Tag Archives: credit scores

New Cars Could Limit Mortgage Options

Could that shiny new car you just financed with a big dealer loan or lease put a damper on your ability to refinance your mortgage or move to a different house? Could your growing debt — for autos, student loans and credit cards — make it tougher to come up with all the monthly payments you owe? Absolutely.

And some mortgage and credit analysts are beginning to cast a wary eye on the prodigious amounts of debt American homeowners are piling up. New research from Black Knight Financial Services, an analytics and technology company focused on the mortgage industry, reveals that homeowners’ non-mortgage debt has hit its highest level in 10 years.

New debt taken on to finance autos accounted for 81 percent of the increase — a direct consequence of booming car sales and attractive loan deals. The average transaction price of a new car or pickup truck in April was $33,560, according to Kelley Blue Book researchers.

Student-loan debt is also contributing to strains on owners’ budgets. Balances are up more than 55 percent since 2006.Credit-card debt is another factor, but it has not mushroomed like auto and student loans have. Nonetheless, homeowners carrying balances on their cards owe an average $8,684, according to Black Knight data.The jump in non-mortgage debt is especially noteworthy among owners with Federal Housing Administration and Veterans Affairs home loans. These borrowers — who typically have lower credit scores and make minimal down payments (as little as 3.5 percent for FHA, zero for VA) — now carry non-mortgage debt loads that average $29,415. By contrast, borrowers using conventional Fannie Mae and Freddie Mac financing have significantly lower debt loads — an average $22,414 — but typically have much higher credit scores and have made larger down payments.

Is there reason for concern? Bruce McClary, vice president at the National Foundation for Credit Counseling, thinks there could be if the pattern continues.

Some people have lost sight of the ground rules for responsible credit and are “pushing the boundaries,” he said.

Auto costs — monthly loan payments plus fuel and maintenance — shouldn’t exceed

15 to 20 percent of household income, he said. Yet some people who already have debt-strained budgets are buying new cars with easy-to-obtain dealer financing that knocks them well beyond prudent guidelines.

According to a recent study by credit bureau Equifax, total outstanding balances for auto loans and leases surged by

10.5 percent during the past 12 months. Of all auto loans originated through April, 23.5 percent were made to consumers with subprime credit scores.

Ben Graboske, senior vice president for data and analytics at Black Knight Financial Services, cautions that although rising debt loads might look ominous, there is no evidence that more borrowers are missing mortgage payments or heading for default. Thanks to rising home-equity holdings and improvements in employment, 30-day delinquencies on mortgages are just 2.3 percent, he said, the same level as they were in 2005, before the housing crisis. Even FHA delinquencies are relatively low at 4.53 percent.

But Graboske agrees that other consequences of high debt totals could limit homeowners’ financial options: They “are going to have less wiggle room” in refinancing their current mortgages or obtaining a new mortgage to buy another house.

Why?

Because debt-to-income ratios are a crucial part of mortgage underwriting and are stricter and less flexible than they were a decade ago. The more auto, student-loan and credit-card debt you have along with other recurring expenses such as alimony and child support, the tougher it will be to refinance or get a new home loan.

If your total monthly debt for mortgage and other obligations exceeds 45 percent of your monthly income, lenders who sell their mortgages to giant investors Fannie Mae and Freddie Mac could reject your application for a refinancing or new mortgage, absent strong compensating factors such as exceptional credit scores and substantial cash or investments in reserve. FHA is more flexible but generally doesn’t want to see debt levels above 50 percent.

Bottom line: Before signing up for a hefty loan on a new car, take a hard, sober look at the effect it will have on your debt-to-income ratio. When it comes to what Graboske calls your mortgage wiggle room, less debt, not more, might be the way to go.

