Know the 5 Parts of a Credit Score

From 7/23/14

Everyone Should Know the 5 Parts of a Credit Score; Do You?

Credit, credit, credit — we hear all the time how we need to have a good credit score. As the prime indicator of our financial trustworthiness, a clean credit report and high credit score tell lenders we are financially sound. While many consumers have their credit in order, roughly one-fourth (24.4 percent as of October 2012) of Americans have a FICO score of under 600, according to the FICO score distribution charts, rendering this portion of the population ineligible for most types of loans.

You need a score in at least the mid- to high-700s to receive good rates on home and auto loans, and to be eligible for some of the premium credit offers. However, the average U.S. consumer credit score of under 690 shows that as a whole, we have mediocre credit. Is this a result of the recent recession? Maybe overspending? Perhaps these are all contributing factors.

The results of new survey from indicate something else may be going on here, as well. That something is potential misinformation, or even a lack of knowledge among consumers on credit matters. Results of the survey, which asked 2,000 Americans older than 25 questions about what’s included in their credit scores, indicate that in some of the main credit score areas, fewer than half of respondents answered questions correctly. How do you measure up against the survey respondents?

Your credit score is calculated using the five major parts: payment history, length of credit history, types of credit used, amounts owed, and new credit. Although many consumers have somewhat of an idea that these factors impact a credit score, when asked specific questions, the results were a bit surprising.

When WisePiggy asked if missing a payment can ding a credit score, only 69 percent of survey respondents answered correctly. On-time payments of course fall under the payment history category, which is 35 percent of your credit score.

What about your outstanding balances compared to your line of credit? Do they impact your score? Only 40 percent of survey respondents seemed to think that credit utilization, or how much of your available credit you have out, can raise or lower a credit score. Utilization goes under the amounts you owe portion (30 percent) of the credit calculation, and it absolutely has an impact on your score.

Only around 43 percent of survey respondents thought that opening a new credit card could ding a credit score, leaving around 57 percent who said it would not have any impact. In this case the majority is incorrect, as opening a new card or any new line of credit impacts the new credit (10 percent) portion of your score calculation. Hard inquiries for new credit can also take off a few points. These inquiries occur when various lenders request to pull your credit file to approve you for a Visa card here and a MasterCard there. Additionally, when you open a new credit account, it may potentially shorten the average length of all of your credit accounts, as well as impact yet another area of your score calculation: the length of your credit history (15 percent).

Around half (46.45 percent) of survey respondents thought the number of accounts they have opened could raise or lower their score. While the sheer number of accounts you have is not directly calculated in your score, this may have an indirect impact on your utilization, mix of credit, and payment history, so both responses could really be considered correct here.

While many of the survey respondents were fuzzy on exactly what’s included in their credit reports, some of them were also unsure about the information that is excluded. For instance, around 31 percent of respondents believed checking your credit report can negatively impact your score. With all of the talk about inquiries and how it can hurt your score to have your credit pulled too much, it’s understandable that some respondents would think this. Because pulling your own file is viewed as a soft inquiry, however, it doesn’t hurt your score.

When you go to a lender and they talk about debt-to-income ratios, it may make you think that income has an impact on your credit score. That’s what around one-third of survey respondents thought. Although having a high income may help you pay your bills faster, it has zero direct impact on your credit score.

What about your banking habits? A small percentage of survey respondents thought their savings account balance (around 10 percent) or how much they used their debit card (around 10 percent) could also raise or lower their credit score. Because these are not credit accounts, these generally have no impact on a credit score.

Improving Default Rates

From 7/24/14
Improving Default Rates on F.H.A. Loans

Default rates for loans backed by the Federal Housing Administration have consistently been higher than those on loans guaranteed by the Department of Veterans Affairs. New research from the Urban Institute suggests that a key difference in how the programs measure a borrower’s ability to pay could account for much of this performance gap.

Both government-backed programs are critical to first-time and lower-income home buyers because they allow minimum down payments. F.H.A. borrowers can put down as little as 3.5 percent of the loan amount, while the V.A., which is limited to veterans and active-duty military personnel, allows for 100 percent financing.

Institute researchers compared F.H.A. and V.A. performance for mortgages originated in 2000 through 2012, and found the cumulative default rate over the life of the loans to date has been consistently higher for F.H.A. loans in each of the years, with the gap widening from 2005 to mid-2007.

For the 2007 origination year, for example, the worst for F.H.A., 36 percent of loans have gone at least 90 days delinquent. By contrast, the default rate for VA loans from that year was 16 percent.

Even when the researchers looked at loans from borrowers with similar income, credit scores and mortgage burden, V.A. loans still performed better.

