Dallas Fort Worth Area Homes and Real Estate

Many buyers in the early stages of either looking for a home or researching their mortgage options often choose to obtain their credit report and credit scores from one of the various "free" credit report offers available online.   I've noticed this trend over the last few years with new clients.  Many of them already have their credit report and credit scores before they ever speak with a lender or Realtor. 

I say "free" because these services typically require enrollment in a membership which must be cancelled or they will be charged a monthly fee.  The monthly service fee typically includes a service or services that can be useful, such as regular updates of their credit report, identity theft protection or credit monitoring.  Credit monitoring is a service that notifies consumers via email whenever new activity occurs on their credit report, which can help detect fraud and errors quickly before they become a serious problem. 

So despite the fact that some of these "free" credit report offers may be marketed in a somewhat misleading manner, the services they provide with the monthly membership can certainly be helpful to consumers, especially those getting ready to purchase a home and want to keep a handle on what's happening on their credit report. 

In addition to these services, the membership usually provides consumers with instant access to both their credit report and credit scores, which is often the main motivation for signing up for the service in the first place. 

Which brings me to my main point - THE CREDIT SCORES THAT MANY OF THESE SERVICES PROVIDE ARE NOT THE SAME CREDIT SCORES THAT LENDERS USE TO QUALIFY BORROWERS. 

In other words, the credit score they see on their "free" credit report is often not the same score a mortgage lender sees on the report they obtain from the three credit bureaus.  Mortgage lenders must pull their own report; they cannot use a copy of a consumer report from a "free" credit report service to issue a formal loan approval. 

Anyone can create a mathematical model or algorithm and market it as a "free" credit score.   But the "official" credit score that mortgage lenders use is called a FICO® Score.  Mortgage lenders usually qualify borrowers based on the median FICO® score acquired from the three credit repositories: Equifax, Experian and Trans Union.  

And yes, it gets a little more confusing.  Each credit repository has slightly different versions of the FICO® Scoring model and each bureau can have different info on a single consumer that causes the scores to vary from one repository to the next. 

How to sift through all of the confusion and find out where you stand?  If you're in the market for a mortgage, the easiest way is to simply contact a lender and get pre-qualified.  Most mortgage lenders will provide borrowers with a copy of their credit report either at their cost (which is usually less than $20) or for free.   

There are some credit report offers on the internet that do provide a FICO® Score, but usually only from one credit bureau.  To obtain all three without going through enormous hassle, it's usually easiest to just talk to a lender. 

But won't credit inquiries destroy your credit score?  Not at all.  That's one of the biggest myths I hear from consumers and even some mortgage lenders as well.  The truth is that special rules apply to mortgage credit inquiries.  In fact, according to MyFico.com, it's OK to have your credit pulled by multiple mortgage lenders as long as the inquiries occur within a certain period of time. 

So if you're in the market to purchase a home, it pays to have a mortgage lender obtain your credit report as quickly as possible.  Credit monitoring can certainly provide consumers with a good way to quickly identify any activity that might potentially affect a loan approval or their ability to qualify for the best interest rates.

And to obtain a copy of your credit report completely free, visit www.annualcreditreport.com

Each week, Freddie Mac releases the results of their mortgage rate survey they conduct to sample mortgage rates offered by lenders and brokers around the country.  Although some interpret this survey as the "rate that Freddie Mac sets" for mortgages, it is not; rates are not set by Freddie Mac directly, but rather by individual lenders and brokers based on mortgage bond pricing. Other factors can also affect these rates, such as the borrower's credit score, down payment, the property type and the total origination charge (points) that the lender is charging in order to obtain a certain rate.

In other words, the rates published in this survey are AVERAGES; they are not the exact rate that every single borrower can expect to receive.  Some borrowers may be able to secure a lower rate if they are making a large down payment and have excellent credit, whereas borrowers with lower credit scores and who may be purchasing properties with higher risk factors may not be able to lock in rates this low.

