Some lenders are now requiring the removal of authorized user accounts before they will
approve a loan since the credit report and score is not an accurate reflection of the borrower’s
own credit history. Due to the fact that an authorized user is not responsible for, and usually
does not make payments on the credit card, the removal of these accounts could mean a loss,
or dramatic decrease of their credit scores and possibly denial of the loan.

Over the years, “piggybacking” (the use of someone else’s credit as an authorized user) has
become frowned upon by mortgage investors. Some authorized users have actually paid
individuals a fee to use that person’s good standing accounts on their own credit file. To be
added as an authorized user on someone else’s account can cost anywhere from $500 to
$5000 depending on the history of the card. This practice has given authorized user accounts a
bad name.

Adding a family member as an authorized user should be a stepping stone to help them
establish credit, but not a long term solution. Once the authorized accounts have helped them
establish new credit and credit scores, this person should start establishing credit on their own.
Secured credit cards or secured lines of credit are an excellent way to build credit. Most gas
cards and department store credit cards are other ways to build credit. It is important to make
payments on time and keep balances low – preferably below 25% of the high credit limit. And it
is best to establish two or three credit cards in their name.

Once credit has been established in their own name, it is wise to have the authorized accounts
removed from their credit. The credit account holder (those responsible for payment on the
account), will need to make the request to the creditor for the removal of any authorized users.

Many buyers may not be aware of the importance of establishing credit in their own name. If
done correctly and with proper planning, new home buyers won’t have as many credit related
hurdles to jump over when it’s time to purchase that new home.

With option-arms coming due we will see more and more borrowers trying to negotiate short sales as opposed to going into foreclosure. In most cases the borrower will be behind on payments and about to go into foreclosure, however this will not always be the case. Some short sales are negotiated simply because a borrower knows they are upside down on their mortgage but has not reached the point where they have late payments. For example, the borrower’s loan is interest only and they have been unable to make principal payments. The original loan amount was $250,000 and they have been making the minimum payment and the loan balance has increased to $263,000. At the same time, the home only appraises for the $250,000 or possibly even less. Because the option-arm period is up, the borrower’s mortgage payments will increase and they are unable to make the higher payment. There is no equity in the property and they cannot sell the home to cover the balance of the loan. At this point they can either try to negotiate a short sale with the lender or go into foreclosure.

If the lender agrees to a short sale, they are buying back the loan for less then what they are owed. This is not something a lender has to do, but it is an option for them. Why would they consider this? The real cost for the lender in a foreclosure action is that they have to carry the loan until they can resell the house. They have to pay the taxes and insurance and this can take time and the cost of carrying the loan can become quite substantial. In some cases it will be more beneficial for them financially to take the short sale.

How does it affect credit?

Typically the loan will show up on a credit report as “settled for less then the full balance”. This will have a negative impact on the borrowers score, however it will be less then if it shows as “foreclosure”. How much it will actually affect the score will depend on the rest of the borrowers credit history. It is always best to have an attorney negotiate a short sale with a lender and at the same time have them negotiate how it will appear on the credit report. Some lenders will agree to show the loan as “paid with no late payments” (providing the borrower hasn’t made any) or they may show it as “paid was 30” if there have been some late payments. This would be optimal.

A short sale can also have a negative affect on a borrowers credit if the lender issues a deficiency judgment. A lender may take this route even if they show the actual mortgage on the credit report as paid as agreed. When they take the short sale there is still a difference between the actual mortgage balance and the amount of the short sale. The lender can then issue what is called a deficiency judgment against the borrower and this will show on a credit report just as any other judgment would. The attorney should attempt to get the lender to accept “payment in full without pursuit of any deficiency judgment.” Sometimes the lender will put the borrower on a payment plan for the deficiency without issuing a judgment. Again, this would be optimal.

The one instance where a lender will not consider a short sale is if the borrower is in bankruptcy. Lenders consider a short sale payoff as a collection activity and collection activities are prohibited once a person has filed bankruptcy.