The study points to two structural differences that could account for the V.A.’s performance. One is the level of lender responsibility. V.A. loans are guaranteed for a maximum of 25 percent of the loan amount; F.H.A. loans come with a 100-percent guarantee. The other difference involves underwriting. In addition to measuring the debt-to-income ratio, the V.A. uses a “residual income” test. Borrowers must show a certain level of income after the mortgage payment, taxes, utilities and job-related expenses (like child care) are subtracted from gross monthly income.

The minimum residual income levels are set by family size and region. In the Northeast, on loan amounts of $80,000 or more, a household of two must show at least $755 in monthly residual income; for four, the minimum is $1,025.

“We think residual income is probably more important than risk sharing,” said Laurie Goodman, the director of the Urban Institute’s housing finance policy center, “but it is actually extremely difficult to disentangle it.”

She estimated that F.H.A. could potentially cut defaults by as much as 20 percent if it incorporated the residual income test. Using the debt-to-income ratio alone doesn’t really measure whether a borrower will have enough excess income to cover living expenses, she added.

This can be a critical difference for lower-income borrowers. For example, two borrowers could each show a mortgage debt load of 40 percent of income, but the one with an income of $60,000 will have substantially more money left each month to cover living expenses than the one with an income of $30,000.

Geoffry Walsh, a staff attorney at the National Consumer Law Center, noted that in January, HUD adopted a new F.H.A. guideline that allows lenders to use the residual income formula as an alternative way to qualify borrowers who exceed the standard debt-to-income threshold.

But Ms. Goodman says using the formula in that fashion does not screen out marginal borrowers; instead it allows higher-income borrowers to buy costlier homes than they could otherwise qualify for.

Richard Morris, the vice president of investor relations and equity lending for Navy Federal Credit Union, which did $5.7 billion in V.A. loans last year, said the lower default rate is also attributable to the tendency of military borrowers to “take their financial obligations very seriously.”

Urban Lofts Coming to Downtown Riverside

From City of Riverside Office of Economic Development

On Tuesday, July 22, 2014 the City Council approved a Purchase and Sale Agreement with Ratkovich Properties, LLC for the sale and development of the Imperial Hardware Building and adjacent parking lot into a mixed-use apartment building with leasable retail space on the ground floor. To serve the new Riverside urban dweller, Ratkovich Properties is adaptively reusing the historic Imperial Hardware Building, built in 1900 and located in the heart of Downtown. At the intersection of the University Avenue and Main Street, this mixed-use project will include 91 apartment lofts, 10,000 square feet of ground floor retail and commercial uses, and rehabilitation of the historic facade. This catalytic development will be the first residential project of its kind in the downtown core. The image above shows the current condition of the Imperial Hardware building on the left and the right shows Santana Row in San Jose, CA which is the vision for the redevelopment project.

The Ratkovich team has a combined 45 years of real estate development experience and has developed residential, mixed-use and commercial projects throughout the Southern California region, with notable experience in historic districts and the adaptive re-use of historic buildings such as the Wiltern Theater, Pellissier Building and Chapman Market in Los Angeles and the Edison Lofts in Long Beach. Ratkovich Properties’ “vision is to develop vibrant communities where people do life together and share in the best urban life has to offer. We aim to create special places that are beloved by our residents and embraced by existing communities.”

This development project is an exciting new step towards more residents living and working in Downtown Riverside.

14 Key Decorating Strategies

From Sunset Magazine

Take a look at some of these great ideas. Let me know which ones you use.

Which Way to Cut Housing Costs when Facing Hardship

From Housingwire 7/23/14

Is this the way to cut housing costs when facing hardship?

The household is the biggest household expense

squeeze money

What’s the No. 1 way people would reduce their housing costs if they were hit with an unexpected financial burden?

Downsizing, pure and simple.

That’s among the findings by Trulia’s (TRLA) chief economist, Jed Kolko.

“In good economic times as well as in bad, financial hardship can always strike. And when it does, people might have to cut back on housing, which is typically the largest household expense,” Kolko says.

He notes that cutting housing costs involves hard choices, since moving can be expensive and a hassle, and living with family, friends, or strangers can be a challenge.

Trulia asked 2,048 Americans in late March and early April 2014, “If you experienced a major financial hardship (e.g., lost your job, unexpected medical bills), and you needed to cut back significantly on your housing costs, which of the following would you most likely do?”

Everyone’s top cost-cutting strategy? Downsizing.

Facing financial hardship that required cutting back on housing, nearly 2 in 5 people (38%) would move to a smaller home — more than any other option by a wide margin, Trulia’s researchers found.

“In fact, twice as many people would prefer downsizing than the next most popular actions of (1) renting out part of their home to a roommate or housemate or (2) moving to a more affordable neighborhood. Far fewer people would take the more radical actions of living in their car or not paying the rent or mortgage,” Kolko writes.