The results of this survey are published by Freddie Mac every Thursday.  They show average rates for four types of loan terms: 30 year fixed rate, 15 year fixed rate, 5/1 adjustable rate and One year adjustable rate mortgages.

The average mortgage rates reported by Freddie Mac as of today (April 22, 2010) were:

30 Year Fixed Rate Mortgage - 5.07%

15 Year Fixed Rate Mortgage - 4.39%

5/1 ARM - 4.03%

One Year ARM - 4.22%

And here's a chart that shows the trend of these four rate categories since the first of the year:

While rates have climbed some since the 2010 low set back in February, they are still near historic lows.  The end of the Federal Reserve program to purchase mortgage-backed securities has not had as much impact on interest rates as some expected, but the market has not had much time to adjust to this new reality as of yet.

FHA loans are definitely the loan of choice for many home buyers in today's market.  FHA has flexible underwriting requirements, competitive interest rates and offers a low minimum down payment of just 3.5%. 

WHAT IS AN FHA LOAN?

An FHA loan is a loan guaranteed by the Federal Housing Administration.  The money itself does not come from FHA, but they do charge a fee to the borrower to insure the loan for the lender.  Without this insurance, the interest rate would be significantly higher because of added risk to the lender. 

WHAT IS COMMONLY REQUIRED TO QUALIFY FOR AN FHA LOAN?

In general, the following are the minimum requirements to obtain an FHA loan:

• A STABLE CREDIT HISTORY WITH AT LEAST THREE CREDIT REFERENCES THAT HAVE BEEN OPEN FOR TWELVE MONTHS AND ACTIVE WITHIN THE LAST SIX MONTHS.  Credit score requirements vary from one lender to the next, but FHA specifically requires borrowers to have at least this minimum of three credit references.  Some lenders may allow these references to come from non-traditional sources, such as a letter from a utility provider, insurance company, etc. 
• TWO YEARS OF INCOME AND EMPLOYMENT HISTORY that show the borrower's income is likely to continue for at least 2-3 years.  (NOTE - The two year income history may be waived in certain situations, such as for college graduates who just started a job in a field related to their degree). 
• BORROWER MUST HAVE A SATISFACTORY INCOME AND DEBT-TO-INCOME RATIO.  FHA looks at these two specific ratios to determine an acceptable payment for a borrower. 
• PROOF OF FUNDS FOR DOWN PAYMENT AND CLOSING COSTS.  Funds typically must be sourced and/or seasoned for 60 days.  "Sourced" means the borrower must prove those funds came from an acceptable source, such as income from employment, gift from a relative or other type of source acceptable to FHA.  "Seasoned" means money that the borrower has shown in their account for a period of 60 days.  Borrowers who can prove funds have been in their account for at least 60 days typically do not have to show the source of the funds.
• GOOD RENTAL AND/OR MORTGAGE HISTORY is often required as well.  Again, the requirements for this vary depending on the overall circumstances.
• OTHER REQUIREMENTS MAY APPLY. 
• PAST CREDIT ISSUES - FHA has certain specific requirements as far as how long a borrower must be out of both a foreclosure and a chapter 7 bankruptcy.  FHA allows buyers currently in a chapter 13 bankruptcy to obtain a loan if they can show at least 12 months of satisfactory payment history and meet the other loan requirements.  Borrowers currently in a chapter 13 bankruptcy must also obtain written permission from the bankrutpcy trustee to obtain a new loan.  FHA has similar requirements for borrowers in CCCS.  Borrowers with past credit issues, such as late payments, collections, charge offs, reposessions may qualify for FHA financing if an underwriter deems them to be past issues that aren't likely to recur. 

While FHA has their own set of requirements, lenders may also impose overlay guidelines, which are requirements that may be over and above the minimum standards that FHA requires.  For example, FHA does not have a specific minimum credit score at the moment, but virtually all lenders have some kind of minimum credit score requirement for borrowers seeking FHA financing.   FHA will begin requiring borrowers with a credit score of less than 580 to put down at least 10% beginning sometime in the summer of 2010.