To see what you options are after a short sale or a forclosure                    contact AZ FHA Lender

In today’s real estate market, you need to know what to look for in a property when using FHA financing. Most home buyers are faced with a lack of available cash needed to do the necessary repairs that might be needed. Why not know the home you are purchasing is up to HUD/FHA standards?

First let us discuss what are the benefits of an FHA mortgage.

Low down payments: FHA loans require a very small down payment. Home buyers can make a down payment of as little as 3.5 percent of the home’s value with an FHA loan. This down payment can come from the home buyer own funds, a gift from a family member or a grant.

Less stringent credit qualifying: Although The FHA does not have a minimum credit score requirement in order to qualify for the loan must lenders require that the borrowers have a 620 minimum fico score. The guidelines are not as strict regarding past bankruptcies and foreclosures.

Higher Debt-to-Income Ratios: Underwriting guidelines allow for 29% of the home buyer income to be spent on housing expenses (Principle, Interest, Taxes and Insurances) and 41% for housing and monthly reoccurring debt. Higher ratios can be used when using and automated approval.

Mortgage Insurance: FHA loans generally require an UFMIP (upfront mortgage insurance premium) equal to 1% of the base loan amount which can be financed, and are also subject to an annual renewal fee depending on the loan to value.

These are the things  to look for in a property when using FHA financing?

So let’s talk about the property now.

What you need to know is that FHA repairs are usually limited to the following three categories:

SAFETY: Protect the health and safety of the occupants
SECURITY: Protect the security of the property (security for the FHA insured mortgage.)
SOUNDNESS: Correct physical deficiencies or conditions affecting structural integrity

Below is a sample of the suggested minimum property requirements under the FHA program. This is meant to be utilized as a guide ONLY and is not a guarantee of necessary requirements. (HUD Handbook 4905.1).

Electrical Service:

1. May be either circuit breakers or fuses.

2. Appraisers should examine the electrical box to ensure that there are no frayed or exposed wires.

3. Existing 60-amp service is acceptable if it appears that this is adequate amperage for the appliances present in the property, or those considered “standard” if the present appliances appear to be less than found in the “standard” home.

4. Knob and tube wiring is acceptable if found to be in good condition and a minimum of 60-amps.

Mechanical Certifications Electrical, plumbing and/or heating certifications may be called for by the appraiser when he/she cannot determine if one or all of these systems are working properly. An appraiser should not arbitrarily call for such certifications as they are still responsible for checking on the adequacy of these systems at the time of appraisal.The certification must be done by a home inspector, an inspector from the local building department, an FHA compliance inspector, a professional in the specific field (e.g. electrician, plumber) or any individual deemed to be qualified by the Direct Endorsement underwriter. (Also see ” Utilities Not On“)

Heating:

1. General: All habitable rooms must have a heat source. This does not mean that each room must contain a heating device but that each room must receive sufficient heat. There are exceptions were it is “typical” for the market area and does not adversely affect the marketability of the property.

2. Wood Stoves and Solar Systems: Dwellings with wood burning stoves or solar systems as a primary heat source must have permanently installed conventional heating systems that can maintain at least 50 degrees Fahrenheit in all living areas and those containing plumbing systems. These systems must be installed in accordance with the manufacturer’s recommendations.

3. Floor Heaters: Due to the inherit dangers of a floor heater it is highly recommended that floor heaters in need of repair be replaced with another permanent heat source.

4. Non-Conventional Heating Systems: All non-conventional heating systems, such as space heaters and others, must comply with local jurisdictional guidelines. Often these are not acceptable as the primary source of heat.

5. Propane tanks must be a safe distance from the dwelling. Leased tanks are acceptable when not offered for sale. Propane fired furnaces located in a crawl space area is not acceptable.

Water Heaters:
1. All water heaters must have a non-adjustable temperature and pressure-relief valve.

2. The water heater must comply with local building codes regardless of its location.

3. Rental water heaters are not acceptable.

Basements:

Basements: Basements must be examined for dampness or wetness, any obvious structural problems and the condition of the furnace, hot water heater or other components located there.

