What is a Short Sale?

What is a Short Sale?
A short sale is a short sale is a property that sells for less than the balance owing on its mortgage. A short sale can be an underwater home, an apartment building or even vacant land. If there is a mortgage balance that is greater than the market value of the home, that property is a short sale.

Not every property qualifies as a potential short sale in a bank's eyes. A bank must agree to grant a short sale. Banks are under no obligation to approve a short sale. Banks will grant a short sale if the bank feels it is in the bank's best interest to approve the short sale. It is in the bank's best interest to approve the short sale if the bank will make more money through the short sale than to foreclose. It is estimated that banks might save 25% to 30% on foreclosure costs to grant a short sale over a foreclosure, but some investor guidelines make it more profitable for the bank to foreclose.

What is Necessary for a Short Sale? 
Most short sale transactions are handled by real estate agents who specialize in short sales.
There are 4 essential ingredients to a short sale; however, strategic short sales, those without a hardship, are also possible.

What makes a short sale work are the following:

• An underwater home 
• A willing short sale bank 
• A seller with a hardship 
• A buyer willing to purchase the home

What Role Do Real Estate Agents Play in a Short Sale? 
Some real estate agents throw homes on the market that will never close as a short sale. That's because the agents do not always qualify the short sale sellers. Some agents place unrealistic price tags on the short sale, which the bank will never accept.

It is wise to choose an experienced short sale agent who has closed at least 100 short sales.

Here is what an agent does in a short sale:

• Determines the type of short sale. There are many types of short sales, from Fannie Mae HAFAs to regular, non-GSE HAFAs to a traditional short sale, and a few more in between. 
• Gathers the required paperwork and submits the short sale package to the bank. Sometimes agents outsource this part of the process or they might hire a third-party to negotiate the short sale. 
• Helps the seller to price the short sale home. The price needs to be attractive enough to entice a buyer to wait for short sale approval but high enough to satisfy the bank's BPO. 
• Puts the home on the market. The agent must submit all offers received to the seller. Some offers will be lowball offers because buyers don't know any better. 
• Negotiates the short sale. Sometimes sellers will hire a lawyer to do the short sale, but often it's the agent who negotiates with the bank on behalf of the seller. 
• Submits the short sale approval letter to the seller. Most sellers want a release of liability and no deficiency to do a short sale. State laws tend to govern the terms in the approval letters. 

Sellers should always get legal and tax advice before completing a short sale.

What does an Appraiser Look for in Your House?

What does an Appraiser Look for in Your House?
The appraiser looks at sq. footage, basic amenities, and then finds comparable's in your neighborhood.


Ideally they are looking for a house just like yours within a few blocks that has sold within the last month. Now the odds of that are slim unless you live in a HUD development. But in general you want to replace items in your home that are older than the typical life expectancies, windows, furnace, water heater, A/C, roof, siding, other appliances, cabinets, counter tops, plumbing fixtures, older than 15-20 years. Carpet, flooring, paint, ceiling texture older than 10 years. Landscaping should be fresh and well maintained. These should all be pointed out to the appraiser. 

The biggest things you can do is add finished Sq. footage, finish the basement, add on, add a bathroom, add a gas fireplace, add garage space 3 stalls is ideal, (increase the amenities). As a former home flipper, you want to buy the ugliest house on the neighborhood and turn it into the 2nd-4th best in the neighborhood. Not first best because the other homes bring your value down, but above average so yours will sell fast. 


As most realtors will tell you neighborhood need curb appeal. Buyers should want to look at the inside, not be turned off from the street. Additionally I would look at your market area, house prices in general are on the decline, now is the time to make improvements because contractors are looking for work and giving deals. You want to be fairly confident you live in an area where the housing market will recover. Will the job market recover? Is a long commute necessary? Gas prices are bringing buyers back to the city/inner suburbs.

What Is the Job of a Loan Officer?

What Is the Job of a Loan Officer? 
If you have ever thought about purchasing a home, one of the main things that may go through your mind is “what is the job of a loan officer?” 


A loan officer usually works for a bank or a mortgage company that specializes in mortgage loans. 


A loan officer is a financial liaison that helps people and businesses get the funding that they need from a lender. They usually specialize in either commercial or individual mortgage loans, although they can also handle other types of credit such as personal loans. 


A loan officer will typically spend some of his day searching for potential clients to service via making cold calls. They may also use a list to work from in order to make contact with potential customers. 


Once a loan officer has secured a client, most of the time, people think of loan officers as their personal liaison between a commercial or home loan lender and the borrower. The loan officer may have a group of financial representatives or banks and lenders that they can reach out to when trying to seal the deal and secure a loan for borrowers. 


The core job of a loan officer is to help borrowers get the loan that they need, whether it is for a home or business. A loan officer may also: 

• Pre-qualify buyers for loans in certain instances 
• Help borrowers complete their applications 
• Run credit checks 
• Advise clients on how they can get the loan they need 

Qualifications of a Loan Officer
Usually you will find that a loan officer has a Bachelors degree in either business, finance or economics. Some may even have banking experience. On occasion you may even find a loan officer who has a solid background in mathematics. 