Read more in The Columbus Dispatch where author Kenneth R. Harney covers housing issues on Capitol Hill for the Washington Post Writers Group. kenharney@earthlink.net

Advertisements

Tenants Benefit When Rent Payment Data Are Factored Into Credit Scores

by Kenneth R. Harney | LA Times

It’s the great credit divide in American housing: If you buy a home and pay your mortgage on time regularly, your credit score typically benefits. If you rent an apartment and pay the landlord on time every month, you get no boost to your score. Since most landlords aren’t set up or approved to report rent payments to the national credit bureaus, their tenants’ credit scores often suffer as a direct result.

All this has huge implications for renters who hope one day to buy a house. To qualify for a mortgage, they’ll need good credit scores. Young, first-time buyers are especially vulnerable — they often have “thin” credit files with few accounts and would greatly benefit by having their rent histories included in credit reports and factored into their scores. Without a major positive such as rent payments in their files, a missed payment on a credit card or auto loan could have significant negative effects on their credit scores.

You probably know folks like these — sons, daughters, neighbors, friends. Or you may be one of the casualties of the system yourself, a renter with a perfect payment history that creditors will never see when they pull your credit. Think of it this way and the great divide gets intensely personal.

But here’s some good news: Growing numbers of landlords are now reporting rent payments to the bureaus with the help of high-tech intermediaries who set up electronic rent-collection systems for tenants.

One of these, RentTrack, says it already has coverage in thousands of rental buildings nationwide, with a total of 100,000-plus apartment units, and expects to be reporting rent payments for more than 1 million tenants within the year. Two others, ClearNow Inc. and PayYourRent, also report to one of the national bureaus, Experian, which includes the data in consumer credit files. RentTrack reports to Experian and TransUnion.

Why does this matter? Two new studies illustrate what can happen when on-time rent payments are factored into consumers’ credit reports and scores. RentTrack examined a sample of the tenants in its database and found that 100% of renters who previously were rated as “unscoreable” — there wasn’t enough information in their credit files to evaluate — became scoreable once they had two months to six months of rental payments reported to the credit bureaus.

https://i2.wp.com/blog.phroogal.com/wp-content/uploads/2013/05/CreditScoreRanges.png

Tenants who had scores below 650 at the start of the sampling gained an average of 29 points with the inclusion of positive monthly payment data. Overall, residents in all score brackets saw an average gain of 9 points. The scores were computed using the VantageScore model, which competes with FICO scores and uses a similar 300 to 850 scoring scale, with high scores indicating low risk of nonpayment.

Experian, the first major credit bureau to begin integrating rental payment records into credit files, also completed a major study recently. Using a sample of 20,000 tenants who live in government-subsidized apartment buildings, Experian found that 100% of unscoreable tenants became scoreable, and that 97% of them had scores in the “prime” (average 688) and “non-prime” (average 649) categories. Among tenants who had scores before the start of the research, fully 75% saw increases after the addition of positive rental information, typically 11 points or higher.

Think about what these two studies are really saying: Tenants often would score higher — sometimes significantly higher — if rent payments were reported to the national credit bureaus. Many deserve higher credit scores but don’t get them.

Matt Briggs, chief executive and founder of RentTrack, says for many tenants, their steady rent payments “may be the only major positive thing in their credit report,” so including them can be crucial when lenders pull their scores.

Justin Yung, vice president of ClearNow, told me that “for most [tenants] the rent is the largest payment they make per month and yet it doesn’t appear on their credit report” unless their landlord has signed up with one of the electronic payment firms.

Is this something difficult or complicated? Not really. You, your landlord or property manager can go to one of the three companies’ websites (RentTrack.com, ClearNow.com and PayYourRent.com), check out the procedures and request coverage. Costs to tenants are either minimal or zero, and the benefits to the landlord of having tenants pay rents electronically appear to be attractive.

Everybody benefits. So why not?

kenharney@earthlink.net Distributed by Washington Post Writers Group. Copyright © 2015, Los Angeles Times

Lenders Stiff-Arm Many First-Time Home Buyers

By Diana ElBoghdady

WASHINGTON — For more than 20 years, Mark Vinciguerra’s small bank specialized in making home loans to first-time buyers in the Toledo, Ohio, suburbs. Then the recession hit, and auditors at Fannie Mae and Freddie Mac came knocking.