Source: Trulia

Grouping together similar options, nearly half (48%) of people would move to a smaller home or a more affordable location; just 21% would rent out part of their home, and only 20% would move in with someone else. That means people would rather change where they live than whom they live with, Trulia found.

“Downsizing, in fact, was the top option chosen by every demographic group, beating out all other actions for every age group, income group, and both homeowners and renters. But other cost-cutting actions were much more appealing to some groups than others – with age differences being particularly important,” he said.

Some other details include that Millennials (aged 18-34) are more willing than older age groups to move into someone else’s home or rent out part of their own home.

“Young adults are, of course, more likely to have the option of moving in with their parents than older adults do, but they’re also far more likely than older adults to move in with a non-relative or rent to a roommate,” Kolko said.

However, when it comes to downsizing, older adults (55+) are as willing as the youngsters.

“It’s the middle-aged (35-54 year-olds) who would be least likely to downsize or move to a cheaper location; they’re especially reluctant to move to a more affordable city (about one-third less likely to do so). These 35-54 year-olds would also be twice as likely to stop paying the rent or mortgage in order to avoid moving as other age groups would be, though few people in any age group would take that step,” he said.

Why are the middle-aged more reluctant to move?

“Relative to other age groups, they’re more likely to have jobs, kids at home, or both – and are therefore more tied to a school district or local labor market. They also might have more resources to weather a financial hardship since they have more savings, on average, than younger adults, and are less likely to have retired than older adults,” Kolko concludes.


Multi-Generational Homes on the Rise

From The Wall Street Journal “in Post Recession Era, Young Adults Drive Continuing Rise in Multi-Generational Living,” Pew Research Center (July 17, 2014) and “All in the Family Home: Record 57 Million Americans Living in Multi-Generational Households,” The Wall Street Journal (July 17, 2014)

Check out these infographics

MultiGenerational Homebuying Infographic 7.21.14

MultiGenerational Under 33 Group Infographic 7.21.14

MultiGenerational 34-48 Group Infographic 7.21.14

MultiGenerational 49-58 Group Infographic 7.21.14

MultiGenerational 59-67 Group Infographic 7.21.14

MultiGenerational 68-88 Group Infographic 7.21.14

The best ways to buy a home with a low down payment

From Yahoo Homes 7/18/14

Even with a low down payment or flawed credit, you might still be able to buy a home. Find out how.

Are you an aspiring homeowner with bad credit or little savings? Well, that doesn't have to stop you from buying a home. Find out about the best loan options for you.

Are you an aspiring homeowner with bad credit or little savings? Well, that doesn’t have to stop you from buying …

Let’s say you’ve found the perfect house with a big backyard for your dog and a great patio for amazing summer barbecue parties. And you’ve managed to save a low down payment to help you buy it.

But what mortgage would be best for you at this point? Well, the answer has changed over the past few years. In the past, lenders probably would have pointed you toward a loan from the Federal Housing Administration (FHA), which is part of the government’s Department of Housing and Development (HUD). In fact, the HUD website says FHA loans have been around since 1934 to help those with low down payments, low closing costs, and easy credit qualifying.

But that’s just not the reality anymore, said Sonia Garrison, research manager at Evolution Finance, which launched the social network WalletHub last year to help people with personal finance issues.

Garrison authored the 2013 Mortgage Insurance Report for WalletHub and discovered that FHA mortgage insurance premiums have doubled since 2008, making an FHA loan hard to afford for many people, she says.

However, she explains that other types of loans offer a cheaper insurance option known as private mortgage insurance (PMI) for borrowers with a low down payment or less-than-ideal credit.

PMI, bought through a private insurance company, is required on every mortgage with less than a 20 percent down payment. On the other hand, FHA mortgage premium insurance is backed by the government. Both protect the lender in case the borrower defaults on the loan. So how’s an aspiring homebuyer supposed to know which to go with? If you have less than 20 percent down saved, keep reading to find out which loan might be the best option for you.

Why FHA Loans May No Longer Be Your Best Option

FHA loans used to be the most affordable mortgage choice, especially for first-time homebuyers or homebuyers with flawed credit history or not much money saved for a down payment, says Michael Neef, branch manager at Portland Home Loan Expert in West Linn, Oregon.

But because FHA mortgage insurance jumped from .55 percent to 1.35 percent in 2013, he says that many people aren’t able to afford the monthly mortgage and insurance.

For instance, on a $200,000 conventional loan, the private mortgage insurance would be about $103 per month. If that same mortgage was drawn up by FHA, the mortgage insurance would be $225 each month, Neef says.