The daily duties of a loan officer vary and include: 

• Constant communication with the client and the lenders either via the telephone or over the Internet Traveling to the client or lender 
• Visiting customers 
• Drafting paperwork 
• Perform online credit checks 
• Draft correspondence 

Having a job as a loan officer will definitely require an ambitious mindset, a penchant for hard work, determination, and the ability to thrive in all environments. There will be times when the pressure is high as well as times where the work day is slow. 


As a loan officer you have to have that special something that makes people want to say yes to you. It is important to be a good salesperson, because for every 100 “nos” you will get at least one “yes.” Loan officers live by the law of averages and make every effort to get their customers the loans necessary for their needs. You will find that most loan officers are eager and determined to get their jobs done effectively.


Source:  YourDictionary

Loan Officer at Banks and Mortgage Brokers

Loan Officer at Banks and Mortgage Brokers
Loan Officers
We'll give you the average profile of a loan officer working for a mortgage broker. Knowing this may give you an insight on the guy that has your life savings in his/her hands. The average loan officer: 

• Has no college degree, may never have finished high school. 
• Makes about $1,500/month (about $500/loan) for which they typically work like dogs. Spends their day getting rejected while looking for business: visiting real estate offices, cold calling customers, going to banks looking for rejected loans, sending out mailers. 
• Gets viciously yelled at by borrowers, title companies, realtors, builders, underwriters, and his/her boss. This is part of the day, no matter how good a loan officer is. 

Loan Officers are are heavily involved in one of the biggest purchases a person makes in a lifetime, and everything about the deal looms large and frightening for the borrower. Mild mannered people turn in to screaming monsters if anything goes wrong, and there are so many things that can hold up a loan. It's not a fun business, it's stressful, hard work, and it's a good day if no one gets upset with the loan officer. Have a heart for these guys. And also realize that most of them don't respond to yelling, hysterics or threats. It's nothing new to them and will only get you an increase in loan fees as compensation for your abuse or get you terrible service. They're people, too. 


If you have less than perfect credit or a tough situation, the loan officer specializing in these non-conforming loans knows he or she will work harder for this deal and will either: 


a) hope you will be impressed enough to send many referrals in the future, or 


b) charge you more money. 


Guess which one they will usually pick? The loan officer sees an opportunity to make a little extra income. Remember the real costs involved in doing a loan. 


You should keep in mind that if you can't get an 'A' loan, the loan officer may only be able to find a loan for you which is certainly higher in interest rates, and possibly in fees, too. There are special loans for non-conforming situations. 


Especially with tough or non-conforming loans, the loan officer may charge extra points to get the loan through. How much extra is their call (and yours; you can always walk away.) However, overcharging isn't the norm: Loan officers with clients who feel they've been overcharged don't get repeat business, the real money in this industry. Unfortunately, you still need to be careful about the guy who will shaft you. Desperate people can get taken because they'll do anything to get a loan. 


If you think you're being overcharged, shop. Most brokers have access to the same products (meaning they can usually find and buy the same loans as other brokers), so call around and compare interest rates and fees, especially if you're not an 'A' loan. Don't believe the loan officer who tells you that you won't get a loan anywhere else. By shopping around, you can usually reveal who's trying to gouge you. Once you find the interest rate and fees you can live with, fill out an application at the broker's office, and lock the terms of the loan. 


A broker is your only option when: 

• you have less than perfect credit 
• are self employed (and can't prove your income) 
• just switched professions 
• or have a high debt load

Mortgage brokers can get you a loan when the banks just aren't interested in the hassle. But you will pay more in both fees and interest rates for getting your loan through. 

A bank is the best option if: 

• you have top notch credit 
• steady job/work history 
• low debt loads 
• are self-employed, but your last 2 years of income tax returns easily prove your income. 

A broker may have competitve rates/fees as compared to a bank, so don't necessarily rule out a broker even if you'd qualify for a bank loan.


Source:  CreditInfoCenter

Mortgage Broker or My Bank - Which One is Better?

Mortgage Broker or My Bank - Which One is Better?
A mortgage broker "buys" loans from a variety of mortgage lenders at a wholesale cost, and sells the loan to another mortgage banker, receiving a commission on the sale.


A banker, gets a loan from your local bank. A banker usually, but not always, has their own money to lend out and makes a profit by collecting loan fees and the interest the customer pays on the loan, called servicing fees. However, most banks package up loans in packets of $1,000,000 dollars or more and sells them to the secondary market, making a commission on the sale. Why? What are interest rates right now, 7 or 8%? The stock market and mutual funds are averaging 15% returns or more. Why have millions of dollars tied up in low return investments?


