Mortgage Insights Blog

Part 5 of our 5 part series: It's surprising how many consumers make the same credit scoring mistakes over and over again. In an effort to educate consumers on credit and credit scoring, we've compiled 5 common credit scoring mistakes into a list that defines each mistake and explains why they are bad and how to avoid them. We will be releasing one per day. Here is:

Credit Mistake #5: Excessively Applying for Credit

Whenever you apply for credit your application gives the lender permission to access your credit reports. When they pull your credit reports, it automatically posts an inquiry in your credit record. This inquiry is a record of who pulled your credit report and the date it occurred.Â

Credit scoring models use inquires to determine if and when you shop for credit. Statistics show that consumers who have more inquiries are higher credit risks than those with fewer inquiries.

It is for this reason that the more inquiries you have, the more points you lose in the credit score calculation.

The exact point value of inquiries is a much argued topic and is impossible to give an exact point value because it really depends on all of the other information included in your individual credit file.

The best strategy would be to only apply for credit when you absolutely need to.

This means that you should avoid those in store offers of "10% off" in exchange for applying for a store credit card. This may sound like a great idea but the reality is that while you may save a few bucks on your purchase, those inquiries could end up costing you a lower credit score which could result in higher interest rates on auto or mortgage loans in the future.

Summary of the 5 Biggest Credit Mistakes

• Closing Credit Cards Accounts
• Missing Payments
• Settling Accounts
• High Revolving Utilization on Your Credit Cards
• Excessively Applying for Credit

There you have it. Now that you know the top 5 credit mistakes, you can avoid making the same mistakes that so many other consumers make. I hope this infromation was helpful to you and please feel free to pass it along to someone else you maight think may benefit form this insider knowledge.

Please feel free to respond back with additional questions or concerns.

If you ever wondered how you might be able to save on homeowner insurance, I’ve compiled six suggestions. To get started, be sure you ask your insurance agent to provide you with a written estimate for each home improvement listed below to make sure the potential cost of the upgrade is worth the discount on the insurance. And in some cases, insurers can’t provide all of the discounts when taken together because there would be little to no premium left to collect.

1. Remove structures. Remove or reduce additional structures coverage from your homeowner policy. It’s typically automatically included in your policy, even if you don’t have a stand-alone shed, garage or cottage. This alone could save you about 5% on your annual premium.

2. Get security alarms and locks. By simply installing smoke detectors, burglar alarms and dead-bolt locks you could save at least 5% according to a report from the insurance institute. Also consider purchasing higher-end security and sprinkler systems as some insurers offer premium discounts of up to 20% for these items, but be sure the discounts outweigh the cost.

3. Reduce damage risks. Modernize your heating, plumbing and electrical systems to reduce the risk of fire and water damage, two of the most costly types of storm claims. For instance, replace rubber hoses behind your washing machine with stainless-steel ones. They’re a bit more expensive but are unlikely to crack or burst.

4. Opt for less coverage. Consider reducing your home contents coverage, especially if you own items that are worth less now and you would be willing to buy second-hand to replace them. (That said, it makes sense to buy replacement coverage for your home. You want enough to rebuild it if a hurricane strikes, which may be more than the value of the home.)

5. Use mulch. Replace gravel or rocks on your lawn with safer materials such as shredded bark. There typically aren’t discounts for this, but it would help prevent the rocks from flying and damaging your home or car.

”With Wall Street engulfed in the biggest financial crisis in a generation, there are a few things that consumers can do to protect themselves from this perilous storm,” said Gibran Nicholas, chairman of the CMPS Institute, an organization that certifies mortgage bankers and brokers. Here are 4 suggestions consumers should consider to protect themselves:

1 - Make Sure Your Investments Are Protected Through the SIPC. The Securities Investor Protection Corporation (SIPC) was created in 1970 as a non-profit, non-government organization funded by its members: broker-dealers that trade in stocks, bonds, mutual funds and other investments in the financial markets. The primary role of the SIPC is to return funds and investments to investors if the broker-dealer holding these assets becomes insolvent.”The SIPC does not cover you if the value of your investments goes down,” said Nicholas. “The SIPC makes sure that you recover the assets in your investment accounts if your stock brokerage firm or the financial institution where you hold your investment account goes bankrupt. For example, if you have an account at Lehman Brothers or any other financial institution that goes bankrupt, the SIPC will make sure that you recover the assets you hold in the investment account. However, if the stocks or other investments that you hold in your investment accounts have lost value due to a decline in stock prices or market conditions, the SIPC will not reimburse you for the lost value of your investments.”

SIPC coverage is limited to $500,000 per customer, including up to $100,000 for cash. “This does not mean that you will only recover $500,000 worth of your account,” said Nicholas. “Under virtually all circumstances, you will recover the full amount as part of the unwinding and liquidation of the brokerage firm.” If sufficient funds are not available in the firm’s customer accounts to satisfy all the claims, the reserve funds of the SIPC are used to supplement the distribution, up to a ceiling of $500,000 per customer, including a maximum of $100,000 for cash claims. Additional funds may be available to satisfy the remainder of customer claims after the cost of liquidating the brokerage firm is taken into account. According to the SIPC website, it typically takes one to three months for investors to recover their property from an account at a failed brokerage firm.

SIPC covers stocks, bonds, mutual funds and other securities registered with the Securities and Exchange Commission (SEC), which is the government agency that oversees the SIPC. The SIPC does not cover unregistered investments such as commodity futures contracts or commodity options. In response to the impending collapse of Lehman Brothers yesterday, the SEC issued a press release specifically indicating that it is taking actions to ensure that those who have accounts at Lehman Brothers will recover the assets in their accounts in the event that Lehman becomes insolvent.

