Can You Beat the Government?

Can You Beat the Government?
by Hassan Nicholás


No, I am not talking about hidden tax secrets, overseas bank accounts or anything illegal for that matter. What I am actually inferring to are government-backed subsidy programs; such as the ones promoted by the California Housing Finance Agency (CalHFA) and the Los Angeles Housing Department (LAHD).


An article on Money.MSN.com by Liz Pulliam Weston listed "Not looking for first-time home buyers' programs" as #2 on her list of "8 big mortgage mistakes and how to avoid them" feature.

And she's right. It is a good idea to look into government-sponsored loans, but they might not always have the best deal.


We've seen a lot of people coming through our doors migrating towards these subsidized products. And I admit, its an aspect of our program that we emphasize greatly. Many lenders will announce that state, county and city programs is really the best deal one can get as a first-time homebuyer. For many this is true, but there's always an exception.


Case in point. Government-backed subsidy programs (we'll refer to them as GSPs for the remainder of this article) alleviate the burdens that credit-strapped first-time homebuyers face when buying a home by offering deferred junior loans, below market interest rates, and in some cases forgiveable interest. Depending on the program and income eligibility of the household, this can amount to a generous helping of government assistance to the borrower - essentially allowing you to "buy more home" then what you would qualify for on income alone.


Knee-deep in a failing real estate market with the word "recession" looming somewhere over the horizon, the popularity of GSPs has gained momentum and this Best Kept Secret is no longer. By now we all know its no secret that predatory, not necessarily subprime lending (yes, there is a difference), is what helped bring us to our current situation. It is then no suprise that buyers look to GSPs as a safe alternative while keeping an untrustworthy eye on traditional lenders. And with all the news coverage of lenders and realtors going under or getting bailed out for their wrecklessness (see Countrywide) it's understandable that many first-timers would seek refuge in the government. But by shying away from a traditional mortgage product are you narrowing your options?

Don't get me wrong, GSPs are great. But like in every decision, especially this one, you should do your due diligence and make sure it is the right decision for you. Here are some caveats that you should know:

• The interest rate is set. Yes, all GSPs have fixed interest rates, which is nice. What I mean here is that the interest is set; meaning regardless if a borrower has a 620 FICO or 700 they will get the same interest rate.

• But the interest rate can change. Here's something the State might not want you to know. When the demand is too high, they will artificially raise the rate. When that demand has subsided, rates will fall again.

• Funds can and do run out. Buying a home in general is an intimidating, nerve-racking experience. Imagine, being in escrow and finding out from your lender that the City of LA has ran out of funds. Now your home...and sanity is on the line.

• Restrictions. GSP is an income qualifying alternative that carries with it other requirements that must be met in order to be utilized. By trying to fit those guidelines a borrower might be compromising something they really want for the sake of getting what they appear to be a "good deal". For instance, short sales and foreclosed properties would not be eligible because they do not require home inspections. Additionally, there are other limitations, such as a cap on the maximum purchase price of a home that you can buy. That's why it is best to take a homeowner education workshop to learn the nuts and bolts of these programs before you apply.

• They Take Longer. Escrow periods when using down payment assistance programs can take up to 15 days longer then normal escrow, for a total of 45 days.

Can you beat the government then? Sure. While lending practices have turned more strict, the news is not so bleek for the borrower with an excellent credit score - which brings us to #5 on the list from the aforementioned article, "Not shopping around for rates and terms". If your FICO lands in the 700s you can probably find a rate better than anything GSPs are offering currently. What's cool is that the state lists all going interest rates for its programs. So now you can get a head start on your loan shopping (just remember interest rate does not equal APR!). And what about the City of LA programs and State programs for teachers that offer up to zero percent interest? The only thing that beats that is a grant...and we can give up on that fairytale in this market. Even if you could beat interest rates currently offered by GSPs with your stellar credit rating you are still giving up a deferred payment of up to 30 years. However, if your FICO is not as competitive going the GSP route could save you a lot of money and "buy" you the security that your mortgage won't turn on you in three or five years (ARM perhaps?).

Both government and private-sector loans offer many benefits. Before you finalize your financing, do all the math.

If I recall it was then president of Def Jam Sean Carter who said, "Men lie, women lie, numbers don't."

New Homebuyer FYI #2

compiled by Hassan Nicholás
FYI #2...random stuff to know

• A Lease not created equal - An auto lease on your credit report is looked upon differently then other types of credit that appear on your report. Why? Lenders figure that even if you pay off that lease, you're still going to need transportation. Which means you'll probably get another lease or have to buy a car outright. So even if you only have 10 months or less left on your lease, a lender could still count those remaining payments against since they anticipate you "replacing" it with another car lease, payment or purchase.