Banks 
No matter what people will tell you, your best deals usually are at a bank. I mean the same building where you get your checking and savings accounts, not a mortgage company with the same name as your local bank. This is because there aren't a lot of add-on fees and middlemen who touch your loan and get paid for it. Plus, these guys do a volume business and therefore can cut corners on costs. The employees generally don't get a commission, just an hourly rate, so they aren't looking for ways to charge you extra. (No, that doesn't happen, does it? Yeah, and I have a bridge to sell you, too.) They also may lend out their own money, making money through the servicing of a loan, not in charging origination fees.


One of the reasons that a bank is cheaper: Banks don't give out loans to anyone without 'A' credit, job stability, long-time residence and good income. If you fit their criteria, giving you a loan is practically automatic and follows the same procedure every single time, without extra work or effort on the part of the bank.


As we stated, the banks make money by processing a cookie cutter type of loan. If you don't fit the 'A' profile in job, credit, and income, forget it: why should the loan officer do any extra work if and not be paid for it? Your loan gets pitched in the reject pile automatically. It's not that you're not a good loan risk, but look at it from the loan officer's point of view.


In the banks that do pay commission, a loan may pay a flat $100 commission for every loan. Therefore, why would a loan officer work on a loan that takes the time of two easy loans? He/she would make $100 less for the same work. It's just common sense for them to pitch out a difficult loan.


And the banks that don't pay commission? Are you kidding? Why deal with the stress if you you can just stamp 'reject' on the file? Those rejected files? This is where the mortgage broker comes into play.


Mortgage Brokers 
In the mortgage broker world, you usually pay higher fees/interest rate for getting your loan through. The sharp loan officer can take a look at your application and know in advance how much effort it will be to get your loan through the system. Not every broker handles difficult loans, most prefer handling 'A' clients. Again, it's easier, like the guys working in the banks: they'd rather make a lower commission for less hassle and go for volume.


So why would an 'A' client go to a broker? The reasons are numerous: clients may not have tried the bank, the broker actually has a better deal (it happens) , either in interest or fees, or their realtor recommends them. Usually the broker, if they're good and have been in the business a while, has a regular clientele consisting of real estate agents or referrals by past satisfied customers. Buying a house is very stressful; a competent, hand-holding professional may be a service worth paying for. Keep this is mind, it's one of the things you should consider for when shopping for a loan.


Source:  CreditInfoCenter

Four Big Money Mistakes First Time Homebuyers Make

Four Big Money Mistakes First Time Homebuyers Make
First-time homebuyers almost always make a few mistakes when buying their home. Perhaps they pay too much, choose the wrong type of mortgage or neglect to budget for needed home improvements.

 Working with a trustworthy, experienced lender can help prevent such mistakes. But consumers also need to take responsibility for their budgets and choices.

 "Before buying a home, consumers need to develop a short- and long-term perspective on their purchase," says Michael Harrison, area director for MetLife Home Loans in Southwest Ohio. Following are the four biggest financial mistakes of first-time homebuyers:

Spending the Maximum on Housing
Lenders qualify buyers based on their incomes and debt-to-income ratios without considering how much the borrowers spend on items such as transportation, savings, food and other necessities.

"A lot of first-time buyers are optimistic about the future and excited about buying a home, so they borrow the absolute maximum they can afford instead of allowing themselves wiggle room for a partial loss of income or for future expenses such as children," Harrison says. Financial experts recommend that consumers decide how much they want to spend each month on housing before meeting with a lender. 

"Every buyer should create their own budget and know their limits," says Stephen Adamo, president of Weichert Financial Services in Morris Plains, N.J. Adamo says many first-time homebuyers experience a sizable change in their housing payments. Some new owners may go from $500 per month in rent to a monthly mortgage payment of $2,000, he says. "You need to deal with payment shock," Adamo says.

Not getting pre-qualified early enough
Meeting with a lender for a buyer consultation and pre qualification for a mortgage should be the first step toward homeownership. Yet many first-time homebuyers wait until they are ready to start house hunting before contacting a lender.

 "It's never too early to set up a free buyer consultation with a lender," Adamo says. "Every buyer needs to get pre qualified early enough in the process so that they can make some changes if they need to or correct errors on their credit report." Some buyers may need to spend up to a year saving more money, increasing their incomes or cleaning up their credit before making an offer on a home.

A buyer consultation should include creating long-term financial goals and strategies for buying property, Adamo says.

Misunderstanding the Importance of a High Credit Score
While most consumers know it's important to have a high credit score, not everyone understands how costly a low score can be.

"All mortgage lending is done with a tier of interest rates and terms based on consumer credit scores," Harrison says.
"A credit score of 720 or above will earn you the best rates and can potentially save you thousands of dollars." A score of 680 to 720 can get you good mortgage rates, while a FICO score of 620 is usually about the lowest score to qualify for most loans, Harrison says. Consumers should learn about credit scores the minute they start working, Harrison says.

Websites such as Bankrate provide information about how to improve your credit score. Even after a mortgage approval, consumers must avoid applying for new credit or taking on new debt, Adamo says, because a second credit check is often required before settlement.