WHAT IS INCLUDED IN THE MONTHLY PAYMENT FOR AN FHA LOAN?

FHA is a budget loan, which means the property taxes and home owner's insurance must be included as part of the monthly payment.  Also, FHA charges both an upfront and monthly mortgage insurance premium that insures the loan for the lender in case of default.   

FHA does not require this monthly MIP to be paid on 15 year loans that are less than or equal to 90% LTV.  Buyers who make a larger down payment may also receive a discount on the monthly MIP.  Also, FHA allows the monthly MIP to be removed once the borrower pays down at least 22% of their loan balance, but not before at least five years. 

FHA is changing their requirements for MIP effective on all case numbers issued after April 5, 2010.

WHAT IS THE MAXIMUM LOAN AMOUNT FOR AN FHA LOAN IN DALLAS?

The FHA loan limit for most counties in the Dallas Fort Worth area is currently $271,050.  This loan limit applies to the loan amount calculated BEFORE the upfront MIP is added to the loan.   FHA does not have a maximum sales price, only a maximum loan amount. 

WHAT IS THE MINIMUM DOWN PAYMENT FOR AN FHA LOAN?

For home purchases, FHA requires a buyer to put down a minimum down payment of 3.5% of the purchase price of a home.   The closing costs and prepaid items are over and above the 3.5% down payment.  However, at this time, FHA allows up to 6% of the closing costs and prepaid items to be paid by the seller.  FHA did recently announce that the maximum seller contribution will be reduced to 3% beginning sometime in the summer of 2010.  

The closing costs and prepaids vary from one lender to the next and also vary depending on other factors, such as property tax rates and the insurance rate the borrower is able to secure on the home.  

DOES FHA REQUIRE THE CONDITION OF HOMES TO BE UP TO A CERTAIN STANDARD?

Yes.  An FHA appraiser will inspect the property to make sure the home meets certain property condition standards required by FHA.  These standards were changed in 2005 and are not as strict as they used to be, but the do still require certain items to be repaired before closing can occur.  

HOW CAN I SEE IF I QUALIFY FOR AN FHA LOAN?

Call John Rasor at Homewood Mortgage at (214) 507-1480 or apply online.

Effective on all case numbers issued on or after April 5, 2010, HUD will increase the upfront mortgage insurance premium for FHA loans from the current rate of 1.75% to 2.25%.  Dallas area home buyers that want to take advantage of the lower upfront MIP premiums must have a property under contract prior to April 5 and their mortgage lender must request an FHA case number on the property in order to secure the current lower premium of 1.75%. 

The increase in upfront MIP premiums is due to FHA falling below the required 2% level of reserves in order to operate.  When reserves fall, the deficit has to be made up in some way. 

The increase in premiums will equate to a $500 increase for every $100,000 in loan amount.  A $200,000 loan will see an increase of $1,000 in upfront premium. 

WILL MONTHLY FHA MIP PREMIUMS ALSO INCREASE?

NO, not at this time.  The following premiums will remain in force for FHA loans:

LOAN TERMS GREATER THAN 15 YEARS (20, 25 and 30 year terms):

For loans with a loan to value ratio LESS THAN OR EQUAL TO 95%, the monthly premium is .5% of the initial loan amount, divided by 12.    For a $100,000 loan, this works out to be $41.66 per month. 

For loans with a loan to value ratio GREATER THAN 95%, the monthly premium is .55% of the initial loan amount, divided by 12.  For a $100,000 loan, this works out to be $45.83 per month. 

LOAN TERMS OF 15 YEARS OR LESS:

For loans with a loan to value ratio GREATER THAN 90%, the monthly premium is .25% of the initial loan amount, divided by 12.  For a $100,000 loan, this works out to be $20.83 per month.

