Credit Scores & Mortgages

The pendulum continues to swing toward more regulations affecting the ability of someone to buy a home. Lenders use a graduated scale basing mortgage interest rates on a consumers credit score. A higher the credit score will result in a more favorable loan and interest rate. Lenders have raised the bar (credit score) to now eliminate consumers from the home buying process by classifying them too risky – simply based on their credit score. This approach is now spilling over to the rental market as landlords scrutinize applicants using credit scores and the sliding scale of worthiness.

Each recession creates its own set of new regulations governing our ability to do what we want to do. Now, lenders have added another step in the mortgage/loan process. Once a borrower has been approved for a loan and just before closing, lenders will again pull the credit score to investigate any significant changes. If there are changes, the loan will be sent back through underwriting and the closing delayed. And, the worst case scenario, the borrower does not qualify for the loan based on a new credit rating.

Thus, buyers should not buy the refrigerator until after they close. In fact, borrowers should not do anything from contract to close that will affect their credit rating.

The following article discusses seven ways to improve your credit score. This article is by Liz Pulliam Weston for MSN Money. http://bit.ly/9P8qcp

It is estimated that if someone went into foreclosure (which is happening at an alarming rate) or filed for bankruptcy, their credit score would lower by -100 to -200. If the rental market is now using the same approach as the mortgage industry, what will be the ramifications as foreclosures continue to rise? Credit worthiness has always been an issue but the pendulum has and will continue to swing toward tighter restrictions and more regulations.

 

Let’s see if I have this correct and please correct me if I am wrong or missing a step:

• Lenders ignore financial sense and issue mortgages to marginal borrowers
• Borrowers are filing for bankruptcy or their home is being foreclosed by the lender
• Government bails out lenders and they pay back the government amazingly quick
• Government and lenders impose stricter regulations on loans through credit scores
• Lenders have stopped or slowed down issuing credit and the process is lengthened
• Lenders are making more money now than before the crisis

Where do we go from here?