Choosing the Wrong Mortgage Product
First-time homebuyers today typically opt for a 30-year fixed-rate mortgage. Their conservatism is a reaction to stories about the dangers of interest-only mortgages and adjustable-rate mortgages. But Harrison says home loan alternatives to a 30-year-fixed sometimes make more sense.

For example, buyers certain they will be relocated by their companies within five years may find a 5/1 ARM "could be a much better mortgage," he says. "There's no reason to pay a premium for a product you don't need like a 30-year loan," Harrison says.

Homebuyers eager to build equity in their homes or who are older and want to live mortgage-free in retirement should consider a 15-year fixed-rate loan or, if they can afford it, even a 10-year mortgage to reach their goals.

Source:  Bankrate

What's the APR and How is it Calculated?

What's the APR and How is it Calculated?
The term annual percentage rate (APR), also called nominal APR, and the term effective APR, also called EAR, describes the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc.

It is a finance charge expressed as an annual rate. Those terms have formal, legal definitions in some countries or legal jurisdictions, but in general:

• The nominal APR is the simple-interest rate (for a year). 
• The effective APR is the fee+compound interest rate (calculated across a year). 

The nominal APR is calculated as: the rate, for a payment period, multiplied by the number of payment periods in a year. However, the exact legal definition of "effective APR", or EAR in short, can vary greatly in each jurisdiction, depending on the type of fees included, such as participation fees, loan origination fees, monthly service charges, or late fees. The effective APR has been called the "mathematically-true" interest rate for each year. The computation for the effective APR, as the fee+compound interest rate, can also vary depending on whether the up-front fees, such as origination or participation fees, are added to the entire amount, or treated as a short-term loan due in the first payment. When start-up fees are paid as first payment(s), the balance due might accrue more interest, as being delayed by the extra payment period(s).

In some areas, the annual percentage rate (APR) is the simplified counterpart to the effective interest rate that the borrower will pay on a loan. When not using the term "effective APR", the use of "APR" is an early term for nominal APR. In many countries and jurisdictions, lenders (such as banks) are required to disclose the "cost" of borrowing in some standardized way as a form of consumer protection. APR is intended to make it easier to compare lenders and loan options. The APR is likely to differ from the "note rate" or "headline rate" advertised by the lender, due to the addition of other fees that may need to be included in the APR. APRs can be found by asking the lender or by reading the appropriate section in the contract.

In the U.S. and the UK, lenders are required to disclose the APR before the loan (or credit application) is finalized (although the definition of "APR" is not the same in the two countries-–see below). Credit card companies can advertise monthly interest rates, but they are required to clearly state the annual percentage rate before an agreement is signed. APR is a term used with regard to deposit accounts as well. However, when dealing with deposit accounts, the annual percentage yield (APY) or annual equivalent rate (AER) is quoted to consumers for comparison purposes.

There are at least three ways of computing effective annual percentage rate: 

• by compounding the interest rate for each year, without considering fees; 
• origination fees are added to the balance due, and the total amount is treated as the basis for computing compound interest; 
• the origination fees are amortized as a short-term loan. This loan is due in the first payment(s), and the unpaid balance is amortized as a second long-term loan. The extra first payment(s) is dedicated to primarily paying origination fees and interest charges on that portion.

Source: http://en.wikipedia.org/

What is Zillow.com?

What is Zillow.com? 
If you are a real estate professional you probably know about the website Zillow.com. But for the benefit of those who don’t know what Zillow is, it is a real-estate website which is dedicated to giving its hundreds of users tons of information about almost any property in the United States. 


It helps realtors, buyers and sellers educate themselves and be aware of as many details as possible that have to deal with buying a potential home, or in selling a home. It is for this reason that Zillow is the most popular real estate website and why many people make use of it. 


There are hundreds of real estate sites on the internet. Another site is Realtor.com – a great website that lists homes for sale by realtors from all over the United States. 

This is where Zillow.com comes in because it does a good job in completing or filling in the information holes that Realtor.com leaves. Some states have better Zillow coverage than others. 


Currently in the state of Tennessee, Zillow.com brags of its 80-100% coverage. There is about 67 million homes across the United States that Zillow.com covers. 


The best thing about Zillow.com is it’s Zestimate. Zillow uses data that has been combed from public records to determine the square foot of a home, how many rooms it has and then integrates all of this information with the selling prices of recently sold homes within the area in order to determine the Zestimate of your home. 


But what Zillow cannot do here is to determine the added value of extra features of the home like a recently added jacuzzi or upgraded siding and windows. Zestimate is a little controversial because many realtors feel that the estimate they get is not accurate and may give potential home sellers biased expectations when it comes to the value of their home. 


Another thing about Zillow is you don’t need to register to use Zestimate but if you need to update the profile of your home you do have to register. Once you’re signed in you can edit your home’s profile anytime. Any details you can add about your home will allow Zillow to make the Zestimate more accurate. 

