Tag Archives: credit score

How to Break a Lease Early

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photo by Marcel Oosterwijk

Realtor.com quoted me in How to Break a Lease Early. It reads,

It’s Murphy’s Law, rental edition: You find the perfect apartment, sign the lease, move in, start to get settled in, then something happens. Maybe you get transferred to another state for work, maybe you meet the love of your life and decide to shack up together (congrats!), or perhaps your parents fall ill and you need to move closer to them.

Unfortunately life and rental laws don’t always coincide, all of which might mean you may have to entertain the idea of breaking a lease. What would happen if you do? Answers are ahead, along with some advice on how to handle this sticky scenario.

First things first: Read your lease

If you find yourself needing to break your lease, your first step should be to read it again—carefully. You could get lucky: Some leases have an “opt out” clause, meaning that you can terminate early for an agreed-upon fee. Depending on that financial amount, it might make sense for you to just pay the penalty and make a clean break, says David Reiss, academic program director for the Center for Urban Business Entrepreneurship.

Then again, some leases will say that you’re responsible for the rent due for the remainder of the term of your lease. Still, even in this worse-case scenario, you may have some wiggle room based on how benevolent your landlord is.

Talk to your landlord

If there is no opting out or the fees are too steep for you to financially absorb, it would probably behoove you to speak directly with your landlord or rental company.

“Your landlord may be willing to let you out of the lease early,” says Reiss. “You could also try to negotiate a lower amount for early termination than the lease calls for by forfeiting your security deposit.”

All in all, it never hurts to ask (and pray you catch your landlord in a good mood). It’s possible he may not mind your moving out since this means he could raise the rent sooner.You won’t know until you ask.

Find a new tenant

Another option is to offer to help your landlord find a new tenant for your apartment.

“It generally is not allowed without landlord consent, but you can discuss it with your management to see if they would consent to a sublease and under what terms,” says Reiss. You may also need to check local laws that may be applicable to subleases. If it is allowable, you might try a site like Flip, where renters can post leases they need to break in search of qualified renters who are looking for someplace to live.

Don’t just walk out

The one thing you absolutely cannot do without legal ramifications is just walk out and stop paying your rent. You won’t be trading your apartment for a cell with bars (it’s a civil, not criminal, matter), but Reiss warns you can get in a lot of financial hot water if you handle this incorrectly.

“You cannot be arrested for nonpayment of rent—unless you live in 19th-century London—but you can be sued in court; have a judgment against you; have your wages garnished; and [have] liens placed on your property to satisfy the judgment,” says Reiss.

Did we mention that this will mess up your credit scores? It will mess up your credit scores.

That said, there are a couple of cases where you could break your lease without consequences, but they are extenuating circumstances.

“If the apartment becomes unlivable—for instance, no heat in the winter—you could argue that you have been constructively evicted from the unit,” says Reiss. “Also, some states allow domestic violence survivors to break a lease in order to ensure their safety.”

Credit Card Debt and Your Mortgage

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photo by B Rosen

Realtor.com quoted me in Fannie Mae Taking a Closer Look at Applicants’ Credit Card Payments. It opens,

If you feel like you’ve been managing your debt just fine, making the minimum payment on your credit cards on time every month, you might want to change your ways before applying for a home loan.

Fannie Mae, which offers government-backed loans to more than a quarter of mortgage applicants nationwide, has just revised its risk assessment software to factor in more details about how borrowers pay off their debts.

Historically, the credit report generated by Fannie Mae—and scrutinized by lenders—mainly showed how much of your available credit you’d used and whether you’d made your monthly payments on time. But the newest version of Fannie’s Desktop Underwriter software (used by about 2,000 lenders and more than 10,000 mortgage brokers) kicks things up a notch. Now, it also details just how much you coughed up each month over the past two years—whether you’re parting with only the minimum, laying out the full monty, or hovering somewhere in between.

