate was initially slow to recover. Now, backed by the demographic tailwind provided by millennials reaching the peak age to buy their first home, the housing market should have some room to grow going forward.”- Sam Khater, Freddie Mac’s chief economist

Stay in the Know

Make use of that once a year free credit report and space them out from among the three bureaus. A review every four months or so will let you see your progress in improving your standing and will let you spot problems, especially errors or fraud, before more damage is done. Requesting your own report won’t affect your score as long as you do it directly from the bureau or through an organization authorized to provide it. Avoid those internet ads for free credit scores-they can open up a can of worms.

Getting your credit on track and keeping it there will be worth it in the end. Think how much a 1% reduction in your interest rate could save you over the 30-year life of your mortgage loan.