Financing and Credit Score Frustration


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Having spent the last 19 years of my professional life writing mortgage loan applications, I know the anguish that can result when mortgage applicants learn about items on their credit report which they were either unaware of, or didn’t know the effect these items would have on the mortgage for which they had applied.

That having been said, I’ve enlisted the help of our friends at North Shore Advisory, Inc., the credit reporting analysts and experts in this field to provide you with a few tips, and what I regard as very valuable information on this subject. So here is the following by NSA:

No matter how sophisticated the mortgage applicant, many find credit blemishes that leave them vulnerable, confused, and rejected for financing.

It seems lately we have had an enormous amount of highly successful professionals on the verge of purchasing or refinancing who have been left frustrated, angry, and ultimately turned down for a mortgage due to lowered scores.

Example 1:

Sam and Carol, both successful Attorneys in NYC had been looking for an apartment for well over six months.  They were having difficulty compromising to find a place that met both their needs for practicality, style, neighborhood, and price. After much difficulty they finally found the perfect Manhattan Condo that brought all their qualifications together, while fulfilling their aesthetic dream.

When they first started their apartment hunting both their scores were well over the 740 fico requirement. With combined income of over a million dollars, good assets, and low debt ratio, it seemed like a slam dunk for loan approval. However, due to the length of time since credit was pulled the banker had to run new scores for loan application.

(The updated credit report showed that) Carol’s score dropped to a 652 which meant they would be denied mortgage approval. They were both astounded and angry when they learned that Carol had a tax lien recently updated on her credit which was placed in error dropping her score at least 60 points, as well as a recent late payment on a Bloomingdale’s card.

By the time Carol and Sam found us they had only a week to get the score increased before losing the property. Carol was devastated and felt it was her fault they were going to lose the home of their dreams. 

Example 2:

Jim, a high powered executive, and his wife Susan, an art dealer, were getting ready to refinance the $900,000 that was left on their mortgage. Since their Fico scores were around a 770 their current rate of 5% would be reduced down to around 3%. This would save about $1000 a month and around $300,000 over the life of the loan. 

Throughout the process of refinancing Jim was traveling and took a very long time to get all the documents the banker needed for loan submission. Since so much time had gone by the bank required a new credit report with the application. Unfortunately, when the credit was pulled Jim’s score dropped by 80 points.

Jim had opened two new credit cards not realizing his average age of credit would be reduced by these new born accounts which would drop his scores. He had no way of knowing the two zero percent balance transfer cards would now be costing him $300,000.

Carol and Sam were very lucky and were able to qualify for loan approval. Within a week we had success removing the lien from Carol’s credit profile and her scores went up to 715. With the couples ability to put more funds down and the increase in score they were able to get loan approval.


Unfortunately for Jim and his wife there was nothing anyone could do to help. Once new accounts are opened only time could increase the average age of credit and ultimately the credit scores.

How often could this happen to your clients?  Most individuals do not understand the confusing algorithms and counter intuitive rules of credit scoring.  By the time they realize just how important their credit behavior is, it is usually too late.

Making sure credit is analyzed with future financial goals in mind is a MUST before taking an action that can foil those plans and limit a consumer’s options for a better quality financial life.

Call us with any questions or feedback on credit challenged clients or credit in general!


“Great credit brings great opportunity!!”             Copyright 2012

 


North Shore Advisory, Inc. offers credit repair, restoration, monitoring, and education services. We’ve been providing credit education and credit improvement for almost 25 years. For bankers and realtors we can review your clients credit reports and scores to see if we can improve them.
We can help you with your business credit needs as well as any personal credit scores.
Contact Us:
914-524-8300
Email:
info@northshoreadvisory.com


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Expand Financing Options With Balloon Mortgage Loans


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If you aren’t familiar with mortgage financing options, it is never too late to get started. Understanding the different terms and having the ability to relate them to each other and to your personal situation will help you avoid situations that are not financially viable. One of the terms that you should know is balloon mortgage loans.

This can either help you financially, or cause you problems. Understanding the details of how a balloon mortgage loan works and using it to your advantage will enhance your ability to select the right loan for your purposes. The original description of a “balloon” mortgage loan is a loan on which repayment is made in monthly payments of “interest only” and exclude any principal reduction feature.

Payment was made to principal in one lump sum at the end of a specified term, meaning that if you took out a 10 year balloon mortgage loan for $100,000 at 5 percent, your monthly interest payments would probably be calculated at $417 per month (rounded to the nearest dollar), and you would have to come up with $100,000 in one lump sum on the due date in 10 years. Folks who opt for balloon mortgage loans do so in order to take advantage of the lower monthly payments.

If you are exposed to balloon loans over a period of time, you’ll find that “Some balloon loans, such as a five-year balloon mortgages, have a reset option at the end of the five-year term that allows for a resetting of the interest rate (based on current interest rates) and a recalculation of the amortization schedule based on a remaining term. If a balloon loan does not have a reset option, or frequently even when it does, it is expected that the borrower will sell the property or refinance the loan before the end of the original loan term.” This according to Investopedia on the Web.