• New Gold Faucet with your Rehab loan? Maybe not - Thinking about using a rehab loan from the government to turn that fixer-upper into the house of your dreams? Well, you might want to hold off on clearing the yard for that new pool. Unfortunately, no improvements considered to be a luxuary are permitted. But, what if the home you're going to purchase already has the pool? Well, then that's fine. Just hold off on installing the imported Italian marble tiles in the bathroom.

• YSP & Pre-Closing Rate Bumps – Yield Spread Premiums can be tool for brokers and agents to pull bait and switch scams on first-time homebuyers. How does it work? The agent convinces the borrower to float the rate (probably tells them that interest rates will likely lower) up until closing. Then, the day before closing the agent announces a “rate bump” due to a dip in credit score, market conditions, cut in appraised value, a pop-up on the credit report, or whatever excuse they can make up to raise the rate – usually by ¼ but no greater than 1/8 points (anything higher might send red flags to the buyer wondering why the rate increased by so much). The agent then presents the buyer with new GFE, TIL and 1003 documents reflecting the changed rate and everything else re-disclosed and compliant (Although, in some states if the rate is changed, the buyer must be given three days notice. If that is the case an agent might backdate documents to reflect that). Since it is unlikely that the borrower can find new financing a day before closing they are practically forced to “eat” the extra cost and take the loan while the agent enjoys an extra $1,000 per transaction. And many times the buyer won’t blame the agent because they claimed to have understood the market risk of going the “floating rate” route anyway.

News Wire: The NEW FICO Score of 2008

Default Lines: The New Math of Credit Scores
by Jane J. Kim
Thursday, December 20, 2007
provided by The Wall Street Journal Online

The company that cooks up credit scores for millions of Americans is changing its recipe -- and that could affect how easily you get credit in the future.
Fair Isaac Corp., maker of the popular FICO credit score used by most lenders, says its new scoring model will do a better job predicting the likelihood of a borrower defaulting on a loan. For one thing, the new model, dubbed FICO 08, will be more forgiving of occasional slips by consumers, but will take a harder line on repeat offenders. Fair Isaac predicts its new system will help lenders reduce default rates on their consumer credit by between 5% and 15%.
The rollout of the new credit-scoring system comes at a time when lenders say they are eager for more-accurate measures of credit risk, in part because of rising loan defaults as subprime mortgages go bad and housing prices fall. And there are signs that delinquencies are creeping into other types of consumer debt, including auto loans, further prompting lenders to tighten up on credit.

The FICO score, which Fair Isaac says is used by 90% of the 100 largest banks, and other similar scores hold sway over the lives of millions of people. Financial institutions use them to determine the granting and pricing of credit, insurance, cellphone usage and, in some cases, employment and utility services. Some consumer groups have raised concerns about whether credit scores are being used properly and whether they are valid measures of credit risk for some groups of consumers, especially minorities and lower-income individuals, says Travis Plunkett, the legislative director for the Consumer Federation of America.


Credit scores, which are calculated using proprietary models, also are criticized for a lack of transparency. "This is a product, per se, but it's a product that has inordinate influence on the financial lives of hundreds of millions of Americans," says Mr. Plunkett. Fair Isaac, based in Minneapolis, says it believes it does a good job of explaining the factors that go into calculating the FICO score and in guiding consumers on how to manage their scores.

Consumers could start seeing the new FICO scores by the spring, though some lenders may take additional time to test the system to see how it works with their business and loan portfolios. Fair Isaac, which last revamped its scoring model earlier this decade, says it is accelerating its FICO 08 rollout, partly in response to lenders' demand for better risk-management tools.

The latest version of the FICO score will largely look and feel the same to consumers and lenders. Scores will still range from 300 to 850 -- the higher the better -- and the model will continue to look at the same factors, including consumers' level of credit indebtedness and payment histories, length of credit histories, number of recent credit openings and inquiries, and the type of credit used, to determine scores.

But the new model will more finely slice and dice the information in consumers' credit files to do a better job of separating the "good risks" from the "bad risks," particularly for subprime borrowers; those with "thin," or young, credit files; or consumers who are actively seeking new credit. "Those are the communities that lenders are most interested in" to determine credit risk, says Craig Watts, spokesman for Fair Isaac.