For loans with a loan to value ratio of LESS THAN OR EQUAL TO 90%, FHA does not require monthly mortgage insurance. 

Buyers who secure a purchase contract prior to the April 5, 2010 deadline should consult with their lender to ensure that an FHA case number is issued on the property to secure the lower premium. 

The complete information regarding this change can be found here. 

If all goes as planned, the Federal Reserve will cease its program of purchasing mortgage-backed securities on March 31.  This program, which was created under the Bush Administration and then expanded under the Obama Administration, has served to keep mortgage rates at or near 50 year lows for the last several months.  The program has certainly achieved its objective of keeping rates low, but many fear the potential liability this program has created for the American public by effectively socializing the mortgage market. 

The end of this program will effectively mean the government will remove the mortgage market from "life support".  Nobody knows exactly what will happen when this occurs, but simply looking at the numbers suggests that rates will increase if the large demand of mortgage-backed securities is not offset by an increase in demand from institutional investors. 

Many economists have estimated that Fed purchases under this program have accounted for as much as 80% of the agency mortgage bonds that have been sold since the creation of this program.  From a supply and demand standpoint, one has to wonder just how much slack will be picked up by institutional investors once the government assistance ends. 

In a "normal" economy, the government does not directly intervine in the mortgage market; rates are determined by the supply and demand of mortgage-backed securities, which is a function of the open markets.  Government purchases of these bonds effectively means they are keeping rates "artificially low" by buying up a large portion of the supply of mortgage bonds. 

HOW MIGHT THE END OF THE FEDERAL RESERVE PROGRAM TO PURCHASE MORTGAGE-BACKED SECURITIES AFFECT HOME BUYERS AND HOME OWNERS LOOKING TO REFINANCE THEIR MORTGAGE?

• MORTGAGE RATES MAY INCREASE, PERHAPS RAPIDLY - If the decrease in government demand for mortgage-backed securities is not offset by an increase in demand from institutional investors, mortgage rates will almost certainly increase.  Again, nobody knows by how much, but just knowing that the government is purchasing as much as 80% of the securities in the market, the increase could potentially be substantial.   
• PURCHASING POWER MAY DECLINE - When and if rates increase, home buyers who qualified with a lender at lower interest rates may find their purchasing power has declined.  For example, the principal and interest payment on a $150,000, 30 year fixed rate mortgage at a rate of 5% is $805.23.  At a rate of 6%, the payment jumps to over $899.  The same payment of $805.23 will only purchase $134,305 at 6%.  So a 1% increase in mortgage rates can reduce purchasing power by over 10%! 
• SOME HOME BUYERS WHO QUALIFIED UNDER THE LOW RATES PRIOR TO THE END OF THE PROGRAM MAY DISCOVER THEY QUALIFY FOR MUCH LESS IF RATES INCREASE - A home buyer who qualifies for a $150,000 home mortgage at 5% might be startled to hear from their lender that they only qualify for $135,000 if rates go to 6%.  Mortgage qualifications are based on several factors, so not all home buyers may be affected in this way.  But it's certainly a possibility. 
• HOME OWNERS LOOKING TO REFINANCE THEIR MORTGAGE MAY LOSE ANY BENEFIT OF REFINANCING IF RATES INCREASE.  There are costs associated with refinancing.  Those costs generally need to be offset by the monthly savings a home owner will receive in order to justify refinancing their mortgage.  The higher the rate, the longer it will take to justify this cost savings.  And in some cases, the payment may not even decrease even with a lower rate because of the increase in the loan balance due to rolling closing costs into the loan. 

WILL THE FED EXTEND THIS PROGRAM?

It is always possible that the Fed could decide to extend this program; it was already expanded in March of last year.  However, public and government support of socialist programs like this one has certainly waned over the last several months.  Additionally, many inside the government and the Fed have expressed a desire to fundamentally change how the mortgage market works, even going as far as to suggest Fannie and Freddie should be dissolved in favor of another system.  What that system will look like is anyone's guess at this point.

