Understanding Your Credit Report.

Many times I’m asked how to improve credit, how to keep good credit, or how to build credit. This blog post will identify what your credit score is made up of, and offer suggestions on what to do to affect the score.

First of all, the biggest effect on your credit is your PAYMENT HISTORY. 35% of the credit score relies on your payment history, which includes such things as details, collections, unpaid credit, amount of delinquency, dates of past due items and amounts of past due items.

Obviously it is most important to keep collections off your report, and to pay everything on time. That’s rule #1 in maintaining good credit.

The second biggest impact on your credit is UTILIZATION. This affects 30% of the credit score. This is where being over the limit hurts your credit greatly. This is also how many accounts you have, what kind of accounts they are, and what balances you carry.

Rule to keep in mind: try to keep balances at 50% or below limits, always. Being over-utilized on credit will impact your future ability to borrow and your credit score itself.

LENGTH of credit makes up 15% of your score. I oftentimes see new credit with a very high score, but the lender will tell me the score is “too new”. Typically credit with at least 1 year of history is reviewed by lenders, anything less will require extra mitigating proof of good credit (landlord reference letter, utility bill repayment history etc).

TYPE of credit products makes up 10% of the score - this includes the number of accounts and prevalence and recent trade-related data. Example is you can have 20 accounts but none are being used, and have not been used for over a year, suddenly your credit isn’t as active!…


Standardizing Penalties

The best way to fix this mess that many borrowers are currently in is to standardize penalties across the board for fixed-term mortgages. What is the best way to do this, though?

Currently there are essentially two ways in which a lender will calculate your penalty:

1. The beneficial way.
2. The dreaded way.

If you fall under #1 then your lender will compare best rate available for term left to the rate on your current mortgage contract.

If you fall under #2 they will use a smorgasbord of excuses and arguments to justify comparing posted rates to your current rates, and/or an extension of some other evil scheme to try and exact maximum penalty from you when breaking the mortgage commitment.

Let’s look at a $450,000 mortgage that you hypothetically took out in September 2012, at a rate of 3.09%. This was about where rates were in 2012, and you took out a 5-year fixed term. If you got lucky and listened to my advice, your penalty today would be $3690. If you went with a bank that charged you the 2nd style penalty, it would be $18968.

(these calculations are from mortgage penalty calculators all using the same variables: term, rate, and balance left).

So how do I propose to bridge this gap?

Our mortgage penalties should be based on “percentage of balance” only and based on term left. Example:

If you break a 5-year contract after only a few months in, you would be expected to pay 3% of the mortgage balance.
If you broker it 1 year in, it would go down, and so forth.

What this would accomplish is simply transparency in mortgage penalties, something that is missing in our mortgage market today. It would also level the playing field, and reward people…


What To Do When Your House Doesn’t Appraise

I’m going to welcome myself back with a story that may happen to any buyer out there going without financing condition. What’s the likelihood of it happening? Well, since I can remember, this has only occured to me three times. In twelve years. And I’ve seen a LOT of deals come across my desk, so statistically speaking it’s not a common occurrence. That being said, here’s what to do if your house doesn’t appraise and you made a firm offer on a purchase:

First of all, one single appraisal does not a value make. There are many appraisers in the city that can give us another opinion, not to mention there are still “auto-valuation” lenders that don’t ask for appraisals. As a result one appraiser’s opinion needs to be verified if truly that appraisal number has been low-balled.

If you have 5% down - the bare minimum then you really have no other option other than to increase your down payment to come up with the difference.

Example; You bought a house for $525,000 but the appraiser is only going to give you $500,000. You are $25K short and are putting down 5% or $525 times 5% = $26250. Suddenly now you need a bit more - or $23 750 because your bonafide binding contract agreement states the price is $525K but the lender will only give you 95% of $500K (the appraised price). The only thing short of trying to gather up more funds is to use a credit line to cover the difference BUT only if you still qualify with that liability.

If you have more than 5% down then you can adjust your down payment and take on mortgage insurance. Using the above example here’s how the numbers work:

Let’s assume the buyer has 20% down…

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