Credit – It’s a Brand New Day

How to Protect Your Clients & Pay Check

Post Mortgage Market Meltdown

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<619 – What Can It Cost You?• Borrower

– $300K to $400K or More in Interest Costs

• Buyer– 12-28% Less Purchasing Power

• Realtor– $3,360 to $28,000 in Commissions Per Sale– Result of Lower Sales Price or Walking Buyer

*Assumes $400,000 sales price, financing 90%

What is a Credit Score?

• A 3-digit number used by lenders to evaluate the risk associated with lending money.

• Generated by a mathematical model created by Fair Isaac Corporation in the 1960s.

• There are 3 major credit bureaus: Equifax, Experian® and TransUnion® - 3 Scores.

• Scores range from 350-850.

Why It’s Important Now

• 2007 Mortgage Meltdown– ARM Resets to Higher Payments– Declining Property Values– Homeowners Walk

• Subprime Contagion– First Subprime Companies Fold– Hedge Funds– A and Alt-A Paper Follow

Score Talk

• Above 720 = Excellent

• 680 = Good

• 620 = Fair

• Below 620 = Poor

Why Are Higher Scores Good?It’s All About the Likelihood of Default

Bad Credit – What’s the Cost?

• What’s The Damage of Lower Credit Scores?Home Financing: A 30-year fixed with a loan principal amount of $360,000

FICO Score APR Monthly Payment Total Payments Paid

Above 760 5.800% $1,760 $633,600

620-719 6.020-7.120% $1,803-$2,019 $649,080-$726,840

Below 620 8.531-9.289% $2,511-$2,739 $903,960-$983,160

If your score improves to 720-850, you could save an additional $318,329If your score improves to 700-719, you could save an additional $308,047If your score improves to 675-699, you could save an additional $263,094If your score improves to 620-674, you could save an additional $163,422

A borrower who increases his or her credit score from 620 to 720+ can potentially save $884 per month on mortgage payments, $10,608 per year, and approximately $318,329 over the life of the 30-year loan.

Loan Level Price Adjustments

Credit Score Factors

Payment HistoryLate PaysCollectionsCharge-OffsRepossessionsForeclosuresTax LiensBankruptciesJudgments

Amounts OwedCredit CardsMortgage LoansAuto LoansHELOCsInstallment Loans

Length of History

New CreditSoft InquiriesHard Inquiries

Types of Credit UsedA Mortgage LoanAn Auto Loan2-3 Major Credit Cards

Payment History: 35% How do your borrowers pay their bills?

• A recent 30-day late can cost 50+ points.

• Paying a collection that is more than 2 years old can hurt a score.

• Being past due on an account can cost 50+ points.

• Derogatory accounts do NOT always fall off of a credit report automatically after 7 years. They must be disputed.

• A divorce decree does NOT take precedence over the creditor agreement.

Amounts Owed: 30% Managing Debt

• New debt temporarily decreases a score.

• Balances should be kept below 50% at all times to maintain a score.

• Balances should be kept below 30% of the limit for 3-6 months prior to applying for a home loan.

• Debt should NOT be consolidated, it should be distributed evenly over all credit card accounts.

• Going over the limit on a credit card, even by $1, will cause a serious penalty.

• HELOCs can be considered revolving debt, not mortgages.

• Credit card accounts should NOT be closed except in special circumstances.

• Unused credit card accounts will become unrated in 3 months.

Length of History: 15% Mix of Credit: 10%

• Borrowers should hold onto old credit cards, even if the rate is not great.

• New credit users can NO LONGER add themselves to another person’s account as an authorized user to generate a score.

• Mixture is best.

• The type of credit card DOES matter.

• 3 to 5 revolving credit cards with established history is optimal.

Inquiries: 10%

• Hard vs. soft Inquiries.

• 14-day window for pulling reports.

• Inquiries affect a score for one year.

• Inquiries can cost between 2 and 30 points, depending on the current score.

• Pre-approved card offers are NOT really pre-approved.

BORROWERS NEED TO WORK ON OPTIMIZING THEIR CREDIT TODAY!

• Step 1 - Order Credit Reports & Scores: The first step is for borrowers to get a complete picture of their current credit situation by ordering a copy of their credit reports and scores for all three national credit bureaus - TransUnion®, Equifax and Experian®.

• Step 2 - Verify the Data Being Reported: It is the consumer's responsibility to verify the accuracy of the data being reported.

• Step 3- Dispute Any Inaccurate Information: Have borrowers contact their creditors and send letters of dispute to the credit bureaus to have errors on their report corrected. These must be sent via CERTIFIED mail.

Partnerships Are Critical!

• Not the time to refer three lenders!

• You need one “go-to” lender– Wide array of available products– Expert in underwriting– “Credit analysis and repair” partnerships– Local and accountable

Buyer/Seller Action Steps

• Review Credit Report Every 3-6 Months

• Pre-Qualifications Are Worthless!

• Pre-Approvals Good for 120 Days

• Do Not Accept Pre-Approvals From the Unknown and Non-Local

Next Action Steps

• Seller Action Meetings– Inform– Risk analysis meeting involving originator– Assess willingness to navigate waters– Promote aggressively to buyers’ agents

• Buyer Action Meetings– Inform– Pre-approve with mortgage lender– Direct toward realistic sellers– Continually communicate with other listing agents

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