CHAPTER 13 BANKRUPTCY AND REBUILDING CREDIT FOR DALLAS HOMEBUYERS

Over the weekend, I received a letter from a gentleman who found my Chapter 13 bankruptcy blog online and had a few more specific questions.  So i decided to post the questions and answers here (with his permission, of course) for everyone to see.

Here's a list of the questions (in bold):

"Hello John- Your chapter 13 and FHA loan article is very concise and helpful. A few additional questions- When opening at least 3 new credit lines should they be a combo of installment and revolving with low or high balances from month to month? "

I would recommend getting two revolving accounts and one installment account to even out the mix.  10% of your credit score is based on having a fair mix of credit, so two revolving and one installment account should do the trick.  As far as the balances, there's no need to keep a high balance on the credit cards.  In fact, this can hurt in the long run because a significant part of your credit score is determined by debt to limit ratios for each open account.  Ideally, i would recommend keeping the balance of the credit cards below 25-50% of their respective limits at all times.

"And... We are in a chapter 13 ( five year plan and currently on month 19) My wife has been on her salaried job for 19 years and I am just starting a new salaried job. Have been out of work for 9 months yet the new job is what I did before- Does FHA still require a full 2 years for me or less time to qualify?"

FHA does require a two year employment history.  However, an underwriter may grant an exception to this rule if the job loss was due to factors beyond your control and if the new job is comparable to the previous job. FHA will still want a full two year work history, so they will just require documentation of the previous two years before the nine month job loss.  Going from a salaried job to another salaried job is just fine.  If you would have started your own business this go-round, FHA would have required a two year history of earnings for the new business. 

If we wait for the Chapter 13 to run its full 60 month course can we apply for an FHA loan the day after? It seems odd that one can apply for a FHA loan while actually in a Chapter 13.

I agree it seems odd, but it's the truth.  FHA does allow a borrower to obtain an FHA loan even if they're currently in a Chapter 13 bankruptcy.  However, there are a few guidelines and requirements that must be met:

• The borrower must have made at least 12 months of timely payments in the Chapter 13 repayment plan. 
• Payment history on accounts not included in the bankruptcy must be near perfect.  This is ultimately an underwriter's call, but they are typically very strict with regards to payment history for all accounts once a bankruptcy has been filed.
• The borrower must meet all other underwriting requirements to obtain an FHA loan (acceptable job history, debt-to-income ratios, cash reserves, credit score, etc).  A loan officer and underwriter will make this determination. 
• The bankruptcy trustee must give written permission for the borrower to obtain a mortgage.  This is true for both purchases and refinances.  To the best of my knowledge and based on my past experiences, there are no specific guidelines for this, but the trustee will generally not approve a request to increase the current payment by very much if any at all.  For example, a person who pays $1000 per month for rent would likely be restricted from purchasing a home with a mortgage of over $1000 per month.  An exception could possibly be made in cases where a specific and compelling need to increase the size of the family home due to a chance in familial status is present (such as an elderly parent having to move in with the family or the birth of a new child).  If you have specific questions, please contact the bankruptcy trustee directly. 

Once the bankruptcy is completed (discharged) and all payments have been disbursed to creditors, you may apply for an FHA loan without having to obtain a letter of permission from the bankruptcy trustee.   But as I mentioned above, it may be possible to obtain a mortgage prior to discharge of a Chapter 13 bankruptcy.  This may or may not be a good idea, depending on your individual financial situation. 

It's very important to focus on rebuilding your financial strength both during and after a bankruptcy.  Ideally, a buyer should try to save at least twelve months of cash reserves in addition to the money needed for down payment. 

Also, make sure to keep all records pertaining to the bankruptcy, including the full petition, discharge and especially the record pf payments to the trustee.  It's not uncommon to see errors on accounts that have been included in a bankruptcy because the creditor did not note the account as included in a bankruptcy. 