Zillow is always adding features to make their website a lot better and useful for everyone. Are you trying to sell your house? Zillow allows its users to list their home for free on the website. And there is also the “Make Me Move” feature which lets you put the amount or budget you need to pack up and move then wait for the offers. 


If you want to know how desirable your home is you can use this feature. There are many reasons why people like Zillow too. Because it starts conversations, it increases awareness and it allows the consumer to get a jumping off point before they set out on their buying or selling venture. 


So Zillow is an especially handy tool for buyers, sellers and realtors right? Not only is Zillow a resource to help market your homes or properties to an even wider audience but it also gives you a better chance of a sales success.


Source:  http://www.openingdoorsllc.com/

Interest Rates are at All-Time Record Low

Interest Rates are at All-Time Record Low
Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates finding new all-time record lows continuing to help keep homebuyer affordability high. 

The 30-year fixed averaged 3.84 percent, down from its previous all-time record low of 3.87 percent last registered on February 9, 2012. 
The 15-year fixed averaged 3.07 percent, also dropping below its previous all-time record low of 3.11 percent set April 12 of this year. 
The 1-year ARM also averaged a new all-time record low in the PMMS at 2.70 percent. 

News Facts 

• 30-year fixed-rate mortgage (FRM) averaged 3.84 percent with an average 0.8 point for the week ending May 3, 2012, down from last week when it averaged 3.88 percent. Last year at this time, the 30-year FRM averaged 4.71 percent. 
• 15-year FRM this week averaged 3.07 percent with an average 0.7 point, down from last week when it averaged 3.12 percent. A year ago at this time, the 15-year FRM averaged 3.89 percent. 
• 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.85 percent this week, with an average 0.7 point, unchanged from last week when it averaged 2.85 percent. A year ago, the 5-year ARM averaged 3.47 percent. 
• 1-year Treasury-indexed ARM averaged 2.70 percent this week with an average 0.6 point, down from last week when it averaged 2.74 percent. At this time last year, the 1-year ARM averaged 3.14 percent. 

Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage.


Source:  http://www.thenichereport.com/

Is my Home Mortgage Interest Fully Deductible?

Is my Home Mortgage Interest Fully Deductible?
Look at the following graph to see if you qualify to take a full deduction on your home mortgage.

Source: http://www.irs.gov/

Mortgage Interest Deduction

Mortgage Interest Deduction 
The mortgage interest deduction encourages homeownership by allowing you to deduct when filing your federal income tax 100 percent of the interest paid on the home mortgage


The mortgage company reports to the IRS all the mortgage interest you paid in a tax year (January 1 to December 31) and sends you a statement of total interest paid on a Mortgage Interest Statement, Form 1098. The principal portion of the mortgage is not tax deductible.

Mortgage interest can substantially reduce your tax liability. 

Step 1 
Complete IRS form 1040 by inputting filing status, income and deductions on the appropriate lines. 
Use the standard deduction, or, if you itemize on Schedule A, use your total itemized deductions, less mortgage interest. 
Calculate tax or refund due using your taxable income and the IRS-provided tax charts. 
Call this total A. 


Step 2 
Prepare a second 1040, using your mortgage interest (reported to you on Form 1098) as part of total itemized deductions. 
Use the tax charts and your taxable income to determine tax or refund due. 
Call this total B. 


Step 3 
Subtract total B from total A. 
The difference is your tax savings due to the mortgage interest deduction. 
For example, if you owed $15,000 in taxes without the mortgage interest deduction (A) and $3,000 with the mortgage interest deduction (B), your tax savings is $12,000 ($15,000 minus $3,000). 

Things Needed 

• Schedule 1040, 
• 2 copies Schedule A, 
• 2 copies Form 1098

Key Factors of Your Credit Score

Just what goes into the score? Everything in your credit report, with different kinds of information carrying differing weights, says Fair Isaac Corp. Public Affairs Manager Craig Watts. The FICO-scoring model looks at more than 20 factors in five categories. (The VantageScore relies on slightly different factors. The Bankrate feature "New Vantage credit score now online" compares the FICO score with VantageScore. )

1. How you pay your bills (35 percent of the score)
The most important factor is how you've paid your bills in the past, placing the most emphasis on recent activity. Paying all your bills on time is good. Paying them late on a consistent basis is bad. Having accounts that were sent to collections is worse. Declaring bankruptcy is worst.

2. Amount of money you owe and the amount of available credit (30 percent)
The second most important area is your outstanding debt -- how much money you owe on credit cards, car loans, mortgages, home equity lines, etc. Also considered is the total amount of credit you have available. If you have 10 credit cards that each have $10,000 credit limits, that's $100,000 of available credit. Statistically, people who have a lot of credit available tend to use it, which makes them a less attractive credit risk.

"Carrying a lot of debt doesn't necessarily mean you'll have a lower score," Watts says. "It doesn't hurt as much as carrying close to the maximum. People who consistently max out their balances are perceived as riskier. People who never use their credit don't have a track history. People with the highest scores use credit sparingly and keep their balances low."

