The Impact of Mortgage Default in a Credit Score

Credit scores really matter.

This is the reason why many homeowners who realize that they may lose their homes primarily worry about how it will impact their credit scores.

Homeowners can allow their homes to be foreclosed and their scores will be affected for 7 years. Another option is to have a deed as a foreclosure substitute wherein the home is given to the lender in exchange for the loan’s cancellation but this also results to a negative credit score.

Getting out of a mortgage through short selling the home is also a way to get rid of the house. In this option, the owner sells the house in a lesser price compared to the amount of his or her loan. This is also bad for the credit score.

A recent report from RealtyTrac Inc. showed that there is a 19% increase in the rate of preforeclosure transactions for quarter one and two of the present year. This rate oftentimes includes short sales. The data shows that short sales accounted for 12% of the total housing sales in quarter two. This is a rise from the 10% rate during the same time in the past year.

But is a there a specific order by which the ever-present system in credit scoring considers a short sale better than a foreclosure or a deed instead of foreclosure?

In case a person with a history of mortgage problem applies for a loan in the future, some lenders might look at a short sale as a better record compared to a foreclosure. However, the scoring system used in determining credit looks at the defaults as equally unpleasant.

Bradley Graham, FICO’s scores product management senior director, said that according to the examination of information that lenders communicate with credit bureaus about mortgage defaults, the weight of the different types of default are almost always equal in determining credit risk in the future.

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• How to Rebuild Your Credit After a Foreclosure or Short Sale (mint.com)

They lost their homes, they do not have a credit card to use and they are paying for a more expensive rent compared to their mortgage payment.

The decline of the housing market had a tremendous effect on almost all races. However, the most severely hit are the black Latino groups. This led to a decrease in the rate of homeownership to its lowest state, shows the new data of the 2010 Census.

Around 36% of blacks still have their own homes. But this is lower than the 40% rate of homeowners in their population in 2000. For the Latino group, the homeownership declined to 47% from the 49% from way back in 2000.

On the other hand, whites have a 67% ownership while Asians at 62%. This is an increase from its rate in the past decade.

Almost all races experience an increase in the rate of homeownership during the boom of the housing market and the doubling of home values between 2001 and 2006. But, in the following housing bust, it changed as the whites and Asians suddenly lost a lot of what they had already gained. As for Blacks and Latinos, they almost lost everything they had gained and even more.

The reason for this is that the number of blacks and Latinos who took out subprime loans during the housing boom were higher. The loans were taken because they were able to afford it and they wanted to take advantage of the housing boom for any price, said a number of real estate experts. Moreover, Traditional loans which are safer required plenty of upfront cash. The loans which basically had low rates of interest suddenly increased in the following years which led to a consistent number of foreclosures.

But, almost six interviewed experts said that the lenders and mortgage brokers in a few cases aimed for blacks and Latinos to obtain subprime loans in order for them to earn money from higher rates of interest and lending charges. As proof of this claim, they determined studies that show how lenders oftentimes sold the subprime loans to most Latinos and blacks who were eligible for less expensive traditional loans.

The results of this have been devastating. A lot of minorities lost their most important property. Plenty of homes in neighborhoods where most minorities live can be purchased with the price of a car. Moreover, bad credit combined with the struggling economy have caused the unemployment rate and income reductions to continuously increase in the groups of Latinos and blacks.

85% of whites are now more likely to own a home compared to blacks and 45% compared to Latinos.

Low Mortgage Rates Continue
The standard of 30-year fixed mortgage rate is at a new low record for the third straight week with a reduction to 4.35%, according to the weekly survey of Bankrate.com. In the previous week, this was at 4.37%. The average 30-year fixed mortgage has an estimate of 0.38 mark down and origination points.
A complete listing of mortgage rates in different areas can be found at http://www.bankrate.com/funnel/mortgages/

The mean rate for 15-year fixed mortgage stayed at 3.48% while that of the 30-year fixed mortgage is at 4.86%. The trend of the adjustable mortgage rates is different. For a 5-year adjustable mortgage, the rate is moving higher to 3.1%. On the contrary, the 7-year adjustable mortgage rate is getting lower to 3.21%.
Bankrate.com conducts their weekly survey every Wednesday. It uses the data given by top 10 banks. The results of its survey are also based from the record provided by top 10 markets’ thrifts.