Feel free to email me with any specific questions related to this or any other issue regarding credit, mortgages or real estate in the Dallas / Fort Worth area. 

Title insurance is insurance that protects the title of a home against any defects or claims that occured on the property prior to the closing date.  It is required by virtually all lenders in order to secure a loan as well. 

Payment of the owner's title insurance policy is negotiable in the State Of Texas.  The owner's policy is customarily paid by the seller in the state of Texas, but may be paid by either party.  Part 6 of the TREC Promulgated Contract (One To Four Family Contract) indicates whether the buyer or seller will pay the owner's title policy. 

The U.S. Department of Housing and Urban Development does not automatically pay the title policy on HUD homes.  Furthermore, many lenders do not require an owner's title policy on a HUD home if the buyer is using FHA financing, but as a realtor I would strongly recommend getting one regardless of whether or not the lender requires it. 

The rates listed below are for the owner's title insurance policy only.  Lenders typically will also require a seperate policy covering their interest in the property as well.  The cost for the lender's policy is significantly less than the cost of the owner's policy when purchased in conjunction with an owner's policy from the same title company.  Contact Marie Quill with Republic Title at 214-341-7733 for a quote on the lender's policy rates.

Although many people fear the negative stigma associated with bankruptcy, sometimes it may be the only "make sense" option to recover from a financial crisis.  However, many of the general rumors about Bankruptcy are overblown, such as the notion that it will "ruin your credit" for 7-10 years.  The truth is that although a bankruptcy will stay on your credit report for a long time (7 years for a Chapter 13 and 10 years for a Chapter 7), it's quite possible to build your credit back up to a range that's acceptable to qualify for a mortgage and even obtain what most lenders would consider a "good" credit score in as little as two years.  Furthermore, it may be possible to qualify for an FHA loan with an active Chapter 13 Bankruptcy as little as 12 months after establishing a repayment plan. 

Here's a summary of FHA guidelines to obtain a loan while in a Chapter 13 Bankruptcy:

• Borrower must have made at least 12 on-time payments to the Bankruptcy trustee.
• The Bankruptcy Trustee must APPROVE the purchase of a new home (or refinance).
• The borrower must have a good payment history on accounts that are not included in the bankruptcy. 
• All other guidelines to obtain an FHA loan must also be met.

I'm not an attorney or an expert on what a Bankruptcy Trustee will approve, other than to say it must generally "make sense". 

Furthermore, many lenders will require each borrower to have at least a minimum median credit score of 580-620.  Although FHA does not specifically have a minimum credit score, virtually every lender has their own minimum requirements. 

In addition to these general requirements, lenders will expect to see some additional credit references besides just paying the Bankruptcy on time.  FHA requires a minimum of three credit references that have been open for at least 12 months and that have had some kind of activity within the last six months.  Borrowers that don't have three credit references that report to the credit bureau may use alternative references in some cases, such as rental history, insurance and utility payments and/or other accounts or lines of credit that are paid monthly.  However, I strongly recommend maintaining at least three open and active tradelines for people that have had past bankruptcies since it takes rebuilding some good credit to offset past bad credit.  Also, most accounts that are included in Bankruptcy will be closed once the BK is completed.  Without establishing new credit, the credit score may remain very low for a long time.  A good alternative may be to obtain one or more secured credit cards. 

If you are contemplating filing Bankruptcy, seek advice from a competent attorney and review your options.  It may also be a good idea to speak with a mortgage lender for advice on how to structure your debts to obtain the maximum long term benefit for both your net worth and credit score.  While credit score is important, it's also something that can be repaired with time. 

This is a quickie, but a very important question that comes up quite often:  How much does a $1000 increase (or decrease) in the loan amount change the monthly payment on a mortgage?  Not that much, actually. 

