Shady banking practices of the past mean newly lax standards should raise concerns. Have your wits about your mortgage.
Any decent human being hates being judged by a number. Whether it’s your age, your waistline, your SAT score, or your bank account, who doesn’t hate being fenced in by a few cold digits? We are human. We contain multitudes.
The mortgage industry, alas, lacks poetry in its soul, and sees nothing wrong with judging you by a number. One number – your FICO credit score – carries more weight than almost anything else in deciding whether you get a new mortgage or can refinance the mortgage you already have. Anything that hurts that score, whether it’s late credit card payments or heavy student loans, is one more strike against you.
For the past few years, the trend has been for banks to require absurdly high credit scores to lend any money. In August 2012, you might have needed a FICO score as high as 763 to get approved for a mortgage for a new home, and 769 to refinance your old mortgage.
So here’s the good news: research shows that it’s easier to get a mortgage with a less-than-perfect credit score than it was last year. According to new research from Ellie Mae, a mortgage origination software firm, only 52% of mortgages had an average FICO score of 700 in June 2013, compared to 71% in June 2012. Some big banks are even reducing the size of down payments they’re requiring, and they’re bragging about it.
It started at the top and it seems to have trickled down. In January, banks started easing lending standards for prime mortgages, which carry the lowest risk. Prime mortgages are for the best borrowers, the ones most likely to pay back debt. After banks eased those lending standards, they saw increased demand for prime mortgage loans, according to the Federal Reserve.
Banks, however, are not charity organizations. They’re businesses, and they’re looking for a profit.
So here’s the bad news: getting a mortgage or refinancing with a lower credit score may not entirely be a gift. It may be a trap.
Usually, when mortgage rates rise – as they have been for the past few months – banks lend less. This time we’ve seen the strange phenomenon of rising mortgage rates and more lending.
That could be an early red flag. The mortgage industry only lowers standards when it’s desperate for business – and when it’s desperate for business, it tends to get sloppy. It’s not clear yet whether the mortgage industry has entirely cleaned up its act since the go-go days of 2006; mortgage lending has been so restricted that we haven’t been able to see how banks would behave in a normal market. History has shown that a freer flow of mortgages also means banks are less watchful.
If history doesn’t convince you, the present should. Just a few weeks ago, the Consumer Financial Protection Bureau released a report showing that the mortgage industry is not exactly a well-oiled machine. In a delicious little section of the August report titled “Significant Violations Detected”, the CFPB notes violations of mortgage standards to military members and failures in compliance that affected 10,000 consumers.
Earlier this year, the CFPB reminded services that they couldn’t get away with UDAAPs, the euphonious acronym for “unfair, deceptive, or abusive acts or practices”.
In addition, there are mortgage moves that aren’t illegal or unethical, but just bad news. For instance, it pays to think very carefully before converting your fixed-rate mortgage to an adjustable-rate mortgage (ARM).
A move like that can seem appealing, because banks promise that switching to an adjustable rate can save hundreds of dollars a month now. Later, however, it could backfire. Since rates are currently the lowest they’ve ever been, they can only go up. So the smaller mortgage payment now is a false front; it will increase considerably as mortgage rates rise again. Certain kinds of ARMs were one of the reasons that homeowners found themselves dramatically behind on payments during the last mortgage crisis.
There are several guides to keeping an educated eye on your mortgage. Here’s one guide to spotting shady lending practices and a handy guide to predatory lending. The US Department of Housing and Urban Development also has some great tips on the signs of dodgy lending.
Make sure you’re educated when you walk into that bank to talk about mortgages. A good FICO score doesn’t tell the whole story about your financial life – but banks don’t know that. Don’t take on more than you can handle.
Original article here.
- How You Qualify For A Good Mortgage Rate! (mhutsonmortgage.wordpress.com)
- Signs of an easing of credit requirements are surfacing (athomesense.com)
- Are Banks Really Lending Where You Live? Now, Anyone Can Find Out (dailyfinance.com)