A bad employment report pulled down the mortgage rates for the sixth straight week. Fears of a threatening recession and continuous economic depression have increased the attractiveness of long-term Treasury securities, with very low projected returns. Fixed mortgage rates and mortgage-backed bonds’ profits are highly correlated with the returns on 10-year Treasury notes. Although there is a possibility that the Federal Reserve will find ways to decrease the long term interest rates even further as a way to continue lowering mortgage rates, growing the number of qualified refinancers will make the low rates of mortgages impact the economy at a bigger scale.

The last period when mortgage rates were above 6% was in November of 2008. Specifically, the average rate for a 30-year fixed mortgage during that time was at 6.33%. So a loan of $200,000 back then required a monthly payment of $1,241.86. With the present rate of 4.35%, the same amount of loan will only charge $995.62 for monthly payment. This is a $246 difference every month for anyone who is refinancing at the current rate.

Take Advantage of Low FHA Mortgage Rates

In the past week, mortgage rates reached another low record. This is one of the news regarding the terrible economic condition. The current rate on FHA mortgage declined to 3.990% with an annual percentage rate of 5.318%. This is once again another big chance for individuals and families who have existing FHA mortgages and for those who are thinking of getting an FHA mortgage.

If you are one of those with an FHA mortgage in your house, you can take full advantage of the streamline refinance program for your mortgage. This program will help you save extra money from your mortgage payments. Oftentimes, FHA streamline refinances do not ask for a new appraisal that is why the process takes faster than a usual refinance program. If you are paying your mortgage at a rate of at least 4.5%, you can inquire from different mortgage servicers to know the amount of savings you can have when you decide to refinance.

On the other hand, if you do not yet own a home as of this time but are thinking of purchasing one, now may be the best time to go for it. Even without enough funds to put in a down payment, you might be able to obtain a mortgage via the FHA. This type of mortgage may only ask you to pay at least 3.5% of your dream home’s purchase price as your minimum down payment. Because of this, FHA mortgage is popular to many homebuyers. There are also many mortgage servicers these days that are willing to assist you in getting an FHA mortgage especially if you have a good credit standing.

The housing market is offering the best mortgage rates so far. Although this may not be a good sign for the economy, it can benefit existing homeowners and those who have been planning to purchase their own homes but are waiting for the most affordable rates.

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• 10 Facts to Know About FHA Loans (doorfly.com)

How to fix a credit score or even how to improve a credit score is a hotly debated concept these days. Especially wit

h the current state of the economy, many people are plagued with bad credit and are looking for ways to get a higher credit score to get better interest rates or even to buy a house.

The thing is, who do you follow or who do you even trust? Afterall, it’s hard to even listen to governments. With some of them looking at going into default, even they seem to have credit issues.

That being said, here are a few notes on common misbeliefs regarding credit and how to improve your credit.

You may have heard some of these things in your time. I bet you may be surprised to see that some of them are just plain bad advice.

Three Myths in Boosting a Credit Score

Credit building is one of the many things in life that can sometimes revolve around myths. People think that there are certain things they do that increases their score even if these things really do not impact their scores in any way. The truth is there are really no easy credit score fixes just like what commercials claim. The simple formula to credit score improvement is having good payment behavior and possessing a healthy mix of credit. Here are some of the wrong beliefs that are not helpful in boosting your credit score.

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Credit Improvement Myth # 1: Choosing to get rid of credit card offers will help

John Ulzeimer, SmartCredit.com’s consumer education president, said that it is a common belief among people that if they choose to get out of credit card offers, the credit inquiries in their reports will be lesser. But, the truth is, these inquiries are “soft” and do not really affect the score. He further adds that people can still welcome the offers but it will not strengthen their credit scores.

Credit Fix Myth # 2: Closing old accounts improves score

Trey Loughran, Equifax’ personal information solutions’ President, says that closing your accounts are not really helpful to a credit score. It can even cause a slight damage by shortening your credit history and leaving you with a minimal amount of remaining credit.

Credit Repair Myth # 3: Opening more accounts helps boost credit score.

Several consumers experiencing problems in their credit think that having many accounts will show that they can manage credit. Actually, this has a reverse effect. According to Experian’s public education director, Rod Griffin, more accounts will make lenders wonder why all those credit are needed. He added that it is even a sign of risk that can make your credit score suffer. What lenders will actually see if you have several accounts is the number of hard inquiries in your report. Those inquiries will decrease your score and lenders will worry that you might be in dire need of financial help because you are gaining access to too much credit.

So, while you are working to get that perfect 800 credit score, just know that there are some things that will help you and some things that are just plain malarky.

Here’s to your credit and financial freedom!

Related articles

• 8 Credit Score Myths Debunked (abcnews.go.com)
• Four Horribly False Credit Score Myths (mint.com)