The mortgage giants demanded he buy back more than 200 loans he’d sold them that were teetering into foreclosure, claiming the bank had failed to meet their quality standards. Vinciguerra ultimately repurchased only five loans, but endless hassles over the others shattered his willingness to take a chance on some moderate- and low-income borrowers.

‘‘Like so many lenders, we thought: ‘Heck, we’re just going to raise the bar,’’’ said Vinciguerra, who insisted the loans went bad because of skyrocketing unemployment. ‘‘We’d like to be serving those people again, but there’s no trust in the system right now.’’

Just as the housing recovery should be taking off, lenders are turning away potential buyers by demanding unusually high credit scores for government-backed loans — exceeding the government’s own criteria in a bid to insulate themselves from penalties and lawsuits. The reluctance to lend has alarmed policy makers and heightened tensions between them and lenders.

The White House has summoned banking executives for a meeting Sept. 17, frustrated that its many pleas to ease lending criteria have not been heeded.

But lenders say the mixed messages they’re getting from Washington give them no incentive to widen access to credit. The government, determined to prevent a repeat of the irresponsible lending practices that sparked the housing bust, has forced lenders to buy back billions of dollars in loans and continues to trumpet massive legal settlements with the industry. The largest came two weeks ago when Bank of America agreed to pay $17 billion to resolve claims that it sold the government defective mortgages.

‘‘The mortgage industry is basically ticked off,’’ said Guy Cecala, publisher of the trade journal Inside Mortgage Finance.

The situation is untenable for lenders, said David Stevens, president of the Mortgage Bankers Association. It’s also creating a homeownership opportunity gap.

‘‘It’s very clear that the proverbial 1 percent, the wealthy American who wants to buy a home, is going to get credit,’’ Stevens said. ‘‘It’s some of the average entry-level or move-up buyers who are getting boxed out.’’

Fannie, Freddie, and the Federal Housing Administration collectively own or back nearly half of all US mortgages, Inside Mortgage Finance says. None of them makes loans, though they are critical to making mortgages widely available.

Fannie and Freddie buy loans from lenders, package them into securities, and sell them to investors. For a fee, they guarantee the mortgages and then pay investors if the loans default. The FHA insures the lenders it works with against losses if loans go bad.

But housing experts say the government’s push to hold the industry accountable for loose lending in the past is unintentionally steering lenders toward the highest-quality borrowers, undermining the institutions’ mission to serve the broader population, including moderate- and low-income families.

‘‘What we have now is a system, because of tight lending standards, that is excluding far more borrowers who are going to succeed than fail,’’ said Barry Zigas, at the Consumer Federation of America.

Industry insiders say the administration could help by encouraging regulators to ease up. Lenders should be held accountable for the type of fraudulent activity that took place before the housing crisis, such as falsifying documents or faking tax returns, they say. But they argue the government should not be scouring loan files for minor errors.

Industry insiders also argue for clearer rules governing when Fannie, Freddie, and the FHA can take action against a lender. Many lenders said they had been asked to buy back loans or reimburse the government for losses even when their lending practices had nothing to do with the loans’ default.

Bill McCue, president of McCue Mortgage Co. in Connecticut, said investors routinely refuse to buy FHA-insured mortgages if the borrowers have credit scores below 640, even though the FHA typically permits scores as low as 580.

There are 13 million potential borrowers with scores between 580 and 640, yet FHA-backed loans to people below the 640 threshold were basically nonexistent last year, according to an analysis by the Urban Institute.

‘‘Are the lower-credit-score borrowers a little more risky than someone with an 800 credit score? Certainly,’’ said FHA Commissioner Carol Galante. ‘‘But this is how families get into the middle class and succeed.’’