Last week’s jobs report, and the continuing financial woes in Europe, are keeping mortgage rates low in Charlotte and throughout the US.

On Friday, after the weak Employment Report, mortgage rates fell to their lowest level on 2010.

When rates eventually go back up, it will happen quick.  It could be this weeks $70 Billion in new treasury debt, so some surprise news from Wall Street that causes it, but something will cause rates to jump and they will jump quickly.  Rates always fall slowly, and rise quickly.

The issues in Europe won’t end this week, so we may see low interest rates all summer.

However, if you are still sitting on the fence about refinancing or buying, (I know you are out there – less than half of the mortgages over 6% have refinanced in the past year) don’t wait too long to get started.  Missed opportunity brings regrets.

Home Loans are not difficult to get – if you meet the basic criteria.  Commercial loans and business loans continue to be tough to get.  Every lender in the country will look at your credit score, documented income, and your savings.  If those things meet the criteria, refinancing or buying a home now is pretty simple when you work with a mortgage professional.

As credit cards balances get close to their maximum limits, your score will start to drop. In fact, a single credit card at its maximum limit can lower someone’s credit score by 75-100 points.  This drop in a score can be the difference between a mortgage loan approval or denial, or add 2% to the interest rate on a car loan.

Reducing the amount owed on a credit card is the fastest way to increase your score.  Even using 20% of the limit of a card ($2,000 with a limit of $10,000) can start to have an impact on your credit score.

Consolidating credit card balances onto one low interest rate card can save you money on credit card interest. However, if this also maxes out the limit on the low interest rate card, you will lower your credit score.  Save the money on the credit card interest only if you are not going to be using your credit score to qualify for something more important. That is, don’t try to save $50 on credit card interest and increase your mortgage payment by $300 due to a lower credit score.

How can you lower your balances and credit utilization ratios?

1. Don’t spend too much – imagine how things would look if Congress and the White House had to have the money to spend it?  You and I should know that, so we also need to live that way.  Credit cards are ok to use to get frequent flier miles, but if they are never not paid in full at the end of the cycle – they are a problem, not a solution. Quit spending more than you can pay each month!
2. Pay off your credit cards every time you get paid.  If you get paid bi-weekly, pay your credit cards online the day you get paid.  This way your balance is always low and manageable, and you never get tempted to carry over the balance from one month to the next.  The best savings accounts today yield only 0.25% to 1.5%, so don’t risk paying interest on credit cards in the hope that you will earn an extra $0.99 on your savings account while waiting to pay off your credit cards.
3. Call your established credit card accounts and ask them to increase your credit limits.  This won’t pay down the balance but it will reduce the amount owed ratio and help your score.  Many banks won’t do this anymore, but if you don’t ask, the answer is definitely ‘No’.  Ask.
4. Don’t do the balance transfers. Most people don’t read the fine print on the transfer and credit card lenders will stick you with a 3% balance transfer fee.  On a home loan, no one would pay 3 points to get a lower rate, but people do this routinely on credit card balance transfers. Balance transfers will usually leave you with a maxed out credit card and still cost you money.
5. Steamroll your credit cards.  Pick the card that is closest to its limit, and apply all extra cash to paying off that card.  When it gets to zero, take that cash and steamroll onto the next card.  Usually we use this strategy to get out of debt, but if the goal is to increase the credit score, rank order your cards in terms of how close you are to the limit rather than the actual interest rates. As each card is paid off, you will have more and more cash available to apply to the next account.  Pay off cards prior to other loans as loan accounts won’t impact your credit score as much as credit cards.

Keep Credit Card balances low.  Reducing what you owe on credit cards can increase your score by up to 80 points in as little as 30 days.

You need to get your credit score to at least 740 in today’s economy.

If your credit score is not a 740 or higher, you will pay more for things like home loans, auto loans, credit cards, insurance. The extra costs of all these things will make it very difficult to have extra money left over.  A lower credit score is like a stealth tax that takes away your ability to save more, spend less, and possibly, even earn more.

The main reasons people have lower than a 740 credit score:

1. High balances on credit cards
2. Late payments
3. Collection accounts from old medical claims
4. Collection accounts from utility bills that their college roommate was supposed to pay
5. Not establishing credit

Ongoing things to do:

• Keep your credit card balances as low as you can
• Keep your credit limits high – don’t close accounts, and don’t lower your limits
• Pay your bills on time

If you have old collection accounts, touching them is going to hurt your credit.  If you aren’t planning any major borrowing in the next year, let’s go ahead and clean them up.  Paying off an old collection account will not immediately improve your score, in fact, your score will likely drop for a few months.  The credit scoring model treats recent derogatory credit more harshly than old stuff.  So, if you pay off a collection, it makes it appear recent and brings down your score.

