mortgage Archives

How To Improve Your FICO Credit Score: A Guide

October 7, 2023 by Marco Santarelli

Improving your FICO® credit score is a gradual process that demands patience and diligent financial management. These scores are a crucial measure of your creditworthiness, playing a significant role in determining the terms of loans, mortgages, and credit cards you can secure. They are based on an analysis of your credit payment patterns over a period, giving more weight to recent financial behaviors compared to older ones.

FICO scores provide lenders with insights into your financial responsibility and reliability. Higher scores signify a lower credit risk and can result in favorable interest rates and better loan terms. However, achieving a desirable FICO score requires a consistent history of responsible borrowing and payments.

Tips to Improve Your FICO Credit Score:

Below are some general tips to follow that may increase your FICO credit score:

1. Monitor and Address Negative Factors:

Regularly check the negative factors listed with your FICO score to understand key areas for improvement.
Address these areas diligently to enhance your credit standing.

2. Smart Management of New Accounts:

Avoid opening unnecessary accounts: Opening new accounts for the sole purpose of improving your credit profile is not advisable.
Open new credit accounts responsibly when needed and maintain a positive payment history.

3. Maintain Low Balances on Revolving Credit:

Strive to keep balances low: High outstanding credit card debt can negatively impact your FICO score.
Manage revolving credit responsibly to maintain a favorable credit utilization ratio.

4. Prioritize Debt Repayment:

Focus on debt payoff: Instead of shifting debt between credit cards, work on paying down your total revolving debt.
Prioritize paying off debt to see a positive impact on your FICO score.

5. Timely Bill Payments:

Prompt bill payments: Make sure to pay all your bills on time to maintain a good credit record.
Avoid delinquencies and collections to prevent a major negative impact on your FICO score.

6. Optimize Credit Card Usage:

Responsible credit card management: Utilize your credit cards within the recommended credit limit to showcase responsible financial behavior.
Regular, timely payments on credit cards contribute positively to your FICO score.

7. Strategic Loan Rate Shopping:

Plan your loan rate shopping: If you're looking for a loan, do your rate comparisons within a focused timeframe to minimize negative impacts on your FICO score.

8. Strategic Account Management:

Avoid unnecessary account closures: Closing unused credit cards without a clear reason can potentially harm your FICO score.
Maintain a healthy credit mix and usage to demonstrate responsible financial behavior.

9. Seek Professional Guidance if Needed:

Consult a credit counselor: If you're facing financial difficulties, consider seeking assistance from a legitimate credit counseling service to improve your financial management.
Focus on managing your credit responsibly to enhance your FICO score over time.

10. Rebuild Credit History:

Establish new credit accounts: Responsibly open new accounts to rebuild your credit history and showcase positive financial behavior.
Ensure timely payments on these new accounts to demonstrate creditworthiness.

11. Maintain a Long-Term Focus:

Understand the impact of time: Past credit issues have less influence on your FICO score as they age, and recent good payment history matters more.
Consistent, on-time payments over an extended period will gradually improve your credit profile.

12. Practice Informed Loan Shopping:

Consolidate loan inquiries: When shopping for loans, do so within a concentrated period to minimize the impact on your FICO score.
Be aware of the purpose: Understand how FICO scores differentiate between loan searches to manage your applications wisely.

13. Maintain a Balanced Credit Mix:

Diversify your credit portfolio: Having a mix of credit types, including credit cards and installment loans, can positively influence your FICO score.
Showcase responsible credit management across various credit accounts.

14. Regular Credit Monitoring:

Monitor your credit report: Regularly check your credit report for any inaccuracies or discrepancies that may be affecting your FICO score.
Address errors promptly to ensure an accurate representation of your credit history.

Reasons to Improve Your FICO Credit Score:

Improving your FICO credit score is essential for several compelling reasons:

1. Better Interest Rates:

Having a higher FICO score allows you to qualify for lower interest rates on loans and credit cards. This results in substantial savings over the life of the loan or when carrying a credit card balance.

2. Easier Loan Approval:

A high FICO score increases your chances of getting approved for loans, including mortgages, auto loans, and personal loans. Lenders view a higher score as an indicator of lower risk.

3. Access to More Credit Options:

A good credit score broadens your access to a variety of credit products, providing more options to manage your finances effectively and choose credit that suits your needs.

4. Lower Insurance Premiums:

Insurance companies often use your FICO score to determine your insurance premiums. A higher score can lead to lower premiums, saving you money on insurance policies.