3. Length of credit history (15 percent)
The third factor is the length of your credit history. The longer you've had credit -- particularly if it's with the same credit issuers -- the more points you get.

4. Mix of credit (10 percent)
The best scores will have a mix of both revolving credit, such as credit cards, and installment credit, such as mortgages and car loans. "Statistically, consumers with a richer variety of experiences are better credit risks," Watts says. "They know how to handle money."

5. New credit applications (10 percent)
The final category is your interest in new credit -- how many credit applications you're filling out. The model compensates for people who are rate shopping for the best mortgage or car loan rates. The only time shopping really hurts your score, Watts says, is when you have previous recent credit stumbles, such as late payments or bills sent to collections.

"Then, looking for new credit will be seen as an alarm because statistically, before people declare bankruptcy and default on everything, they look for a life preserver," Watts says. Also, if you have a very young credit file, an inquiry can count for more than if you've had credit for a long time.

What doesn't count in a score
The scoring model doesn't look at:

• age
• race
• sex
• job or length of employment at your job
• income
• education
• marital status
• whether you've been turned down for credit
• length of time at your current address
• whether you own a home or rent
• information not contained in your credit report

A lender may consider all those factors when deciding whether to approve a loan application, but they aren't part of how a FICO score is calculated, Watts says.

Credit scores are not perfect
The major drawback to credit scoring is that it relies on information in your credit report, which is quite likely to contain errors. That's why it's critical that you check your credit reports annually, or at the very least three to six months before planning to buy a house or a car. That will give you sufficient time to correct any errors before a lender pulls your score.

Watts says that the need for accuracy in credit files is one reason why it's good for consumers to learn about credit scores.

"There's a hope that as consumers know about credit reports and scores, they'll do more to correct errors and provide more oversight," he says. "If consumers can police the accuracy of their own reports, everybody gains."

How does Credit Scoring Works? How is a Score Calculated?

Ever wonder why you can go online and be approved for credit within 60 seconds? Or get pre-qualified for a car without anyone even asking you how much money you make? Or why you get one interest rate on loans, while your neighbor gets another?

The answer is credit scoring.

Your credit score is a number generated by a mathematical algorithm -- a formula -- based on information in your credit report, compared to information on tens of millions of other people. The resulting number is a highly accurate prediction of how likely you are to pay your bills.

If it sounds arcane and unimportant, you couldn't be more wrong. Credit scores are used extensively, and if you've gotten a mortgage, a car loan, a credit card or auto insurance, the rate you received was directly related to your credit score. The higher the number, the better you look to lenders. People with the highest scores get the lowest interest rates.

Scoring categories
Lenders can use one of many different credit-scoring models to determine if you are creditworthy. Different models can produce different scores. However, lenders use some scoring models more than others. The FICO score is one such popular scoring method.

Its scale runs from 300 to 850. The vast majority of people will have scores between 600 and 800. A score of 720 or higher will get you the most favorable interest rates on a mortgage, according to data from Fair Isaac Corp., a California-based company that developed the first credit score as well as the FICO score.

Fair Isaac reports that the American public's credit scores break out along these lines:

Currently, each of the three major credit bureaus uses their own version of the FICO scoring method -- Equifax has the BEACON score, Experian has the Experian/Fair Isaac Risk Model and TransUnion has the EMPIRICA score. The three versions can come up with varying scores because they use different algorithms. (Variance can also occur because of differences in data contained in different credit reports.)

That could change, depending on whether a new credit-scoring model catches on. It's called the VantageScore. Equifax, Experian and TransUnion collaborated on its development and will all use the same algorithm to compute the score. Consumers can order their VantageScores online at Experian's Web site for $6. Its scoring range runs from 501 to 990 with a corresponding letter grade from A to F. So, a score of 501 to 600 would receive an F, while a score of 901 to 990 would receive an A. Just like in school, A is the best grade you can get.

What's the big deal?
No matter which scoring model lenders use, it pays to have a great credit score. Your credit score affects whether you get credit or not, and how high your interest rate will be. A better score can lower your interest rate.

The difference in the interest rates offered to a person with a score of 520 and a person with a 720 score is 4.36 percentage points, according to Fair Isaac's Web site. On a $100,000, 30-year mortgage, that difference would cost more than $110,325 extra in interest charges, according to Bankrate.com's mortgage calculator. The difference in the monthly payment alone would be about $307.

Powerful little number
If you rented an apartment, got braces, bought cell phone service, applied for a job that involved handling a lot of money, or needed to get utilities connected, there's a good chance your score was pulled.

If you have an existing credit card, the issuer is likely to look at your credit score to decide whether to increase your credit line -- or charge you a higher interest rate, according to a credit scoring study by the Consumer Federation of America and the National Credit Reporting Association.

Buying a car? Most car dealers want to know your credit score when you walk in the door, says Bob Kurilko, vice president of product development and marketing for Edmunds.com, an online consumer resource for automotive issues. "They want to know how they can put a loan together for you."