Even if “it’s not your fault”, paying a collection that your old insurance company or roommate was supposed to pay, is far better in the long run than being right.  Take the hit, write the check, and over time, that old collection will fade from memory, and more importantly, from your credit report.

If you are thinking of buying a house or car this year – don’t touch old collection accounts! Stirring up the past will lower your score and will cost you more to borrow.  Make the important purchases first, then go back and clean up the old stuff on your credit.

When people tell me they “are working on their credit”, I usually wince, as what they are doing is hurting them.  People normally close accounts (Bad), pay off old collections (bad), and lower limits on existing credit cards (bad).  If you need to “work on your credit, have a mortgage professional who understands the credit scoring model help you create a plan for success.  Call me if you want to talk it over and don’t have someone else to work with.

As mortgage lenders tighten approval standards   in South Carolina and nationwide, the importance of a good credit score is rising.  Credit scores not only make the difference between a mortgage approval and mortgage turn-down, but they also play a large role in determining your actual mortgage note rate.

In the 3-minute piece, the NBC Today Show talks about 7 ways that homebuyers ruin their credit — often by accident.  Some of the highlighted mistakes include:

• Closing open credit cards
• Making appliance buys on credit prior to closing
• Asking creditors to lower credit balances prior to closing

In general, a 740 FICO will insulate a borrower from the higher costs and/or rates associated with low credit scores.  Below 740, though, every 20 points adds to the damage.  Watch the video and apply what you can to your own situation.  The more you know, the more you can save.

Know what you are working with!

If you haven’t seen your credit report in a while, get a copy now.  There is only one place for a truly ‘Free’ report – but it comes with a catch – www.AnnualCreditReport.com will give you a copy, but the catch is you have to pay for your score.  At this point, you don’t really need the score, but you can pay the extra money if you want to.

Other services (with catchy radio jingles) offer free reports, then try to sell you their service.  Use with caution.

When you get your report, you need to decide if you are in one of two camps:

1. I don’t have enough credit and need more credit history
2. I have very established credit history, and too much credit.

Your credit score will usually reflect the categories above – if you are below a 720-740 range, you need more or better credit history.  If you are above a 750, your score won’t improve further with more credit accounts, in fact, you probably have too many accounts to keep your score from getting even higher.

Credit scores range from 350-850

The lowest I’ve ever seen is in the 400′s, and I routinely see credit scores in the 800-810 range.  Above 820 is just luck.

What Score do you need?

• To buy a house with an FHA loan: 620 (Although the FHA says 580 officially)
• To buy a car:  700
• For a Jumbo Mortgage:  680-720
• Best rates on a Conforming mortgages: 740

Above a 740, credit scores are really just bragging rights, but the higher the score is, the more buffer you have in case something happens to your score. If you have an 810, for example, and a credit card payment gets lost in the mail, the late score won’t affect your home mortgage rate. However, if you have a 741, and then make a late payment, you will drop below 740, and then your mortgage rate would be higher.

Step One:

After getting a copy of your credit report – count the number of active “tradelines”, or active accounts that are on your report.

• More than 4 tradelines:  We’ll probably close some of them down.
• 4 or fewer tradelines: You will want to get some new credit.

Check back in a few days after you get your credit report copy and we’ll talk specific strategies for both groups.

1.       Do you pay your bills on time? The answer to this question is very important. If you have paid bills late, have had an account referred to a collection agency, or have ever declared bankruptcy, this history will show up in your credit report.

2.       What is your outstanding debt? If the amount you owe is close to your credit limit, it is likely to have a negative effect on your score.

• Keeping your credit cards balances at 20-30% of their limit is the fastest way to increase your credit score.

3.       How long is your credit history? A short credit history may have a negative effect on your score, but a short history can be offset by other factors, such as timely payments and low balances.

• Parents, help your children establish good credit habits – not using credit at all will hurt them as they get older and want to buy a house, so help them get credit when they turn 18, and then make sure they treat it with respect.

4.       Have you applied for new credit recently? If you have applied for too many new accounts recently that may negatively affect your score.

• The 10% you saved at a department store last month by opening a new account can lower your score.  If your score lowers just prior to buying a house or getting an auto loan, that 10% store savings is nothing compared to the cost of a lower credit score.

5.       How many and what types of credit accounts do you have? Many credit-scoring models consider the number and type of credit accounts you have. A mix of installment loans and credit cards may improve your score.

• When I see credit scores above 800, the owner of that score will never have more than two credit cards, one mortgage, and maybe a car loan.  To get an 800 credit score, you need to have used credit in the past, but now only use 1 credit card, pay if off every month, and close all the accounts you don’t use.
• Closing accounts is normally bas for your credit.  If you have a score below 720, this is usually true.  When you get a score above 750, closing old accounts will further increase your score.