Fannie officials say these new details, known as “trended credit data,” can help lenders better assess how well people manage their debts—and, consequently, how well they’ll manage their mortgage payments.

“Generally, the new underwriting model gives weight to how borrowers pay off their credit debt,” explains David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “While it is not clear how finely tuned the new system is, there is clearly a move toward a more granular approach to debt repayment.”

How this news affects your prospects of a home loan

So far, FICO and other credit score measures aren’t factoring in this extra info, so your score won’t get dinged. But your application could be affected in another way.

“If you compare two people with exactly the same credit profiles except that one pays more than the minimum amount due or the entire balance, that person would be considered to be a lower credit risk by Fannie Mae,” says Reiss. “As a result, that person would be more likely to be approved for a mortgage.”

But you might not have to pay much more than the minimum to boost your chances of getting that loan.“At this time it’s unclear what impact to mortgage scoring and automated underwriting the payment history will have, but we believe anyone that is paying 30% or more of their balance monthly will see improvement,” says San Diego loan officer Michael Rosenbaum at CrossCountry Mortgage.

Of course, people who pay off the whole balance every month will be favored even more, and with good reason.

“Research has indicated that borrowers who paid off their credit card debt every month are 60% less likely to become delinquent than borrowers who make only the monthly minimum payment,” Rosenbaum adds.

And while this might sound ominous, it could actually be helpful if you had some credit blemishes in your past.

“Fannie has also indicated that paying more than the minimum due will particularly help borrowers with delinquencies on their credit report, because it will allow borrowers to ‘demonstrate that a late payment was not deeply reflective of their general debt repayment ability and behavior,’” Reiss notes.

Women Are Better Than Men,

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Greeks vs Amazons, Mausoleum of Halicarnassus, British Museum

at least at paying their mortgages. This is according to an Urban Institute research report that found that

It’s a fact: women on average pay more for mortgages. We are not the first people to have noticed this; a small number of other studies have also pointed it out (e.g., Cheng, Lin, and Liu 2011). One possible explanation is that women, particularly minority women, experience higher rates of subprime lending than their male peers (Fishbein and Woodall 2006; Phillips 2012; Wyly and Ponder 2011). Another explanation is that women tend to have weaker credit profiles (Van Rensselaer et al. 2013). We find that both these explanations are true and largely account for the higher rates.

Looking at loan performance for the first time by gender, however, we find that these weaker credit profiles do not translate neatly into weaker performance. In fact, when credit characteristics are held constant, women actually perform better than men. Nonetheless, since pricing is tied to credit characteristics not performance, women actually pay more relative to their actual risk than do men. Ironically, despite their better performance, women are more likely to be denied a mortgage than men. Given that more than one-third of female only borrowers are minorities and almost half of them live in low-income communities, we need to develop more robust and accurate measures of risk to ensure that we aren’t denying mortgages to women who are fully able to make good on their payments. (1)

This second paragraph undercuts the catchy title of the report, Women Are Better than Men at Paying Their Mortgage, because it is only true when comparing single women to single men and when credit characteristics are held constant.

The report confines its analysis to sole female and sole male borrowers, excluding two-borrower households. This limitation is compounded by the fact that the credit characteristics of men and women are not the same (as men have better credit characteristics as a group).  As a result of these limitations, I think the title of the report goes too far. The authors also acknowledge that the stakes are not that high because the “inequality does not translate into a significant amount that single women overpay for their mortgages: less than $150 per female-only borrower per loan.” (15)

That point aside, the report does raise an important issue about whether credit characteristics metrics are biased against women: “the dimensions we rely on to assess credit risk today do not adequately capture all the differences. This omission has real consequences.” (15) This is certainly true, but lenders will have to carefully navigate fair lending laws as they seek to capture all of those differences.

Mortgages for Borderline Borrowers

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photo by Olli Henze

BiggerPockets.com quoted me in 7 Mortgage Qualification Tips for Borderline Borrowers. It opens,

It’s super easy to qualify for a mortgage when you have an 800 credit score, a six-figure salary, no debt, and 20% to put down. But that isn’t everyone’s story.

