Your Credit Score Doesn’t Cost You Today, But In Three Months It Could Cost You Plenty

Credit scores are the best predictor of how a homeowner will pay on a mortgage, so it’s no surprise that credit scores will play a bigger role in mortgage financing in 2008.

Actually “that date” is more clearly defined.  It’s March 1, 2008.

For loans closing on or after March 1, 2008, Fannie Mae and Freddie Mac will subject the bulk of their mortgage products hefty fees when the loan-to-value exceeds 70%.

Credit scores will determine the amount of the rate adjustment.

• Credit scores between 660-679: 0.750% of loan size in fees
• Credit scores between 640-659: 1.250% of loan size in fees
• Credit scores between 620-639: 1.750% of loan size in fees
• Credit scores below 620: 2.000% of loan size in fees

For example, a person with a $250,000 mortgage rate would face a “credit-based fee” of $3,125 just because they carry a 650 credit score.  It would jump to $4,375 for a 635 credit score.

Alternatively, this fee can be “financed” into the mortgage instead of paid as cash.  The general rule is that for every 1.000% in fees, you can exchange it for a 0.250% increase to rate.  This is just a guideline, of course — every mortgage lender has its own pricing scheme.

Because the credit score adjustment is not into effect for loans closing prior to March 1, 2008, there is plenty of time to be proactive if you think you’ll trigger the new rule.

If you are planning to purchase a home on or after March 1, 2008, it would be prudent to have your credit scores checked as soon as possible.  If your scores are below 680, or teetering on the edge, take ownership of your credit and start working to improve your score.

A terrific source of non-biased credit scoring information is myFICO.com.

Why New Home Sales Data Doesn’t Tell Us Much About The Real Estate Market

October’s New Homes Sales report showed a modest month-over-month improvement from September.  

Before we interpret that to mean that the housing market is rebounding, though, let’s consider the fallibility of the New Home Sales report. 

On the Census Bureau’s Web site, there is a disclaimer about the validity of the data.  Paraphrased, it reads:

A new housing unit is considered sold when a contract is signed and/or earnest money is exchanged.  There is no follow up to verify if the sale was closed, or canceled. 

Therefore, if cancellations are high, the New Homes Sales data can be overestimated.

Couple that with the 35-45% cancellation rates as reported by builders and you start to get the picture.

However!  The disclaimer also includes the following text (again, paraphrased):

A housing unit will never be counted twice so if a previously canceled unit is later sold again, the Census Bureau does not count this sale a second time. 

Therefore, when demand is strong, New Home Sales can be underestimated.

In other words, the New Homes Sales report overestimates sales figures in a weak market, and underestimates them in a strong market.

The long-term impact of October’s New Homes Sales report is unclear.  The only thing that is clear is that the monthly New Homes Sales report doesn’t tell us a whole lot.

The Week In Review (December 3, 2007) : What To Watch For

If you enjoy roller coaster rides, last week’s mortgage markets were a delight.  Up and down mortgage rates went, trying to find a balance between inflation and recession (or maybe neither).

A major cue for markets last week came from a high-ranking Fed official who raised expectations for future cuts to the Fed Funds Rate.  Currently, the Fed Funds Rate sits at 4.500%. 

For homeowners, it is unclear how changes in the Fed Funds Rate will impact mortgage rates.  Contrary to popular belief, changes in the Fed Funds Rate are not tied to changes in mortgage rates. 

This chart shows, for example, how the FFR increased more than 3.00% between 2004 and 2006 while mortgage rates only edged higher. 

Similarly, the recent drops in the Fed Funds Rate have been accompanied by only a slight reduction in mortgage rates.

Instead, mortgage rates are based on the prices of mortgage bonds and recently the demand for the bonds has been erratic.  This is why mortgage rates have been erratic, too.  As demand goes up, mortgage rates come down.  The reverse is true, too.

This week, demand for mortgage bonds should be tied to expectations from the Fed and its December 11 meeting, and to this Friday’s employment data.  Many economists believe that the Fed will take some cues from Friday’s report so the numbers will take on added significance.

The economy is expected to have added 75,000 jobs in November, and the unemployment rate is expected to rise to 4.8%.  If the actual numbers are stronger than the estimates, expect that mortgage rates will increase in response.