Why is this question important in the first place?  Buyers and realtors often negotiate contracts in the evenings and the weekends, or at times when the loan officer may not be available, and many buyers panic when they hear the seller countered their offer by a thousand or two thousand dollars thinking this will astronomically affect their payment.  Also, many buyers are under the false impression that adding a few thousand dollars to their down payment will have a substantial effect on their monthly payment.

The truth is usually pretty shocking to most people.  In every case, the difference in monthly payment is under $10 per month (actually way under, in most cases).

The amount of the payment difference per $1000 depends on two main factors: The interest rate and especially the LOAN TERM. 

Here are some examples:

On a 30 YEAR LOAN at 5% INTEREST, a $1000 increase in the loan amount will only increase the payment by $5.37 per month.  Not that much at all.   

On a 30 YEAR LOAN at 6% INTEREST, a $1000 increase in the loan amount only adds $6.00 to the monthly payment.  

On a 15 YEAR LOAN at 5% INTEREST, a $1000 increase only adds $7.91 to the monthly payment.  And at 6% INTEREST, it adds $8.44 per month. 

And likewise, lowering the loan amount by $1000 will result in a savings equal to these amounts as well. 

Yes, it's true this can add up to alot of money over time, but most people will not live in one home for a full 30 years (or keep the same loan, for that matter).  The fact that the difference in payment is so small per month is pretty amazing to many people.  

This is also one big reason why I suggest to buyers that they should consider keeping some money in the bank rather than putting every penny they have saved towards down payment.  Texas does not allow home equity over 80% of value to be cashed out of a homestead, so if you put less than 20% down, you will not see that money again until you sell the house.  

Of course, there are situations where it makes sense to put more money down.  The difference in rate and PMI between a 3% down and 5% down Conventional loan is pretty substantial, for example.

I'm referring more to people who insist on putting all of their money down to lower their payment.  For example, I had some buyers come in this week who had around $10,000 saved.  The minimum down payment for the home they were buying was around $3,500 ($100,000 FHA loan), but they insisted on putting down the whole $10,000 because they were under the impression it would significantly lower their payment.  Once I explained to them that the extra $6,500 would only lower their payment by around $35 per month, they opted to hold on to that extra money instead.  That was probably a wise decision.  It's not unrealistic to expect to spend a few thousand dollars on various items for a new home (furniture, repairs, movers, utility deposits, appliances, etc), so having some reserves after closing is very important to avoid a financial hardship.  It's never a smart decision for a new homeowner to use all of their savings for down payment.  There's just way too much risk that they will default or at least incur some tough financial times.  Don't let the happy emotions of buying a home overshadow good financial common sense.  That's a mistake that I see way too many people make, especially first time homebuyers.

If you need to raise your credit score to qualify for a mortgage (or qualify for a better rate), ask your mortgage professional if they offer the rapid rescore service.  Rapid rescore is a tool offered by some mortgage companies that allows newly documented and vertified information to be reported and updated to the databases of all three credit reporting agencies in three to five business days.  Depending on the information, this can potentially result in a dramatic improvement in your credit score. 

We have used the rapid rescore system with much success over the last several years.  The process enables us to report and update information to the credit bureaus quicker than most creditors.  The reason for this is that most creditors don't have a direct, real-time connection to the credit bureaus to update information.  Most creditors only download information to the bureaus once a month or every couple of weeks at most.  So if they change information on your account, it still may take up to 30-60 days to reflect on your credit report and update your score.  If you're in the middle of buying a house or plan to close in the near future, that 30-60 day time period may mean the difference between closing and getting the rate that you want versus having to rent, sign a lease and waiting 6-12 months to qualify again.  You should never persue a contract on a home without knowing for sure if you qualify for a loan by having a mortgage professional do a thorough pre-approval. 

WHEN IS A RAPID RESCORE THE RIGHT SOLUTION TO RAISE A LOW CREDIT SCORE?

