What If I Have a Low Credit Score?

How your credit score affects the interest rate you pay

First of all, don’t panic. Millions of Americans are struggling with the same problem. Your dream home is still within reach.

Lenders take multiple factors into consideration when deciding whether or not to approve you for a loan. Your credit score is just one of many variables that get taken into account during the underwriting process.

If credit scores were the sole basis for determining whether or not to fund a loan, the entire economy would indeed come to a standstill. The economic conditions of individuals and families are too diverse and multifaceted for lenders to determine a borrower’s risk level based solely on their credit score.

Keep in mind, however, that simply qualifying for a home loan is not the only objective you should have when purchasing a home. You’ll also want to be confident that the interest charged with your monthly payment will fit within your budget.

Lenders offset risk by charging a higher interest rate to borrowers that are deemed to be a medium or high risk. A lower credit score may result in a borrower being charged a higher interest rate in order for the lender to mitigate risk. This is common practice and serves as justification to approve the loan in the first place. Without any measures (such as increasing the interest rate) in place to offset risk, nobody with imperfect credit would ever be able to buy a home.

Having less-than-perfect credit is not an absolute deal-breaker when buying a home. However, it’s important that you are confident that the interest rate being charged will fit into your budget.

Learning the ins and outs of home buying can be overwhelming. On top of that, uncertainty about how to navigate the real estate legal landscape can be downright frustrating. Pujol Law Group specializes in real estate law. Give us a call. We are passionate about what we do and look forward to assisting you during this critical time in your life.

 

Knowing your credit score and fixing mistakes can save you on interest

Knowing your credit score and fixing mistakes can save you on interest

There are many things which affect your credit score and most of them determine not only if you will get a loan but how much interest you will be paying.

Your credit score

The first step in getting a good rate on any loan is knowing your credit score. There are many ways to find your score but a good first step is to turn to the U.S. government for help.

Thanks to the Fair Credit Reporting Act, the three nationwide reporting agencies — Equifax, Experian, and TransUnion — are required by law to provide you with a free credit report once every 12 months. To get your free report, visit annualcreditreport.com or call 1-877-322-8228. You can request a report via mail by completing the Annual Credit Report Request Form and mailing it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

In order to get a free report, you will need to be ready to provide your name, address, Social Security number, and date of birth.

According to the Federal Trade Commission, “If you have moved in the last two years, you may have to provide your previous address. To maintain the security of your file, each nationwide credit reporting company may ask you for some information that only you would know, like the amount of your monthly mortgage payment. Each company may ask you for different information because the information each has in your file may come from different sources.”

What’s your score

Depending on the reporting agency, there is a range of what your score might be. Scores generally range from 300 to 850. The higher the score, the better chance of you getting a loan with a good interest rate. A good FICO score is used by many lenders to determine who gets a loan and how much interest is paid.

The ranges of the scores are:

  • 300-579 is very poor: applicants may be required to pay money up front and may not receive credit at all.
  • 580-669 is fair: applicants are considered subprime borrowers.
  • 670-739 is good: less than 10 percent of borrowers are expected to become seriously delinquent in the future.
  • 740-799 is very good: applicants will likely receive better than average rates on loans.
  • 800-850 is exceptional: applicants will get the best rates from lenders.

Problems with your report

Mistakes are made on credit reports so you should check yours yearly. If you find a discrepancy in your credit report, the first course of action should be to contact the reporting agency and get it worked out. The agencies are:

If all else fails, file a complaint about a credit reporting agency to the Consumer Financial Protection Bureau online or by phone at 1-855-411-2372.

When you need help

When you need help moving into that new home or are upgrading to a bigger place, you may need legal help on your side. If you find yourself in need, contact the Pujol Law Group. The attorney group serves all of South Florida with a wide range of services to help you save money and ensure everything is done just right.

If You Have a Lower Credit Score, You’ll Pay More for Your Home. Here’s How.

If you’re seeking to purchase a new home, one of the first things you should look at is your credit score. Your credit score is one of the most important factors a bank will consider when it comes to approving you for a mortgage. A higher score usually equates to a lower interest rate, which will save you many thousands of dollars over the life of the loan.

It’s important to know the difference between consumer credit and real estate mortgage credit. The former is relayed by well-known credit reporters such as Credit Karma or Credit Sesame. The scores between reporters like these can vary widely between each other because of some differences in calculation.

When you’re shopping for a mortgage, the score that matters comes from a triple-merged credit report. Typically, this score is reported by agencies like Experian, TransUnion, Equifax, etc. These agencies are cross-referenced with each other to ensure accuracy, and mortgage lenders rely on the lowest middle score between them. Your score is determined by such things as credit card payments, timeliness of payments, the ratio of your outstanding credit compared to your credit limit, how long you’ve had established credit accounts, and so on.