It’s far more difficult to be approved with a 620 credit score, a low five-figure salary, some outstanding debt, a car loan, and 3% for the down payment. You can still qualify, but it’s a LOT more difficult. And you’re not going to be getting the lowest rate around.

I asked some experts for their mortgage qualifying tips for borrowers who run the highest risk of being turned down. Here’s what they had to say:

7 Mortgage Qualification Tips for Borderline Borrowers

Go FHA

“Applicants with a low credit scores should be sure to look for lenders who offer FHA-insured mortgages. The FHA will insure mortgages with lower credit scores than most others will accept. Borrowers with small savings should look for lenders with low-down-payment requirements. Again, an FHA-insured lender may be the right match, but Fannie Mae and Freddie Mac also have programs with low down payment requirements, so applicants should ask their lenders about those as well,” says David Reiss, a Law Professor at Brooklyn Law School who also writes at REFinBlog.com.

J.D. Crowe, President of Southeast Mortgage of Georgia agrees. “Those with less-than-ideal credit scores sometimes have home loan options through the Federal Housing Administration. The FHA works with approved lenders to help applicants who have lower credit scores and small down payments, and can offer as much as 96.5% financing.”

You can find the other six tips here.

 

Low, Low, Low Mortgage Rates

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photo by Martin Abegglen

TheStreet.com quoted me in Top 5 Lowest 15-Year Mortgage Rates. It opens,

U.S. mortgage rates have continued to decline in the aftermath of the Brexit vote, low Treasury rates and the stagnant economy, giving potential homeowners an opportunity to save money because of the dip.

The current market conditions give homeowners in the U.S. an opportunity to take advantage of the continuation of low mortgage rates since the Federal Reserve has not increased interest rates.

But, how do you snag the absolute lowest rates?

How to Get a Low Rate

Low mortgage rates can play a large factor in homeowners’ ability to save tens of thousands of dollars in interest. Even a 1% difference in the mortgage rate can save a homeowner $40,000 over 30 years for a mortgage valued at $200,000. Having a top notch credit score plays a critical factor in determining what interest rate lenders will offer consumers, but other issues such as the amount of your down payment also impact it.

A high credit score is the key to ensuring that borrowers receive a low mortgage rate. Here’s a quick rundown of what the numbers mean – a score of anything below 620 ranks as poor, 620 to 699 is fair, 700 to 749 is good and anything over 750 is excellent. Think carefully before canceling a credit card with a long, positive history, but decrease your debt. One of the biggest factors which impact your credit score is your credit utilization rate.

Many potential homeowners focus only on the interest rate or the monthly payment. The APR or annual percentage rate gives you a better idea of the true cost of borrowing money, which includes all the fees and points for the loan.

The origination fee or points is charged by a lender to process a loan. This fee shows up on your good faith estimate (GFE) as one item called the origination charge. However, the origination fee can be made up of a few different fees such as: processing fees, underwriting fees and an origination charge.

Homeowners who are able to afford a 20% down payment do not have to pay private mortgage insurance (PMI), which costs another 0.5% to 1.0% and can tack on more money each month. Having at least 20% in equity shows lenders that there is a lower chance of the individual defaulting on the loan.

Choosing Between 15-year and 30-year Mortgages

Obtaining a 15-year fixed rate mortgage instead of a traditional 30-year mortgage means homeowners can save thousands of dollars in interest. One drawback of a 15-year mortgage is that consumers will be locked into higher monthly compared to a traditional 30-year mortgage or a 5-year or 7-year adjustable rate mortgage, “which could put the squeeze on homeowners when times are tight,” said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization.

Many households would not benefit from a 15-year mortgage because it “does more to limit their financial flexibility than to enhance it,” said Greg McBride, chief financial analyst of Bankrate, a North Palm Beach, Fla.-based financial content company.