1. Sump Pumps in Crawl Space and Basement Areas: Sump pumps are acceptable to HUD provided that they are properly functioning at the time of appraisal. A sump pump may be hard-wired by an acceptable wiring method or may have a factory electrical cord which is to be connected to a receptacle suitable for such use. The receptacle must be located to allow connection to the factory wiring without the use of an extension cord. Note: A sump pump is not a cure-all. If there is significant incurable ponding of water in basements or crawl spaces, the underwriter may elect to reject the property.

Crawl Spaces: General Requirements HUD Handbooks 4905.1 REV-1, 2-14 & 2-11 and 4150.2, Section 3-6A11 – In order to ensure against conditions which could cause deterioration to the building and seriously affect the marketability of the property, it is required that:

1: There must be adequate access to the crawl space.

2: The appraiser will enter the crawl space at a minimum entry of the head and shoulders to observe conditions, except when access is obstructed, when entry could damage the property, or when dangerous and adverse situations are suspected.

3: It is highly recommended that the minimum height of a crawl space be 18 inches from the bottom of the joists.

4: The crawl space must be clear of all debris.

5: The crawl space must not be excessively damp and must not have any water ponding.

6: The crawl space must be adequately ventilated, providing positive airflow with no dead air space. A vapor barrier is not typically required; however, if moisture problems are evident, a vapor barrier should be required.

Roof:

The appraiser must exercise sound judgment when evaluating roof condition. The roof should have a remaining physical life of at least two years. If the roof has less than two years remaining life, then the appraiser must report this condition in the appraisal report.

FHA will accept a maximum of 3 layers of existing roofing. If more than 2 layers exist and repair is necessary, then all old roofing must be removed as part of the re-roofing.

These are some of the thinks  to look for in a property when FHA financing will be used?

To learn more, please feel free to contact your AZ FHA Lender.

New FHA Annual Mortgage Insurance Premium
A bill was in august of 2010 giving HUD the flexibility to increase Annual Mortgage Insurance Premiums. According to Mortgagee Letter 11-10, the increase in Annual Mortgage Insurance Premiums will be effective for all case numbers dated on or after April 18th 2011.

HUD is implementing a 25 basis point increase in the annual premium for terms of greater than 15 years and equal to or less than 15 years. On loans with greater than 15 year terms, the new amount depends on the down payment. If the down payment is equal to or greater than 5%, the new Annual Premium is 110 basis points (bps). If the down payment is less than 5%, the new Annual Premium is 115 basis points (bps).

On loans equal to or less than 15 year terms, the new amount depends on the down payment. If the down payment is equal to or greater than 10%, the new Annual Premium is 25 basis points (bps). If the down payment is less than 10%, the new Annual Premium is 50 basis points (bps).

Upfront Mortgage Insurance Premium
Effective for loans on or after October 4th, 2010, for FHA regular purchases and refinance products, the Upfront Mortgage Insurance Premium is 1.00%, which decreased from 1.5%. This amount remains unchanged.

FHA‘s monthly mortgage insurance payments will be automatically terminated when these conditions occur:

• For mortgages with terms 15 years and less and with Loan to Value ratios 90 percent and greater, annual premiums will be canceled when the Loan to Value ratio reaches 78 percent regardless of the amount of time the mortgagor has paid the premiums.

• For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be canceled when the Loan to Value ratio reaches 78 percent, provided the mortgagor has paid the annual premium for at least 5 years.

• Mortgages with terms 15 years and less and with loan to value ratios of 89.99 percent and less will not be charged annual mortgage insurance premiums.

FHA Requirements: Mortgage Insurance

Medical debt is not the borrowers fault; no one chooses to be sick or get in an accident. It
has long been felt that these debts should not be used against a borrower in determining their credit worthiness. Yet even paid off, medical collections can significantly damage a person’s credit score for years, causing them higher interest rates and even denial for loans.

This bill actually amends the Fair Credit Reporting Act under section 605 to read (a)”any
information related to a paid or settled medical debt that has been characterized as
delinquent, charged off, or in collection which, from the date of payment or settlement,
antedates the report more than 45 days.” This means that 45 days from the time a collection is settled it must be removed from the report. Currently, a collection will stay on your report for 7 years from the date it went into collection.

