Credit Scoring and Mortgage Lending

What is your “mortgage score?” The answer could determine whether or not you qualify for a loan to finance the next home you’d like to purchase — or the terms you are offered by a lender to refinance your present mortgage. Or if you are a mortgage lender, your clients’ score will be a major factor in determining whether or not, and when, you can close a loan for them.

Over the past decade, the mortgage industry has been quietly but aggressively developing a system of scoring people, related to their capability to repay a mortgage loan. For a long time, consumers weren’t aware it was taking place. Now, many people know about the system, but lenders are still reluctant to tell them how their scoring is determined and what their score is. And an increasing number of prospective borrowers are asking questions about the scoring system. They want and demand answers.

Homebuyers with a score of 700 or higher usually have no problem obtaining a desired mortgage loan. In fact, lenders will often roll out the red carpet for these buyers, knowing the paper work will flow through easily and rapidly.

On the other hand, if the score turns out to be low, or a “caution” flag is attached to the report, lenders will typically pass on the application, according to Jeff Segal, president of D.L. Mortgage, Inc., a major mortgage broker firm in California. Most lenders would rather wait for a high-scoring applicant to come along, rather that hassle with an applicant with high-risk or marginal qualifications, he said.

Scoring can be a very positive development in processing and closing mortgage loans. It expedites the process significantly. It can also make life more difficult for some applicants.

A key problem in the current system is the method by which a person’s score is determined. It involves their credit reports from the major credit reporting bureaus, and a “modeler” who determines the credit score. Lenders then use the score to determine loan eligibility, interest rates and other terms associated with a mortgage.

“In addition to a person’s credit report, the scoring is affected by a lot of erroneous stuff – information that shouldn’t be considered at all,” Segal said. “And if a person can get hold of that information and finds it is filled with errors, it take weeks or months to have it removed or corrected. It can be a real nightmare.”

The scoring system’s adverse and unfair impact on homebuyers is finally being addressed by legislators. New laws are being proposed that gives homebuyers the “right to know” their credit scores. Lenders may soon be required to share the credit score with loan applicants, along with information about how the score was determined.

“An example of how a score can be negatively impacted is when someone shops for a loan on the Internet or transfers loan balances on credit cards in order to obtain more favorable interest rates,” said Kay Wilson-Bolton, president of a regional Association of Realtors. “Every credit inquiry negatively impacts the score.”

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An increasingly hot niche in the real estate market is corporate housing. It’s directly affecting local home sale and mortgage markets. Corporations are buying residential properties to house employees temporarily while they are finding a permanent home of their own in an area where they have been transferred – or while an employee is on a temporary assignment.

This has grown to be a $3 billion industry, according to the CEO of Denver-based Avenue West Corporate Housing.

“In many areas, demand for temporary corporate housing has outpaced supply. That has made investing in such properties highly lucrative,” the CEO said.

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“Foreclosed Homes from $3,000 – No Money Down.”

That was the bold-face heading of a recent mailing promotion, advertising a guide to making money from foreclosed and auctioned homes. But don’t be mis-guided, states a report from the Federal Trade Commission.

“You’re likely to hear pitches for homes being sold and auctioned in your area at great prices. But the deal isn’t always what’s promised. And if you buy one of those guides, you may end up spending more than you planned,” the FTC report warns.

The guides typically sell for about $50. The seller usually wants the buyer’s credit card number or a direct withdrawal from a checking account. You may even be billed for a guide you didn’t order, an FTC report points out.

“In many cases, the guide selling business will bill a credit card or debit a checking account even if the consumer never agreed to buy anything. They get your bank account or credit card information under false pretenses, sometimes claiming that they need the account number to verify a credit history or to hold’ an order.

“When the guide arrives in the mail, chances are it contains far less information than expected. Actually, it’s information that is readily available elsewhere for free,” the FTC report stated.

Bottom line: While it’s possible to buy homes through foreclosure sales, you won’t find the “good deals” advertised in auction guides sold by fraudulent promoters.

Most well maintained homes being sold in a foreclosure sale will sell for close to their appraised value, the FTC noted. The houses that sell for significantly lower prices often are in disrepair or located in unstable communities.

Also, foreclosed homes are usually sold “as is.” They don’t come with warranties, and sellers aren’t required to disclose any problems. Buyers, particularly those who don’t pay for a professional home inspector before closing on the deal, may find themselves mired in unanticipated repair bills.

Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends. It’s titled “Open House” in most newspapers, and carries his byline as James M. Woodard. He is also a professional storyteller with a Web site at:

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