“Locking into higher monthly payments makes the household budget tighter and for what?,” he said “So you can pay down a low, fixed rate loan? On an after tax, after-inflation basis you’re essentially borrowing for free.”

McBride suggests that this strategy does not bode well for homeowners, especially if they are not paying down their higher interest rate debts and maximizing their tax-advantaged retirement savings options such as IRAs and 401(k)s.

“Even then, you might be better off investing your money elsewhere than tying up more of your wealth in the most illiquid asset you have – your home,” he said. “Just 28% of American households have a sufficient emergency savings cushion, so why the hurry to pay off a low, fixed rate, tax deductible debt. Money in the bank will pay the bills, home equity will not.”

The current economic situation has pushed down rates with 15-year mortgages becoming “relatively more attractive” than even 5-year adjustable rate mortgages (ARMs) over the last year, said David Reiss, a law professor at the Brooklyn Law School in New York. Last week Freddie Mac announced the average 15-year mortgage rate was 2.74% and the average for the 5-year ARM was 2.75%.

“These rates are virtually the same,” he said. “A year ago, the 15-year was relatively more expensive than the 5-year by about 0.16%. If you can swing the higher principal payments for the 15-year mortgage you will be getting about as good an interest rate as you could hope for.”

Millennial Homeowners Following ‘Rents

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TheStreet.com quoted me in Potential Homeowners Follow in Footsteps of Parents. It opens,

Consumers tend to follow the strategies of their parents when they are faced with whether they should stick with renting or buying their first home.

Potential homeowners, including both Gen X-ers and Millennials, are influenced by the decisions made by their parents. As homeownership rates in the U.S. have fallen to a 51-year low, one reason Gen Y-ers tend to skip homeownership is due to the choice made by their parents while others are faced with mounting student loans and higher costs to purchase a house.

Consumers are nearly three times as likely to purchase a house if their parents were homeowners compared to parents who rented, said Felipe Chacon, a housing data analyst at Trulia, a San Francisco-based real estate website, which analyzed over four decades of data from the University of Michigan in Ann Arbor.

 “What the analysis in the report suggests is that people who grew up in rented homes are less likely to own their own home, even after you exclude those who have gotten financial help from their folks or their spouse’s folks,” he said.
As Millennials are heading toward their 30s, the impact of their childhood is taking effect as ones which grew up in homes the parents owned were 2.8 times more likely to seek the same goal, the researchers found. The trend of home ownership has declined among Millennials and part of the reason could be that people who are 19 to 34 years are less likely to have been raised in homes where their parents owned the homes compared to Gen X-ers or those who are 35 to 45 years old.
“It could simply be an issue of values, where those from owned homes make homeownership a more urgent priority and strive to reach it sooner simply because it is familiar and comfortable to them,” Chacon said.
Consumers are probably more likely to buy a house if their extended family can explain how the process works and what criteria should be prioritized from improving their credit score to saving for a down payment.
“It probably helps to have parents and relatives around who can help you navigate the system as a first time homebuyer,” he said. “Since Millennials, especially younger ones seem to be slightly less likely to be raised in owned homes, there could be a long term cooling effect on the ownership rate among this group.”
The attitude of Americans owning their homes and pursuing the traditional “American Dream” has remained pretty steady over the past five years. In fact, more Millennials are eager to purchase a home and 80% expressed this sentiment in 2015 compared to 71% in 2010, according to a Trulia survey. The overall population mirrors this belief with 75 % who agree in 2015 from 72% in 2010.
One of the hurdles to homeownership is accruing enough money for the down payment. Millennials who grew up with parents who owned a home received more help financially with 11.4% who were given money compared with 2.6% of those who grew up in mostly rented homes.
“The American homeownership rate carries a lot of political and social significance with it and for many, it is seen as a marker of the health of American society,” said David Reiss, a law professor at Brooklyn Law School in New York. “The significant dip in the homeownership rate that has occurred since the financial crisis has shaken the confidence of many that the nation’s households are on solid footing.”