Up until now it has always been advised not to pay collection accounts, especially older ones as it could actually hurt the credit score by bringing the activity date current. For medical collections it will now be advisable to pay them off promptly as they will have to be removed within a very short period of time. Under this bill, agencies collecting medical accounts will be required to stop reporting once the account has been paid for 45 days.

One question is going to be, are the bureaus going to develop new scoring models to
accommodate this new law or simply “tweak” the existing scoring models. Until this is
decided, a borrower paying off a medical collection should get something in writing stating the account is paid. The borrower can dispute the account directly with the bureaus to have it removed after 45 days have elapsed. This will have to be policed by the Federal Trade Commission so having this documentation will be critical to the borrower.

Your credit score is a numerical representation of your statistical likelihood to repay credit that is extended to you. Mortgage Scores range from 300-850. Your score is a “snapshot” of a specific moment and can change with new actions and the passage of time.
 FICO Scores are calculated from different data that can be grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining your FICO score.

The secrets of credit score calculation have been very closely guarded. We can now estimate how your score is put together.

Payment history = 35%

· Do you pay your credit on time?
· Length of positive credit history
· Severity & quantity of delinquencies

Amount owed = 30%

· Quantity of credit Accounts – too many credit cards with balances can lower a score.

Length of credit history = 15%

· The longer the history, the better.
· How long have your credit accounts been established?
· How long has it been since you used certain accounts?

New Credit = 10%

· Research shows that opening several credit accounts in a short period of time does represent greater risk – especially for people who do not have a long established credit history.

Types of Credit in use (Healthy mix) = 10%

· 2 installment loans
· 3 revolving accounts with balances
· Balances on revolving debt below 30% of the high credit
· No collection accounts
· No public records
· No foreclosures
· No late payments

What’s in your score?

• Accts paid as agreed remain for up to 10 years.
• Accts not paid as agreed remain for 7 years.

Collection accounts:

• Remain for 7 years from the original inception date of the collection

Public Records

• Chapters 7 & 11 remain for 10 years from the date filed.
• Chapter 13 –open or dismissed – remains for 10 years from the date filed.
• Unpaid tax liens remain indefinitely.
• Paid tax liens and judgments remain for up to 7 years from the release date.

Every industry has its own scoring models or scoring method. If you are applying for a car, a credit card, a mortgage, or even insurance they all use different scoring models and you will have different scores based on different parameters. The credit scores you receive when requesting your own credit report will be higher and will not be used by any of the industries.

There are some scores that are not even true FICO scores. You can request your FICO scores through www.myfico.com but again you will receive personal FICO scores that are not industry driven.

What about www.annualcreditreport.com? This takes you to each individual bureaus website to obtain your credit. Those are FICO scores – right? Not necessarily.When you pull credit though Experian and order your scores you receive a PlusScore which is a score based on an in-house model developed by Experian not by FICO. The same is true for TransUnion; you are receiving an in-house model called a TransRisk score. If you want a FICO score from Trans Union you have to order it through their sister site which is www.transunioncs.com. Equifax does provide a FICO score; however, they are still personal scores. The only way to obtain your mortgage scores is when you apply for a mortgage loan through a lender, bank, credit union, etc. They are set up with special codes that are used to pull your credit through the mortgage scoring models.

 We have all seen the commercials for www.freecreditreport.com. This is an Experian based website and the scores you receive are not FICO and there is a cost. There are other advertisements that also provide this type of service and all come at a cost.   

Bankcard scores are true FICO scores but are revolving scores which will be different from mortgage scores and are usually 30 days old by the time the card holder receives them. Scores can change daily so they may not be accurate. With so many scores why bother to look at them if they’re all different? Each score model has factors that carry different weight depending on what they support. For example, when you apply for a credit card the focus will be on your credit card history and when applying for a mortgage the focus will lean towards previous or existing mortgage history.  

Vantage Score is the score that you may receive through credit monitoring services. These scores are developed by Experian, Equifax, and TransUnion and the scores range from 501-990. These are not accepted by the Lenders when applying for a mortgage loan.

The most important scores are your FICO scores and these are the one’s that will be used when applying for your mortgage loan.