Mortgage Credit

Credit: Essential for Mortgage Loan Approval

Mortgage Credit

To a mortgage lender, it means everything to the mortgage loan approval process. It is the basis upon which everything else is calculated and incorporated in approving a mortgage loan, whether it is a conventional or FHA loan. Yes it is important to have a job and be working on that job for two or more consecutive years; And, of course, money for down payment and settlement costs are also important and is taken into consideration in determining a mortgage borrower's qualifications for a mortgage loan approval and subsequent loan closing.

The article below is a product of North Shore Advisory and is presented here for the benefit of our readers based on special permission granted to Borrower-friendly Loans by North Shore Advisory.

How do late Mortgage payments impact FICO scores?

FICO has recently given us more information about the delinquency decreases in credit scores. Although it is impossible to know exactly how late mortgage payments affect Fico scores, we can now give you a detailed glimpse into the score dips and the length of time it takes for recovery.

I have listed three different examples of situations which are common in today's economy and an analysis of financial strategies based on the new score information.

- John is a retired police officer who just finalized a divorce. He bought his home with his ex-wife 6 years ago. He can no longer afford the monthly mortgage payment on a single based income. The home is worth 40% less in value than his current mortgage. He is trying to decide whether he should cut his losses and short sale his property through a local realtor. John has no intention of buying a home for another 4-5 years. He has no pressing financial goals in the near future. He has had one recent 30 day late payment on his current mortgage and his credit score is a 660.

- Janet is a 25 year old teacher's aide. She lives in a condo she purchased 4 years ago. She is recently unemployed and has just become engaged. Janet and her fiancé plan to get married and have a family. Their goal is to purchase a home in the next two years. Janet's mortgage is becoming difficult for her to pay and she has had one 30 day late payment. Her credit score was a 720 but decreased to a 630 after her recent late payment.

- Stanley is a single 32 year old business development representative. He has had a difficult time in the past two years, earning enough income to cover his expenses and mortgage. He was earning a high salary until his business declined due to the economy. He now earns $50,000 which is less than half of his previous income. Due to this drastic change he has had a 90 day late payment on his mortgage and his credit card debt is very high. Stanley's credit score is a 650.

The Fico Score ranges from 300-850. A 780 Fico Score is considered to be in the excellent range. Let's look at what happens to the scores with late mortgage payments:

ONE 30 DAY LATE ON A MORTGAGE

Starting at 780 will reduce down to 670-690 range
Starting at 720 will reduce down to 630-650 range
Starting at 680 will reduce down to 600-620 range.

ONE 90 DAY LATE ON A MORTGAGE

Starting at 780 will reduce down to 650-670 range
Starting at 720 will reduce down to 610-630 range
Starting at 680 will reduce down to 600-620 range

When you look at the impact of a 30 day late payment as opposed to a 90 day late payment, the impact difference is not substantial. What is SUBSTANTIAL is the time it takes to recover from these two actions.

Recovery time for scores from late mortgage payments without credit restoration:

For the 780 original credit score it will take 3 years for the 30 day late payment and 7 years for the 90 day late payment. For the 720 original score it will take 2.5 years for the 30 day late payment and 3 years for the 90 day late payment. For the 680 original score it will take 9 months to recover from both the 30 and 90 day late payment.

So what does this mean for John, Janet, and Stanley?

- Since John has no interest in purchasing a home within the next 4-5 years and his score has dropped from a late payment already it will have no consequence to his life if he follows through on a short sale. He has an apartment that he rents and he will move into it once the home is sold. Because of this, his credit will not be scrutinized for landlord approval and his score dropping is of little consequence to him. The short sale will be viewed as a settlement for less than full balance on his credit profile and will reduce his score further.

On the other hand Janet has to consider her short term future. If she is late again or late 90 days, her score will decrease further and it will take her longer to recover. Her 30 day late payment occurred when her score was 720. Since she only had 1x30 day late, her score recovery should take 2 ½ years. If she did not hire a credit repair company, and chose to wait 2-3 years to buy a house, her scores would be back to a range that would afford her a good rate. Once Janet was educated as to how important it is for her to stay current on her mortgage, both her and her fiancé decided to move in together immediately. They wanted to ensure her credit was protected. Her fiancé took full responsibility for the current payments on her mortgage. This will help them both by securing their ability to get a loan within the next 2-3 years at a good rate. Without this understanding Janet may have risked having a series of late payments. This would have been very difficult to recover from when the time came for them to purchase a home.

Stanley's original score was over 700, he had a 90 day late payment on his mortgage, and it will take 7 years to recover. If he does not hire a credit repair company he will be waiting it out a very long time. His debt is over $50,000 and he only owns one property which is his primary residence. His sole interest is getting back on his feet and getting rid of his debt. It is advised, he consider speaking with a bankruptcy attorney. He is not interested in getting married or having a family for a good ten years and has no plan to buy a property in the near future. Yet, Stanley can still remain in his home if he goes into bankruptcy. Without the knowledge of the length of recovery time from this 90 day late payment, Stanley might have continued to juggle all his debt and opt to pass on bankruptcy. He does understand that the bankruptcy could reduce his score another 100 plus points. Stanley decides since he has to wait 7 years to get back to his original 780 score, the choice to move ahead with the bankruptcy and free himself of debt was much easier. Although the bankruptcy may drop his score further, the difference between a 650 and a 540 is not going to change any choices he has foreseen in the next 7 years. The burden of all his debt being lifted by including it in a bankruptcy would make a huge impact on his life and give him the fresh start he so badly needs.