Credit scores usually range between 300-800 and are an important factor in determining what a mortgage lender would consider as your theoretical risk (your likelihood of repaying the loan). The lower your credit score is, the higher the chance a mortgage lender will think that you might have a problem in repaying your loan in a timely fashion. As such, should your credit score be on the lower side, your interest rate will be higher since you’ll be regarded as possibly having more difficulty in repaying your loan.

Simply put, a lower credit score means a higher interest rate for borrowers, which will add up over the months and years.

Your triple-merged credit report isn’t just a number, though. There’s a lot of moving parts behind this score that’s so influential in determining the interest rate you’ll pay. Contact us to find out more about how it works.

How Short Sales Make the Best of a Bad Situation

What is a short sale?

A short sale is an option for distressed homeowners to avoid foreclosure and divest themselves of an “upside down” mortgage. Homeowners who won’t or can’t make payments to the bank might be able to negotiate an agreement with the bank to allow the sale of the property to a third party for a lower price than the outstanding mortgage balance. The difference between the sale price and the outstanding mortgage balance is less than the full amount owed, thus “short sale” is the term used in the industry.

Unlike foreclosure, a short sale sells the home to another person, and is usually only present when property values in an area drop quickly, such as in the recent recession.

Homeowners are usually (but not always) forgiven on the difference between the sale price of the home and the remaining mortgage balance. However, a short sale will severely impact a homeowner’s credit score for many years to come.

A short sale is different from a deed in lieu of foreclosure, where a bank accepts a deed transfer and owns the home.

Why would someone do a short sale?

A short sale can benefit distressed homeowners and banks in a number of ways.

For the homeowner, a short sale can mean avoiding the painful foreclosure process and allow all parties involved to gracefully exit.

For the bank, a short sale is the easiest way to divest an underperforming asset because it avoids the lengthy and expensive legal process of foreclosure. Although this will mean a loss on the bank’s books, it also means the removal of a non-performing asset off those books. For banks, it’s a question of math, and the numbers are often attractive. It also lets the bank avoid owning an illiquid asset which is expensive to maintain and can be difficult to sell.

What are the tax implications of a short sale?

The seller in a short sale may be forgiven the shortage of money that should have been paid. This does, however, have some tax implications, as the IRS may consider those savings to be income. Due to the fairly recent number of short sales throughout the country, however, the IRS has usually forgiven short sellers.

A short sale is an important decision. No homeowner should enter the process without the advice of an experienced real estate attorney. If you face this difficult decision and need some help to understand the process better and to protect your rights, contact us.

Why Lower Credit Score Customers Often Pay More to Buy a Home

You may have heard that a low credit score can prevent a prospective home buyer from purchasing the house they want. Not only is this true, but even if a buyer with a lower score qualifies to buy the home, they will often end up paying more in closing costs. The reason for this is that lenders give preferential deals and rebates to borrowers who have illustrated a propensity to pay their debts on time. Banks and other lending firms want to know that if they loan out a large sum of money to a home buyer, they are likely to get it back.

Quite often, there is one lender rate sheet for customers with credit scores above a certain benchmark (typically 680-720), and another for customers with scores below that. For borrowers with scores above the benchmark, they receive a credit which can be applied to their closing costs: lender fees, title fees, and escrow fees. Borrowers below the benchmark also receive a credit, but it is usually much lower, meaning they have to pay more of the above fees themselves, out of pocket (or rolled into the loan). Customers with high credit scores also sometimes receive a bonus credit of 0.25% of the loan or more, which is deducted from their closing costs as well.

Thus, the low credit score borrower often finds him or herself facing a high closing cost loan at the rate they want, let’s say 4.25%. One option to reduce this cost is chosen a higher rate—banks are willing to give out bigger credits to cover closing costs if the customer is willing to accept paying more interest over the life of the loan. If that same customer with a lower score is okay with a 4.5% rate, the closing costs can drop by a couple thousand dollars, or even more.

The higher the interest rate, the lower the closing costs. If someone is facing the prospect of high closing costs, because their credit score is not strong enough to qualify for a large enough rebate to pay off some of the closing costs for them, obtaining a higher rate may be the only solution. Often, a borrower with only fair credit will not even be offered a lower rate, to begin with. Instead, the lending officer will immediately see that closing costs would be too high for them and offer a slightly higher rate instead. The moral of the story is to build up your credit score as much as you can—it can save you a lot in interest, over the decades that you own your home.

 

Looking for another way to cut closing costs? Request Pujol Law Group as the title company for your transaction. We pass Butler rebate savings on to you, and offer low, flat rates for title and escrow services.