The score has made it easier for many people to get credit, Kurilko says.

Before, it was up to individual lending institutions to come up with their own criteria, he says. "They would hedge their risk and tend to go conservatively. It's opened up lending to a lot more people."

Consumers' rights
Until recently, many Americans didn't even know this number existed because it was a closely guarded secret in the lending industry. In fact, lenders were prohibited from telling borrowers their credit score. The line of reasoning: The number was the result of analyzing complex financial data that the layperson would have difficulty understanding. Plus, if people knew their score (according to the industry mindset at the time), they might be able to change their behavior to manipulate the score and throw off the whole model, rendering it useless.

All that changed a few years ago, when consumers began finding out about the score and demanding to see it. In an unprecedented move in 2000, online lender E-Loan offered to give consumers their scores for free, with information explaining how the score is calculated and how they might improve it. Fair Isaac responded by cutting E-Loan off from its source of credit reports, effectively crippling its ability to lend money. E-Loan stopped giving away credit scores.

Public outcry on the possibility of people being denied credit based on bad information in credit reports led to several pieces of legislation -- and a much more open attitude about credit scores.

Fast forward to current day: Not only can consumers buy their score online from any number of sources, but everyone is entitled to a free copy of their credit report every 12 months from each of the three major credit bureaus -- Equifax, Experian and TransUnion. The program rolled out across the nation one geographical region at a time with all consumers eligible on Sept. 1, 2005.

Reverse Mortgage - Get the Facts

Reverse Mortgages: Get the Facts Before Cashing in on Your Home’s Equity

If you’re 62 or older – and looking for money to finance a home improvement, pay off your current mortgage, supplement your retirement income, or pay for healthcare expenses – you may be considering a reverse mortgage. It’s a product that allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills.


The Federal Trade Commission (FTC), the nation’s consumer protection agency, wants you to understand how reverse mortgages work, the types of reverse mortgages available, and how to get the best deal.


In a “regular” mortgage, you make monthly payments to the lender. In a “reverse” mortgage, you receive money from the lender, and generally don’t have to pay it back for as long as you live in your home. The loan is repaid when you die, sell your home, or when your home is no longer your primary residence. The proceeds of a reverse mortgage generally are tax-free, and many reverse mortgages have no income restrictions.

Types of Reverse Mortgages

There are three types of reverse mortgages:

• single-purpose reverse mortgages, offered by some state and local government agencies and nonprofit organizations
• federally-insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs) and backed by the U. S. Department of Housing and Urban Development (HUD)
• proprietary reverse mortgages, private loans that are backed by the companies that develop them

Single-purpose reverse mortgages are the least expensive option. They are not available everywhere and can be used for only one purpose, which is specified by the government or nonprofit lender. For example, the lender might say the loan may be used only to pay for home repairs, improvements, or property taxes. Most homeowners with low or moderate income can qualify for these loans.

HECMs and proprietary reverse mortgages may be more expensive than traditional home loans, and the upfront costs can be high. That’s important to consider, especially if you plan to stay in your home for just a short time or borrow a small amount. HECM loans are widely available, have no income or medical requirements, and can be used for any purpose.

Before applying for a HECM, you must meet with a counselor from an independent government-approved housing counseling agency. Some lenders offering proprietary reverse mortgages also require counseling. The counselor is required to explain the loan’s costs and financial implications, and possible alternatives to a HECM, like government and nonprofit programs or a single-purpose or proprietary reverse mortgage. The counselor also should be able to help you compare the costs of different types of reverse mortgages and tell you how different payment options, fees, and other costs affect the total cost of the loan over time. 


To find a counselor, visit www.hud.gov/offices/hsg/sfh/hecm/hecmlist.cfm or call 1-800-569-4287. Most counseling agencies charge around $125 for their services. The fee can be paid from the loan proceeds, but you cannot be turned away if you can’t afford the fee.


How much you can borrow with a HECM or proprietary reverse mortgage depends on several factors, including your age, the type of reverse mortgage you select, the appraised value of your home, and current interest rates. In general, the older you are, the more equity you have in your home, and the less you owe on it, the more money you can get.


The HECM lets you choose among several payment options. You can select:

• a “term” option – fixed monthly cash advances for a specific time.
• a “tenure” option – fixed monthly cash advances for as long as you live in your home.
• a line of credit that lets you draw down the loan proceeds at any time in amounts you choose until you have used up the line of credit.
• a combination of monthly payments and a line of credit.

You can change your payment option any time for about $20.


HECMs generally provide bigger loan advances at a lower total cost compared with proprietary loans. But if you own a higher-valued home, you may get a bigger loan advance from a proprietary reverse mortgage. So if your home has a higher appraised value and you have a small mortgage, you may qualify for more funds.

Loan Features

Reverse mortgage loan advances are not taxable, and generally don’t affect your Social Security or Medicare benefits. You retain the title to your home, and you don’t have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence.


In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 consecutive months before the loan must be repaid.


