Since the development of the FICO credit scoring model in 1989, lenders—including mortgage lenders—have relied on that method for assessing the creditworthiness of people applying for mortgages and other types of loans. The FICO Classic score, developed by Fair, Isaacs & Co., ranges between 300 and 850. Lenders require a minimum of 620 for conventional loans (those that will ultimately sell to Fannie Mae or Freddie Mac), while borrowers with scores as low as 580 may qualify for a loan insured by the Federal Housing Administration (FHA) with as little as 3.5% down.

The FICO Classic does have some drawbacks for consumers. The three credit reporting agencies, Experian, Equifax and TransUnion, have collaborated to develop a new scoring system, called VantageScore, which also generates scores between 300 and 850. The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, is considering the use of this model. It has begun a comment period, which will be open until February 2018. Interested consumers can go to the FHFA’s Request for Information page.

Mortgage giants Fannie Mae and Freddie Mac currently own or guarantee half the mortgages in the United States.

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VantageScore claims that the use of the new model will open the credit window to 7.6 million potential borrowers who do not qualify under the current FICO model. While the specific number may be debatable, there are enough differences between the two scoring systems to allow more people to qualify.

Both scoring systems use the same criteria to generate their scores:

  1. Payment history
  2. Length of credit
  3. Types of credit
  4. Credit usage
  5. Recent inquiries

The differences have to do with how the information from the borrowers’ credit files is processed. Some of the differences may benefit consumers whose credit files are comparatively unseasoned or “thin” (few active accounts).

Both methods consider “hard” inquiries for credit in generating their scores. Too many of them may lower a borrower’s score considerably. Because a consumer often shops around for financing, whether for consumer financing or a mortgage, FICO and Vantage perform “deduplication” of inquiries. This means that they consider multiple inquiries for the same purpose over a certain period to be the same as just one. For FICO, the deduplication period is 45 days. For Vantage, the time is shortened to just 14 days.

FICO requires at least six months’ history before issuing a score. Vantage would shorten that period to just one month. This is of particular interest to younger borrowers just beginning to establish credit.

FICO judges delinquent payments on all types of credit in essentially the same manner, while Vantage treats late payments on mortgages more harshly.

It is unlikely that there will be any changes to credit scoring in the immediate future, but it is important for consumers to be aware of the mechanism for any credit scoring system so that they can adjust their financial behavior accordingly.

Source: TBWS

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newhomecosts

FHA loans are going to be more expensive.  Starting in April a lot of first time home buyers will be hit with changes to FHA loans that will cost tens of thousands of dollars.  A recent HUD Motgagee letter (2013-04) outlines changes to both an increase in monthly payments amount and the elimination of the ability to cancel monthly mortgage insurance premium (MIP) payments.  The results translate into over $20,000 of additional payment amounts over the course of one $300,000 FHA loan or over $10,000 over the life of a $150,000 FHA loan.

Tables of the FHA MIP changes:

 Effective for case numbers assigned on or after April 1, 2013. MIPchart2012a

 Effective annual MIP rates for loans  or after June 3, 2013

MIPchart2012b

 

Sometime in the near future HUD is also expected to increase the required minimum investment to 5% from 5.5% on some larger FHA loans and cap debt to income ratios to 43%.

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Credit score FICO improvementFor home buyers in Richmond and nationwide, credit scores can change low mortgage rates and alter home loan approvals.

Borrowers with high credit scores get access to lower mortgage rates, for example, and can find the mortgage approval process to be more smooth that borrowers with low credit scores.

If your credit score is low, here are some basic ways to help improve it. 

Get The Reports
Download an updated version of your credit report from each of the three major reporting bureaus — Equifax, Experian and TransUnion. The reports may mirror each other, but credit accounts — especially derogatory ones — sometimes don’t appear on all three. Ordering reports from all three bureaus is a safety step. Note that the credit bureaus each use different scoring models so your credit scores will vary.

Check For Errors
Yes, credit reports can have errors in them. Should you find any items on any of the three credit reports which, in your opinion, do not belong or are erroneous, contact the credit bureau regarding removal. Errors on a credit report must be addressed with each bureau individually. 

Pay Up 
Or, rather, pay down. Be diligent about paying down your credit card balances in order to lower the percentage of your credit line(s) in use. In general, aim for a 30% ratio or less. An added benefit of paying down debt is that it can lower your total monthly debt load, which can increase your maximum home purchase price.

For items which are harming your score, such as a 30-day or 60-day mortgage late payments, medical collection items, and/or judgments, consider writing a brief letter which explains the circumstance of the derogatory credit event. Such a letter won’t help your score to improve, but it can help your lender to make better credit decisions, which can aid in “exceptions”, if required.

Making even minor changes to an overall credit profile can yield measurable long-term results. It can also result in lower mortgage rates.

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