5. Enhanced Rental Opportunities:

Landlords may check your credit score when considering rental applications. A good FICO score improves your chances of securing a rental property and may even lead to better rental terms.

6. Employment Opportunities:

Some employers review credit scores as part of their hiring process, especially for roles involving financial responsibilities. A higher FICO score can positively impact job prospects.

7. Financial Security and Peace of Mind:

Maintaining a good credit score provides a sense of financial security and peace of mind, knowing that you have a strong credit foundation to support your future financial goals and endeavors.

Improving your FICO credit score is a proactive step toward financial well-being and stability, offering a wide array of benefits that can positively impact your financial life.

New FHFA Mortgage Rule: Fees Structure to Change on May 1

September 13, 2023 by Marco Santarelli

The Federal Housing Finance Agency (FHFA) recently announced changes to the loan-level price adjustments (LLPAs) for borrowers with conventional mortgages backed by Fannie Mae or Freddie Mac. The changes, which are set to take effect on May 1, 2023, will impact the pricing structure of mortgages for borrowers.

New Mortgage Pricing Structure

The FHFA's new pricing structure will vary based on credit scores and down payments made by borrowers. Borrowers with higher credit scores and lower down payments are likely to see a reduction in fees, while those with lower credit scores and higher down payments will see an increase in fees. For instance, a borrower with a 700 credit score and a 20% down payment will now pay a fee of 1.375% compared to the previous 1.25% upfront.

Who Benefits and Who Pays More?

Borrowers with a credit score of 780 or higher who put down 3% will pay a fee equal to 0.125% of their loan amount, as opposed to the previous 0.75% of the loan amount. This could translate into significant savings for borrowers. However, the National Association of Realtors has pushed back against these changes, citing affordability concerns for borrowers and compliance issues for lenders.

Another fee change is expected to take effect on August 1, following pushback from the mortgage industry. This change would add an upfront fee for borrowers with a debt-to-income ratio (DTI) above 40%. While some industry leaders have urged the FHFA to reconsider the rule, the FHFA has yet to make any announcements about delaying this particular rule.

What New Rules Mean for People with Higher Credit Scores

While the new pricing structure may have unintended consequences for homebuyers with higher credit scores, it is still better than having a lower score. The new rules could lead to higher closing costs for buyers with higher credit scores, but they will still get a better deal than those with lower scores. It's important to note that these changes will not apply to FHA, VA, or USDA loans, and homebuyers should continue to pay their bills on time and avoid purposely lowering their credit scores.

Potential Risks for Borrowers with Lower Credit Scores

While the new pricing structure may benefit borrowers with higher credit scores, those with lower scores could be at risk of paying higher fees, making it harder for them to qualify for a loan or to afford a home. As a result, industry leaders have expressed concerns about affordability for these borrowers. Furthermore, some experts have pointed out that the new pricing structure could exacerbate existing inequalities in the housing market, particularly for marginalized communities who already face barriers to homeownership.

Lender Compliance Concerns

Lenders face compliance concerns as they try to adapt to the new pricing structure. Many lenders have already invested heavily in their systems to comply with the previous pricing structure, and the new changes could require additional investments in technology and personnel. The National Association of Realtors has urged the FHFA to delay the implementation of the new pricing structure until January 2024 to give lenders more time to adapt.

The new pricing structure will also impact borrowers who are looking to refinance their existing mortgages. Borrowers who have built up equity in their homes may be able to benefit from lower interest rates, but they may also have to pay higher fees if they have lower credit scores. The changes could make it more difficult for these borrowers to refinance their mortgages and access the savings that come with lower interest rates.

FHFA's Response to New Mortgage-Fee Rule

The Federal Housing Finance Agency (FHFA) recently updated the pricing framework for Fannie Mae and Freddie Mac (the Enterprises). This change has attracted a lot of attention and unfortunately, much of what has been reported is based on a fundamental misunderstanding about the fees charged by the Enterprises and the reasons behind their update.

FHFA's Objectives and Actions

The FHFA is primarily a safety and soundness regulator, and the Enterprises were chartered by Congress to provide liquidity, stability, and affordability by facilitating responsible access to mortgage credit through their activities in the secondary market. To achieve this mission, the Enterprises charge fees to compensate them for guaranteeing borrowers' mortgage payments. A portion of these fees are “upfront” fees that are based on the risk characteristics of the borrowers and the loans they are obtaining.

It had been many years since a comprehensive review of the Enterprises' pricing framework was conducted. FHFA launched such a review in 2021, with the objectives to maintain support for purchase borrowers limited by income or wealth, ensure a level playing field for large and small lenders, foster capital accumulation at the Enterprises, and achieve commercially viable returns on capital over time.