If you’re considering a reverse mortgage, be aware that:

• Lenders generally charge an origination fee, a mortgage insurance premium (for federally-insured HECMs), and other closing costs for a reverse mortgage. Lenders also may charge servicing fees during the term of the mortgage. The lender sometimes sets these fees and costs, although origination fees for HECM reverse mortgages currently are dictated by law. Your upfront costs can be lowered if you borrow a smaller amount through a reverse mortgage product called a "HECM Saver."
• The amount you owe on a reverse mortgage grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total debt increases as the loan funds are advanced to you and interest on the loan accrues.
• Although some reverse mortgages have fixed rates, most have variable rates that are tied to a financial index: they are likely to change with market conditions.
• Reverse mortgages can use up all or some of the equity in your home, and leave fewer assets for you and your heirs. Most reverse mortgages have a “nonrecourse” clause, which prevents you or your estate from owing more than the value of your home when the loan becomes due and the home is sold. However, if you or your heirs want to retain ownership of the home, you usually must repay the loan in full – even if the loan balance is greater than the value of the home.
• Because you retain title to your home, you are responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. If you don’t pay property taxes, carry homeowner’s insurance, or maintain the condition of your home, your loan may become due and payable.
• Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.

Getting a Good Deal

If you’re considering a reverse mortgage, shop around. Compare your options and the terms various lenders offer. Learn as much as you can about reverse mortgages before you talk to a counselor or lender. That can help inform the questions you ask that could lead to a better deal.

• If you want to make a home repair or improvement – or you need help paying your property taxes – find out if you qualify for any low-cost single-purpose loans in your area. Area Agencies on Aging (AAAs) generally know about these programs. To find the nearest agency, visit www.eldercare.gov or call 1-800-677-1116. Ask about “loan or grant programs for home repairs or improvements,” or “property tax deferral” or “property tax postponement” programs, and how to apply.
• All HECM lenders must follow HUD rules. And while the mortgage insurance premium is the same from lender to lender, most loan costs, including the origination fee, interest rate, closing costs, and servicing fees vary among lenders.
• If you live in a higher-valued home, you may be able to borrow more with a proprietary reverse mortgage, but the more you borrow, the higher your costs. The best way to see key differences between a HECM and a proprietary loan is to do a side-by-side comparison of costs and benefits. Many HECM counselors and lenders can give you this important information.
• No matter what type of reverse mortgage you’re considering, understand all the conditions that could make the loan due and payable. Ask a counselor or lender to explain the Total Annual Loan Cost (TALC) rates: they show the projected annual average cost of a reverse mortgage, including all the itemized costs.

Be Wary of Sales Pitches

Some sellers may offer you goods or services, like home improvement services, and then suggest that a reverse mortgage would be an easy way to pay for them. If you decide you need what’s being offered, shop around before deciding on any particular seller. Keep in mind that the total cost of the product or service is the price the seller quotes plus the costs – and fees – tied to getting the reverse mortgage.


Some who offer reverse mortgages may pressure you to buy other financial products, like an annuity or long term care insurance. Resist that pressure. You don’t have to buy any products or services to get a reverse mortgage (except to maintain the adequate homeowners or hazard insurance that HUD and other lenders require). In fact, in some situations, it’s illegal to require you to buy other products to get a reverse mortgage.


The bottom line: If you don’t understand the cost or features of a reverse mortgage or any other product offered to you – or if there is pressure or urgency to complete the deal – walk away and take your business elsewhere. Consider seeking the advice of a family member, friend, or someone else you trust.

Your Right to Cancel

With most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason, without penalty. To cancel, you must notify the lender in writing. Send your letter by certified mail, and ask for a return receipt. That will allow you to document what the lender received and when. Keep copies of your correspondence and any enclosures. After you cancel, the lender has 20 days to return any money you’ve paid up to then for the financing.

Reporting Possible Fraud

If you suspect that someone involved in the transaction may be violating the law, let the counselor, lender, or loan servicer know. Then, file a complaint with:

• the Federal Trade Commission (FTC). You can do that online at www.ftccomplaintassistant.gov or by phone at 1-877-FTC-HELP (1-877-382-4357).
• your state Attorney General’s office or state banking regulatory agency.

Whether a reverse mortgage is right for you is a big question. Consider all your options. You may qualify for less costly alternatives. The following organizations have more information:


Reverse Mortgage Education Project
AARP Foundation
601 E Street, NW
Washington, DC 20049
www.aarp.org/revmort
1-800-209-8085


U. S. Department of Housing and Urban Development (HUD)
451 7th Street, SW
Washington, DC 20410
www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm
1-800-CALL-FHA (1-800-225-5342)


Federal Trade Commission
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
www.ftc.gov/bcp/menus/consumer/credit.shtm — Click on “Mortgages & Your Home”
1-877-FTC-HELP (­1-877-382-4357)


The FTC works to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. Watch a video, How to File a Complaint, at ftc.gov/video to learn more. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.