Keeping your credit score above 740 is necessary in today’s economy. People with lower credit scores will pay more for home loans, car loans, cell phones, and it can even effect employment hiring, auto insurance and home owner’s insurance rates.

For many people the first question they ask a mortgage loan officer is, “What are your Mortgage Rates?” When I get this question, I could flippantly choose between any of these answers:

A. That Depends
A. Anywhere from 1% to 10%, what would you like them to be?
A. 5% plus or minus
A. Rates on what?

As you can see, none of these answers really answer the question that the caller really wants to know. I recently did a quick count, and I added up 30 questions that need to be answered before an accurate rate quote can be given.  Here is a list:

• Is this a purchase or refinance?
• If a refinance, are you looking to take cash out at closing, or just lower the interest rate?
• How will this property be occupied? (Owner occupied, second home or investment property)
• Where is the property located? (City, State, Etc.)
• What is the condition of the property?
• What type of property is it? (Single family home, condo, town home, high rise, duplex, triplex, etc)
• How much land is the property being sold with? (if it’s a huge acreage, it won’t be a conventional loan)
• If it’s a condo – is this condo project approved? (I don’t expect clients to know, but we have to find out!)
• Will you have an escrow account for property taxes and homeowner’s insurance?
• Is this property located in a flood zone?
• How much is the property worth? (Sales price AND appraised value)
• How much money will you be putting down?
• How many properties do you already own? How many of those are financed? By whom?
• What would you like the loan amount to be?
• Will the loan be more than $417,000?  (Above that, ‘Jumbo’ loans usually have higher rates).
• How long of an amortization would you like on the loan? (10 years, 15 years, 20 years, 30 years, 40 years, 45 years?)
• How long of a note would you like? (for balloons… 7 year, 10 year, etc)
• Do you need a fixed rate, or could it adjust in the future?
• If you’re considering adjustable, what length would you like to have it fixed? (6 months – 10 years)
• If you’re considering adjustable, which index would you like to have your ARM tied to?
• How will you repay the loan:  Principal and Interest each month, or Interest Only for a period of time?
• How quickly are you looking to close on this loan?
• Would a pre-payment penalty be ok if you got a lower rate?
• Do you have a preference on which bank services your loan? (some clients like some banks and hate others)
• What is your credit score? (To truly be accurate, we have to run your credit, as the score we get when we run your credit is the score we use for pricing the interest rate).
• What’s your debt to income ratio? (We will calculate this for you when we have your income and expenses fully documented).
• After closing, how much money will you have left over, in reserve?
• Will you be getting private mortgage insurance (PMI)?
• If you’ll need PMI – which type will you get?
• Will you be getting a second mortgage or Home Equity Line of Credit (HELOC) with this new first mortgage?

So, what can you learn from this list?  First, if someone answers with a number when you ask them, “What are your rates?”, recognize right away that the answer you just heard is completely arbitrary and may have no resemblance to the actual interest rate you will end up with.

Second, there may be something more than just an interest rate that matters.  A mortgage professional should be able to walk you through these 30 questions, not just to waste your time, but rather to help you understand the impact of the different answers and how they will not only affect your interest rate, but your financial future as well.  For example, a 15 year mortgage usually has a lower rate than a 30 year mortgage, but the larger payment of the 15 year term could create great hardship for you if you suffered a job loss and didn’t have adequate savings to carry you through that period.

Next time you are looking for a mortgage, make sure you have thought trhough some of these questions and find a loan representative that asks you all the questions up front to eliminate any surprises for you.

If you want to boost your credit score fast – there is one best way.  Credit scores are a prediction of how likely is someone to default on an obligation.  So, if you do anything that is similar to what people did in the past prior to defaulting, it increases your risk of default and lowers your score.

To always keep a great credit score, don’t do anything that others have done prior to defaulting.  So think about that for a second – if I was going to be 90 days late on an account, what would I do 120-180 days prior to that?

I would have my credit report pulled to try and get more credit.  Then the new accounts would show up on my credit report.   I would max out my existing credit card accounts.  Lastly, I would start missing payments.

I can have my credit report pulled for any reason, I can open new accounts for any reason, and, if I was careless, could even have a late payment once in a great while and still not be in trouble.

If I max out my credit cards, however, I am either in financial trouble or I am using 0% cash advance credit card to put some money in the bank.  The Credit scoring model(www.myfico.com), however, assumes I am in trouble. 

Knowing this, there is only one way to increase your score fast – and you don’t have to pay someone to fix your score.  Keep all your credit cards at a 30% or less ratio of the amount owed versus the maximum limit.  If you have a maxed out credit card, and then pay the card down to 30% or less of the limit, you will bring your score up dramatically in 30 days or less.

The credit scoring model looks at all your cards’ limits and balances.  So, keep the total amount you could borrow high (Don’t close old accounts) and keep the amount owed low overall and on each card.