There have been a number of creative changes to the balloon mortgage loan over the years, and during the subprime mortgage era some lenders offered balloon mortgage loans with a feature which consolidated a specific percentage of the loan each month. At the end of your agreed-upon term, you were required to pay the additional percentage that is left. In many cases, this equalled about fifty percent of the loan that you had taken out.

You can work with balloon mortgage loans to your advantage if you have the right finances in place. For example, if you know that you will have a large sum of money at a given time or date in the future, borrowing money under the terms of a balloon mortgage loan would make sense as long as you arrange the end of your loan term to coincide with the date you will receive the large sum of money. It is circumstances like these when having a balloon mortgage loan can help you to save now and build your credibility with financial investments later.

If you aren’t certain of your financial picture and what it will look like in ten years, then a balloon mortgage loan will most likely not be right you. Because since you will be expecting to pay a large (lump sum) amount at the end, it can lead into debt – or foreclosure if you don’t have the money – and therefore won’t help you to make an investment on another house in the future.

On the other hand, if your income is a specific amount now but you know that it will increase later, then you can use a balloon mortgage loan in order to stabilize your financial conditions by refinancing into a higher payment amortized loan.

By using an exotic balloon mortgage loan (if you can still find a lender that offers such a loan), you will be put into a situation where your mortgage will blow up to twice as much at the end of the term. This can be an advantage or a disadvantage, depending on your situation. By knowing exactly how to tie the end of your balloon mortgage loan into your expectant good fortune, you will be a good position to find the best financial options for your situation.


When Is Refinancing Into A New Mortgage Not Advisable?


Many homeowners make the mistake of thinking that refinancing is always a viable option. However, there are times when refinancing into a new mortgage is really not advisable. Homeowners can make a significant financial mistake by refinancing at an inopportune time. There is a couple of classic examples of when refinancing is a mistake.

One occurs when the homeowner does not stay in the property long enough to recoup the cost of refinancing into a new mortgage. The other is when the homeowner has had a credit score dropped since the original mortgage loan. Other examples are when the interest rate has not dropped enough to offset the closing costs associated with the refinance mortgage.

Recouping the closing costs

In determining whether or not it is worthwhile take out a refinance mortgage, you should determine how long you’ll have to maintain ownership of the property in order to recoup the closing costs. This is significant especially in the case of you intending to sell your property in the near future. There are refinancing calculators readily available on the Web which will provide the amount of time you will have to retain the property for making a determination whether it’s worthwhile to get a refinance mortgage.

These calculators require you to input information such as the balance of your existing mortgage, the existing interest rate and the new interest rate, after which the calculator returns results comparing the monthly payments on the old mortgage and the new mortgage as well as information about the amount of time required for you to recoup the closing costs associated with refinancing into a new mortgage.

When credit scores drop

If you believe that a drop in interest rates is a signal for you to immediately refinance into a new lower rate mortgage, you may need to take a step back and examine the circumstance. If the new lower interest rates are combined with a drop in your credit score, the resulting refinanced mortgage may not be favorable to you simply because your current credit scores may not be favorably compared to the credit scores at the time of your original mortgage, then refinancing into the new mortgage may not be to your benefit. However, depending on the amount interest rates have dropped, you will have to take out the calculator again to help you make a good decision.

Have the interest rates dropped enough?

A common mistake many homeowners make in regard to refinancing into a new mortgage is to refinance whenever there is a significant drop in interest rates. This can be a mistake because the homeowner must first carefully evaluate whether or not the interest rate has dropped enough to result in an overall cost savings. Homeowners often make this mistake because they fail to consider the closing costs associated with refinancing the home.

These costs may include application fees, origination fees, appraisal fees and a variety of other closing fees and charges. These costs can add up quite quickly and may eat into the savings generated by the lower interest rate. In some cases the closing costs may even exceed the savings resulting from lower interest rates, so it requires careful thought about refinancing into a new mortgage even when there’s a significant decline in interest rates.

Refinancing into a new mortgage can be beneficial even when it is a “mistake”

In reality, refinancing into a new mortgage is not always advisable, but some homeowners may still opt to refinance even when it’s technically a mistake to do so. This classic example of benefitting under adverse conditions is when a homeowner refinances to gain the benefit of lower interest rates even though s/he winds up paying more in the long term. Under these circumstances, the lower interest rate is not low enough to result in an overall savings, but the homeowner benefits anyway because s/he consolidates a considerable amount of short term debt into a long term refinance mortgage.

Although most financial advisors may warn against this type of financial approach to refinancing into a new mortgage, homeowners sometimes go against conventional wisdom to make a change which may increase their monthly cash flow by reducing their overall debt obligation payments. In this situation the homeowner is making the best possible decision for his/her personal needs.