"Consumers who are low risk will score better with the new FICO version, and consumers who are high risk will score lower," says John Ulzheimer, president of consumer education for Credit.com, a personal-finance Web site. Higher-risk borrowers may find it tougher to get credit, while those with less-risky profiles -- though they may have gotten approved for credit accounts in the past -- will start to get better deals from lenders, he says.

Two people with the same FICO score currently could see their scores diverge under the new system. One possible reason: FICO 08 gives more points to consumers who maintain a variety of credit types, such as credit cards, a mortgage and auto loan, because it shows they can manage payments on different kinds of loans. On the other hand, the new scoring system penalizes to a greater degree borrowers who use a high percentage of their available credit.

FICO 08 also will draw greater distinctions among different borrowers who are at least 90 days late in making a loan payment, known as a serious delinquency. Traditionally, many credit-scoring models grouped subprime consumers into one general category. But Fair Isaac says its new model will give a higher score to a borrower in arrears if they also have a number of other credit accounts in good standing. Conversely, a person's score could drop if he or she has multiple delinquent accounts.

"Overall, more consumers will see their FICO scores go up slightly than will see their scores drop," says Tom Quinn, vice president of global scoring solutions for Fair Isaac.

Despite the new scoring model, consumers still have to make sure the information in their credit reports, which Fair Isaac relies on to come up with its score, is accurate. If consumers feel their FICO score is unfair, they would have to go to the individual credit bureaus, Experian Group Ltd., TransUnion LLC and Equifax Inc., for a copy of their credit report on file and look for any errors or missing information. If there are any, they would have to contact the credit bureau or the financial institutions to dispute those errors.

FICO 08 also aims to curtail the growing business of allowing people to polish their credit by "piggybacking" on someone else's good credit history. In recent years, credit-repair Web sites have sprung up that arrange for subprime consumers to boost their scores by becoming authorized users on accounts held by strangers with better credit. When scoring a consumer, FICO 08 won't take into consideration credit-card accounts for which that person is an authorized user. But the move also will hurt legitimate users: People who give a credit card to a child or a spouse as an authorized user to help boost their credit score.

FICO 08 is likely to face some competition from VantageScore Solutions LLC of Stamford, Conn., a joint venture of the three credit bureaus that was rolled out in 2006. Fair Isaac has sued VantageScore and the three bureaus, accusing them of using unfair and anticompetitive practices to harm the FICO brand. Recently, Equifax linked the suit with the launch of FICO 08. The company has said it wouldn't move forward with FICO 08 and that its relationship with Fair Isaac remains "strained" until the lawsuit is resolved, says David Rubinger, Equifax spokesman. The new FICO model has already been distributed to Experian, which is in the process of implementing it, while TransUnion expects to have the scoring model available for lenders to test during the second quarter of 2008. Fair Isaac says its intention is to provide the formula to all three credit-reporting agencies.


Copyrighted, Dow Jones & Company, Inc. All rights reserved.
Link to Article

What You Need to Know About Credit

Why is Good Credit Important?

The difference between a 700 FICO score and 698 is one-half percentage point. Meaning, on a $165,000 30-year fixed rate mortgage, that half point could cost you more than $19,000 in interest charges, assuming 6 percent is the lowest rate available.

Having good credit and strong FICO score makes all the difference between getting a good deal or bad one - or even none at all. Here are some facts that you should be aware of:

• A typical credit card purchase ends up costing 112 percent more than if cash were used.


• Your debt payments are reported to creditors once a month. While you might be able to get away with being 30 days late with some lenders, all lenders will turn their heads if you're 60 or more days late.


• Lenders typically don't want to see no more than 3 - 4 open credit cards. If you must, then close the most recent card(s) first. But always pay off your outstanding debt before closing.


• Before you apply for a mortgage be sure you're not spending over 30% of the maximum balance on your credit card(s). To figure this out, simply multiply your maximum limit by 0.3. That will be the number you shouldn't go over. Example: Discovery card has a maximum limit of $3,000. You have a current balance of $1,500. You should not spend over $900 (3,000 x 0.3).


• It is possible to improve your credit score by 20 points in 60 days.


• Any time you apply for a mortgage or car loan a tri-merged credit report is pulled. This has a negative impact on your FICO score, which is why you should keep your loan shopping condensed to five days if you know you will be applying more than once, rather then spread throughout the month. This way you will only get "hit" once, instead of for each time you your credit was pulled.

• Just because negative information no longer shows up on your credit report after 7 - 10 years, that doesn't mean it isn't affecting your score. Don't try to "wait out" your debt.

• To be eligible for government-backed subsidy programs (downpayment assistance), you must have a FICO score of at least 620.