Why did FHA mortgage premium insurance jump so high, so quickly?

Two years ago, Neef says 70 percent of the loans he wrote were for government-backed loans, most of which were FHA loans.

“But FHA was never designed to be 70 percent of the market share. It was designed to help certain people. But it was serving all the people,” he says. “By increasing the insurance, FHA has corrected and repositioned itself to be that 18 to 20 percent of the market that they meant to be in the first place. This is a good thing. There are still those who will fit preferably into the FHA bucket.”

When Garrison began doing her study, she knew there was going to be a difference in what people paid for PMI and FHA insurance. But it was very surprising, she says, how quickly a large difference accumulated over a period of three to five years for a homeowner.

Take this example: With 5 percent down and a 659 credit score, someone can save $5,000 for five years or $1,000 a year by having a conventional loan with private mortgage insurance instead of an FHA loan, the study shows.

When you’re looking for a mortgage, it’s really easy to just focus on the interest rate of the mortgage itself, she says. But if you want the best deal, ask mortgage lenders to compare what you’d pay for FHA mortgage insurance and private mortgage insurance.

It’s possible that one lender might go through some extra steps to get you approved with a conventional loan with less monthly mortgage insurance, Garrison explains.

Who Should Still Look Into An FHA Loan?

Even with rising insurance premiums, are there still people who can benefit from an FHA loan?

Of course, says Neef. For example, those who only have down payment assistance from a gift might be better off with an FHA loan, because most conventional loans don’t allow for 100 percent of the down payment to be a gift from a family member or friend, he explains.

Or if you have a credit score under 660 or have a high debt-to-income ratio (DTI), you’re more likely to get approved for an FHA loan than a conventional loan, says Neef. He explains that FHA loans are a little more flexible when it comes to those qualifications.

According to the HUD website, you don’t have to have a perfect credit score to qualify for an FHA mortgage. In fact, even if you’ve had credit issues, such as a bankruptcy, it’s easier for you to qualify for an FHA loan than a conventional loan.

Also, homeowners might choose to take out an FHA loan if they already own one home and want to buy another one, says Neef. Conventional loans require six months of mortgage payments reserved for their current home, and a two months reserve for the new house they are buying. This is an added security measure in case the homeowner defaults on either one of the loans they are carrying. Alternatively, an FHA loan doesn’t require any reserves.

For example, if you have a monthly mortgage payment of $1,000 on your current home and a payment of $1,500 on your second home, the bank issuing the second conventional loan would want to see $6,000 in a savings account for the first house and $3,000 more for the second. That’s $9,000 in reserves before they would even consider giving you a conventional loan, Neef says.

Other Loans Available With A Low Down Payment

The traditional down payment of 20 percent of the purchase price seems impossible to many folks. That would mean saving $40,000 for the down payment on a $200,000 home. That could be a tall order, especially for first-time home buyers, those who have gone through some financial burden like a divorce, or young college graduates who have high student loans, Neef says.

And now that FHA loans have become quite expensive with their increased mortgage insurance, lenders have to be quite creative to help borrowers who don’t have that magical 20 percent, Garrison says.

So check out some loan options that might be the perfect fit for your financial situation:

Conventional Loan: You will need a credit score of 700 or more and at least a 10 percent down payment saved up, Neef says. Comparatively, an FHA loan only requires a bare minimum of 3.5 percent down. “If you have a 660 credit score, it will be a coin toss of what loan will suit you best – an FHA or a conventional. The pricing in terms of monthly payments will probably be the same,” says Neef.

The Veterans Administration (VA) Loan: This can provide an amazing mortgage loan to military veterans and their families with low or zero down payment, Neef says. The government gives 100 percent of the financing, although there’s a .4 percent mortgage insurance that is added on.

USDA Loan: Another government-backed loan is the USDA loan, which, like the VA loan, offers 100 percent financing, Neef says. Plus, the mortgage insurance premium called a “guarantee fee” is lower than that of FHA mortgage insurance or PMI. However, USDA loans do have stricter requirements, such as falling below a certain level of income. “For instance, in my Portland, Oregon area, if you have five people in your household, you cannot earn more than $100,000,” he says.

State-Sponsored Loan Programs: On a state-by-state level, there are some programs to encourage first-time homebuyers to buy in areas that were hit hard by foreclosures. You could try calling several loan officers to see if any of those special lending programs are available where you want to buy a home, suggests Bill Redfern, CEO and founder of A Buyer’s Choice Home Inspections in Pompano Beach, Florida. These state-sponsored programs enable some borrowers to take out a conventional loan and get down payment assistance. For instance, New York State’s Homes and Community Renewal program offers a conventional loan with options of 3 to 5 percent down, plus competitive fixed interest rates for 30 years.