Rapid rescores are typically used by mortgage lenders to improve the credit scores of their clients for three reasons:

1. To qualify them for a better interest rate or loan program.  Fannie Mae and Freddie Mac have substantial interest rate adjustments for lower credit scores, and many other lenders have arbitrary rate adjustments as well. 
2. To qualify them for a loan program that requires a minimum credit score. 
3. To obtain an automated underwriting approval.  Some loans and loan scenarios require approval through an automated underwriting system.  Although raising the score can certainly have a positive impact on automated underwriting recommendations, there's no way to know for sure without re-running the program after the rescoring process is complete. 

Since the rapid rescoring process is quite expensive (can cost up to $75 PER TRADELINE in some instances), it's typically not used unless it's absolutely necessary. 

New technology and tools, such as Credit Analyzer and the Credit "What-If" simulator can give mortgage lenders a very close estimate of the potential score results from a rapid rescore.  The service is great, but it doesn't work 100% of the time.  For this reason, buyers should seriously consider delaying the process of submitting an offer on a home until the process is complete and the lender has repulled credit and verified the new score is good enough to qualify for the loan or obtain the desired interest rate. 

The credit bureaus also have very strict documentation requirements for rapid rescores.  Also, the information must be verified with the creditor, which can sometimes cause delays. 

WHAT TYPES OF ITEMS CAN BE RESCORED?

There are many different items that can be rescored using the rapid rescore service, but they all require very specific documentation.  Here are the most common types of credit items that can be rescored, as well as the documentation that's usually required:

• Removing late payments that were reported in error by a creditor.  This requires a letter from the creditor that specifically states the late payments in question were a mistake.
• Change in the balance of an account, especially a revolving account, such as a credit card.  Since 30% of your credit score is determined by account balances, paying down accounts can have a dramatic positive effect on credit scores.
• Paying off a collection, judgment or tax lien.  Documentation from the creditor, or a release of lien or judgment is required.
• Updating the status of accounts included in a bankruptcy.  This requires submission of the bankruptcy petition and discharge, and all accounts in question must be listed in the petition, along with their respective account numbers. 
• Release of liability from an account.   

 WHAT TYPES OF DOCUMENTATION ARE ACCEPTABLE FOR A RAPID RESCORE?  WHAT TYPES ARE NOT?

The rapid rescoring process requires very strict documentation in order to be accepted by the credit bureaus.  Typically, these are the requirements:

• A letter, on letterhead, from the creditor stating which specific information about the account (such as the balance, status, date of late payments, etc.) is to be corrected.  Simply making broad statements, such as "The information you inquired about", or "We have updated our account records with new information" is not acceptable. 
• The letter must typically have a signature and/or at least the name and number of the person or department from where the letter originated. 
• The letter must be legible.  Be careful when faxing as fax machines often degrade the quality.  Consider scanning and emailing to ensure quality.
• Account statements are acceptable for balance updates, but must show the account holders name, the full account number and an accurate balance.  IF the balance changes in between the time the statement is received and it is verified by the credit bureau, the reported balance may change as well.

Information and documentation that's generally NOT acceptable includes:

• Written letters of dispute.  Disputes must be filed directly with the credit bureaus and go through the normal process.
• Paid receipts from third party payment processing agencies, such as Western Union, that did not come directly from the creditor.  If you are paying off a collection, always demand they send a letter stating the account is paid in full. 
• Cancelled checks for payments. 
• Letters that are missing important and required information, especially account numbers and the specific information that is to be updated, such as the removal of a late payment or change in balance.

Rapid rescores have saved many loans that would not have otherwise closed had this service not been available.  Again, the process is very expensive and the documentation requirements are very strict, so it's never a good reason to put off dealing with issues ahead of time that may cause problems in the middle of the loan process.  You should start the pre-approval process at least two months before you plan to begin looking for homes, EVEN IF you think your credit is perfect.  Errors and mistakes on credit reports are all-too common, and they are one of the main reasons why buyers don't close on time.