 

Fannie & Freddie G-Fee Equilibrium

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The Federal Housing Finance Agency’s Division of Housing Mission & Goals has issued its report on Fannie Mae and Freddie Mac Single-Family Guarantee Fees in 2015. Guarantee fees (also known as g-fees) are another one of those incredibly technical subjects that actually have a major impact on the housing market. The g-fee is baked into the cost of the mortgage, so the higher the g-fee, the higher the mortgage’s Annual Percentage Rate. Consumer groups and housing trade associations have called upon the FHFA to lower the g-fee to make mortgage credit even cheaper that it is now. This report gives reason to think that the FHFA won’t do that.

The report provides some background on guarantee fees, for the uninitiated:

Guarantee fees are intended to cover the credit risk and other costs that Fannie Mae and Freddie Mac incur when they acquire single-family loans from lenders. Loans are acquired through two methods. A lender may exchange a group of loans for a Fannie Mae or Freddie Mac guaranteed mortgage-backed security (MBS), which may then be sold by the lender into the secondary market to recoup funds to make more loans to borrowers. Alternatively, a lender may deliver loans to an Enterprise in return for a cash payment. Larger lenders tend to exchange loans for MBS, while smaller lenders tend to sell loans for cash and these loans are later bundled by the Enterprises into MBS.

While the private holders of MBS assume market risk (the risk that the price of the security may fall due to changes in interest rates), the Enterprises assume the credit risk on the loans. The Enterprises charge a guarantee fee in exchange for providing this guarantee, which covers administrative costs, projected credit losses from borrower defaults over the life of the loans, and the cost of holding capital to protect against projected credit losses that could occur during stressful macroeconomic conditions. Investors are willing to pay a higher price for Enterprise MBS due to their guarantee of principal and interest. The higher value of the MBS leads to lower interest rates for borrowers.

There are two types of guarantee fees: ongoing and upfront. Ongoing fees are collected each month over the life of a loan. Upfront fees are one-time payments made by lenders upon loan delivery to an Enterprise. Fannie Mae refers to upfront fees as “loan level pricing adjustments,” while Freddie Mac refers to them as “delivery fees.” Both ongoing and upfront fees compensate the Enterprises for the costs of providing the guarantee. Ongoing fees are based primarily on the product type, such as a 30-year fixed rate or a 15-year fixed rate loan. Upfront fees are used to price for specific risk attributes such as the loan-to-value ratio (LTV) and credit score.

Ongoing fees are set by the Enterprises with lenders that exchange loans for MBS, while those fees are embedded in the price offered to lenders that sell loans for cash. In contrast to ongoing fees, the upfront fees are publicly posted on each Enterprise’s website. Upfront fees are paid by the lender at the time of loan delivery to an Enterprise, and those charges are typically rolled into a borrower’s interest rate in the same manner as ongoing fees.

Under the existing protocols of the Enterprises’ conservatorships, FHFA requires that each Enterprise seek FHFA approval for any proposed change in upfront fees. The upfront fees assessed by the two Enterprises generally are in alignment. (2-3)

The report finds that “The average single-family guarantee fee increased by two basis points in 2015 to 59 basis points. This stability is consistent with FHFA’s April 2015 determination that the fees adequately reflected the credit risk of new acquisitions after years of sharp fee increases. During the five year period from 2011 to 2015, fees had more than doubled from 26 basis points to 59 basis points.” (1)

At bottom, your position on the right g-fee level reflects your views about the appropriate role of the government in the housing finance market. If you favor lowering the g-fee, you want to further subsidize homeownership  through cheaper mortgage credit, but you risk a taxpayer bailout.

If you favor raising it, you want to to reduce the government’s footprint in the housing finance market, but you risk rationing credit to those who could use it responsibly.

From this report, it looks like today’s FHFA thinks that it has the balance between those two views in some kind of equilibrium.