It is clear that knowing more about how the scoring systems work can ultimately help individuals to make excellent choices for their future. As credit experts, when evaluating a consumer's options for moving forward to give the best cutting edge credit advice, we need a full current copy of the credit reports, scores and an outline of the individuals short and long term goals. Once all of these factors are analyzed, we are able to give valuable advice tailored to the individual's unique situation. In many of the cases discussed today, with our credit restoration program we are able to cut down the time periods outlined significantly. These examples were given to educate consumers and professionals on the time factors, if the choice was made to wait for the natural recovery of credit scores.

North Shore Advisory offers credit repair and restoration services. We've been providing credit education and credit information for more than 20 years. We can help you with your business credit needs or personal FICO scores. For Banks and realtors we can improve your clients' credit score.
Call us at 914-524-8300
Email: info@northshoreadvisory.com Following is another article brought to you by the good folks atNorth Shore Advisory.

Building and Nurturing Great Credit Scores
What Can It Do For You?

In today's economy it is clear that credit and credit scores are extremely important. In many cases the right score could not only save consumers hundreds of thousands of dollars, if not millions, over the life of a mortgage. It could also dramatically change an individual or families quality of life. The point I am trying to make, is a higher score could buy a consumer a larger mortgage. This could allow a family to live in a better area with a higher rated school district. In reality this could provide a child with a better education with more options for future success. There are so many ways in which a credit score can help or hinder consumers. Unfortunately, many consumers do not realize the power of credit and scores until they are denied financing or told they will have to spend hundreds or thousands more on monthly mortgage payments. At this point they are playing catch up and companies like ours are called to help address lower scores. In the majority of these cases we are successful at increasing credit scores by hundreds of points or just getting consumers to the goal they have in mind.

To be clear here is a view into how low scores can hurt and how high scores can help.

John and Susan are teachers about to get married. They would like to buy a home in the suburbs of Long Island N.Y. and start a family as soon as possible. John had some credit management problems. He had many late payments with accounts that he did not pay at all. He is now in his late twenties and has not addressed these credit issues in a few years. Susan has at least 6 creditors listed on her credit report. She has always been diligent about managing her credit and paying on time. Susan has a 745 Fico score and John's score is in the high 500's. Since they need both incomes to cover the cost of the mortgage, both of their credit scores are essential for mortgage approval. Unfortunately John also had some student loans that were defaulted on. Therefore, he can't get approved for an FHA backed loan. The government does not want to approve a loan they insure if the applicant has previously defaulted with them. This puts the couple in a difficult situation. Since real estate has dropped dramatically, they now have the opportunity to afford a home in a better school district which will enable their children to have greater success in the future. If they decide to wait until John's credit naturally gets better, it could be 5 years and prices on homes may be much higher. This is a very stressful way to begin a life together and start a family. Susan is already disappointed and resentful that her plans must be set aside and the relationship is already on shaky ground.

Larry is a real estate broker and has just come across a property that is an incredible value. He had no intention of purchasing an investment property but he knows this deal is a once in a lifetime opportunity. Larry has been a great credit manager and has a Fico score of 785. Although his income has lowered dramatically due to the economy Larry has worked hard to insure his credit is protected. Larry qualifies for the best loan at a very low interest rate. He just managed to afford the property with his income and has been approved by the bank. If Larry's score was below a 740 he would have been denied the funding needed. The property is valued at $800,000 and Larry will be renting it out. He will earn $3000 a month in profit of rental income once the deal is done. Larry's credit has afforded him a great value and extra income at a time where he needs it most. If he had John's credit this would never have happened.

Maggie is in her third year of part time employment with an Information Technology Company in NYC. She has built up a consulting business on the side. Maggie graduated from college five years ago. She is a very talented and goal oriented young woman. When she turned 18 her mother gave her an authorized user credit card on a very old Visa account that was managed well. Once the Visa card appeared on her credit, three months later, Maggie opened up a card solely in her own name. Within a year of using and managing the card Maggie began building more credit. To date Maggie has 5 credit cards, a car lease and a few student loans. Maggie has a credit score of 763 which is excellent for a young woman in her twenties. With her mother's eighteen year old credit card on her record, her score boosted an extra 50 points. This puts her in a great score category. Recently, with enough income from her part time consulting business she decided to develop her own business on a full time basis. She will need to sign a lease for office space, get approval for equipment leases, hire some employees, and will need a line of credit as well. Since Maggie is in the beginning of a new business she will have to sign personally to get approval for all the financing products needed. Fortunately, Maggie will have no problem getting these approvals with her current credit scores. If Maggie had John's credit she would either have to wait 5- 7 years or take in a partner limiting her ability to have control of her business and future.

As you can see credit can do much more than just save interest in financing. Credit is an asset that all consumers must aggressively manage since it can significantly impact so many aspects of an individual's quality of life and the choices available to them.

Please call us if you would like any feedback on a credit report or how we can improve the scores. Remember "Great credit brings great opportunity"

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