FHFA took several steps over the past 18 months to achieve these objectives. First, targeted fee increases were announced for second home loans, high-balance loans, and later, cash-out refinances. Next, upfront fees were eliminated for certain groups core to the Enterprises' mission, such as first-time homebuyers with lower incomes who nonetheless have the financial capacity and creditworthiness to sustain a mortgage. Finally, in January, the upfront fees for most purchase and rate-term refinance loans were recalibrated. These actions work collectively to create a more resilient housing finance system.

Addressing Misconceptions

The final step, in particular, seems to have attracted a series of recent misconceptions despite being announced over three months ago. Director Thompson addresses these misconceptions directly:

Higher-credit-score borrowers are not being charged more so lower-credit-score borrowers can pay less. The updated fees, as was true of the prior fees, generally increase as credit scores decrease for any given level of down payment.

The new framework does not incentivize a borrower to make a lower down payment to benefit from lower fees. Borrowers making a down payment smaller than 20 percent of the home's value typically pay mortgage insurance premiums, so these must be added to the fees charged by the Enterprises when considering a borrower's total costs.

The targeted eliminations of upfront fees for borrowers with lower incomes – not lower credit scores – primarily are supported by the higher fees on products such as second homes and cash-out refinances.

The changes to the pricing framework were not designed to stimulate mortgage demand.

Why This Matters

Since entering conservatorship in 2008, the Enterprises have remained undercapitalized and maintain a taxpayer backstop should they confront significant losses. This change will better protect taxpayers in the long term and put the Enterprises on more durable footing, which will allow them to support affordable, sustainable mortgage credit across the economic cycle to the benefit of all Americans.

The updated pricing framework will further the safety and soundness of the Enterprises, which will help them better achieve their mission. They will provide reliable liquidity to the market while also providing more targeted support for creditworthy borrowers limited by income or wealth. And they will do so with a pricing framework that is more accurately aligned to the expected financial performance and risks of the loans they back.

Summary

The updates made to the pricing framework of Fannie Mae and Freddie Mac are designed to bolster safety and soundness, better protect taxpayers, and support affordable, sustainable mortgage credit across the economic cycle. These changes were made after a comprehensive review of the Enterprises' pricing framework to ensure a level playing field for large and small lenders, foster capital accumulation at the Enterprises, and achieve commercially viable returns on capital over time.

Contrary to recent misconceptions, the updated fees do not unfairly charge higher-credit-score borrowers more to benefit lower-credit-score borrowers, nor do they provide incentives for borrowers to make lower down payments. The targeted eliminations of upfront fees for certain groups, such as first-time homebuyers with lower incomes, are primarily supported by higher fees on other products.

The updated pricing framework will help the Enterprises better achieve their mission of providing liquidity, stability, and affordability in the mortgage market, while also promoting safety and soundness and protecting taxpayers.

References:

https://www.businessinsider.com/personal-finance/biden-fhfa-new-mortgage-fee-structure-2023-4?IR=T
https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-from-FHFA-Director-Sandra-Thompson-on-Mortgage-Pricing.aspx

FHA Likely To Be The Next Shoe To Drop

September 4, 2009 by Marco Santarelli

The FHA is a big reason that home prices haven't fallen even further. The FHA's aggressive lending programs have continued throughout the housing downturn, causing its market share of the mortgage industry to grow from 2% in 2005 to 23% today. The FHA is an even larger percentage of the new home mortgage industry – nearly 25% according to HUD.

The FHA insurance fund, however, is likely running dry. According to a report from mortgage finance experts, the FHA will not meet its minimum requirement as of its fiscal year-end, which is only 26 days from now. For months, we have been investigating this and reporting our findings to our clients.

While almost all of the experts believe that Congress would support the FHA if necessary (it's currently self-funded), we wonder if FHA officials will be under pressure to continue tightening their lending policies, which currently allow 96.5% mortgages to people with 600 FICO scores. Already, FHA has contracted its own standards to require a 10% down payment for those with credit scores below 500.

Claims against the insurance fund have climbed, with roughly 7% of all FHA-insured loans now delinquent.

Given the FHA's September 30 fiscal year-end, this financial reality will come to light about the same time that other market forces run out of steam:

Just as the $8,000 tax credit expires.
Just as more of the stalled REO currently held on banks' balance sheets will be coming to market.

The culmination of all these factors means housing could see another leg down by early next year.

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