2 - Make Sure All Your Bank Accounts Are Covered with FDIC Insurance. The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency that was created in 1933 to insure bank depositors and protect them against the failure of their bank. The current limit on FDIC insurance is $100,000 for bank accounts and $250,000 for retirement accounts.

“You should make sure that all deposits over the limit are held in separate accounts owned by different individuals or entities,” said Nicholas. “This means that if you are married with two children, you can have one account in your name, one account in the name of your spouse and one account each in the names of your two children, all with the maximum of $100,000 in deposits, and you would still be fully insured for the full $400,000.”

Additionally, if you have a corporation or limited liability company (LLC), your business can also have an account at that same bank and it will also be insured up to the $100,000 limit. The only caveat is that the company must be engaged in an “independent activity,” meaning that the entity is operated primarily for some purpose other than to simply increase your insurance coverage. When two or more insured banks merge, the deposits from the assumed bank continue to be insured separately for at least six months after the merger. This grace period gives you the opportunity to restructure your accounts, if necessary.

If your deposits at one bank exceed the FDIC limits, it’s advisable to move the money and open up some new accounts at other banks that are not affiliated with one another and that are not owned by the same parent company. Additionally, you may consider asking your bank if they participate in the CDARS® network. CDARS stands for Certificate of Deposit Account Registry Service, and it is offered by nearly 2,500 financial institutions across the country. When you place a large deposit with a financial institution that is part of the CDARS network, the financial institution uses CDARS to place your funds into certificates of deposit issued by other banks in the network. This occurs in increments of less than $100,000 to ensure that both principal and interest are eligible for full FDIC insurance.

3 - Max Out Your Home Equity Line of Credit Before Your Lender Cuts Off the Limit. “Lenders have been arbitrarily reducing credit limits on home equity lines of credit,” said Nicholas. “If you still have credit available on your home equity line, it could be very beneficial for you to draw out the money now before the lender reduces your limit. In this environment, it’s probably a safer bet to have the cash sitting in your FDIC-insured bank account in case you lose your job or in case you need the funds for any other reason.”

4 - Stop Making Extra Mortgage Payments and Take Out a Mortgage Even If You Don’t Need One. “Cash is king in a liquidity crunch,” said Nicholas. “The worst thing you can do in this environment is dump more of your cash into your home equity because you may not be able to get access to it if you run into financial difficulties, if the housing market continues to decline, or if the credit crunch gets worse. Although it sounds counter-intuitive, you should have as big a mortgage as possible - even if you don’t need it - and leave as much cash as possible in a safe, liquid place that is readily available to you. This empowers you to weather the storm and also have your funds available to take advantage of bargain opportunities that are becoming available because others have not followed this advice. In this environment, the one with the most cash wins.”

Qualifying for a mortgage is certainly not as easy as it used to be. The turmoil that has gripped the housing and the credit markets has led to lenders tightening their approval standards. But while it is more difficult to qualify, it is not impossible. And in fact, with the current availability of first-time homebuyer programs, historically low long term interest rates, and low home prices, now has never been a better time to look into purchasing a home.

To help you prepare for the mortgage approval process I am offering some tips to better improve your chances of getting a mortgage:

1. Check your credit reports.

The three main reporting agencies are Equifax, Experian and TransUnion. You’ll want to make sure that all the information on these reports is correct. If you find some information that is incorrect, you should report the discrepancy immediately to all three reporting agencies. Anything negative on your credit report can hurt you, even if it’s not right.

There are many sources available on the internet where you can download a free copy of your credit report once a year. I recommend going to www.annualcreditreport.com for their easy to use and navigate website.

Once you have your credit report, if you have any questions or do not understand how things have been reported, please feel free to contact me for a free credit consultation.

2. Boost your FICO score.

Most mortgage lenders will use the middle credit score as calculated by the three major credit bureaus to determine a borrower’s ability to repay and possible default risk. Because lenders use these scores to measure your ability to repay a loan, you may be interested in some steps you can take to improve them.

One such step is to pay down the balances on your revolving debts. Revolving debts are debts such as credit cards that do not have specific loan structures, rather your payments are based on the current outstanding balance. And be sure to pay all your credit accounts on time and do not intentionally close any accounts, even if those accounts currently have a $0 balance.

3. Put money aside for a down payment.

Generally it is recommended to set aside enough for a 5% to 10% down payment. From a lender’s perspective this will show that you are serious about becoming a homeowner and most lenders feel more comfortable granting a mortgage to a borrower than can make a larger down payment. And if you end up not using the amount of money you have set aside, these balances will count towards your reserve requirements which lenders use to measure your ability to repay future payments.

That said, there are programs available to first-time homebuyers that currently offer grants that can be used for down payments and even towards your closing costs. But qualifying is very strict and you are still expected to have some amount saved up for reserves or to pay your closing costs.

4. Get realistic about your budget.

As a general rule of thumb, your total housing expense including mortgage payment, property taxes and homeowner’s insurance should be no more than 35%-45% of your monthly household income. Be sure to get pre-qualified by a mortgage professional before you begin your search so that you will have a good idea of your price range and the availability of special first-time homebuyer programs and down payments assistance grants.

And don’t forget to factor in other expenses of homeownership, for example, figure out what your possible utilities expenses may run. If you are buying a home with a pool you can expect to have a higher energy bill. Or if you are buying a home with a large yard, you might spend more money on water each month.

Bottom-line, be sure to plan your expenses carefully and allow yourself room for savings, food and entertainment, as well as any unforeseen future events. If you make $4,000 a month, don’t take a mortgage out for much more than $1,400 a month. This will ensure that you have adequate reserves to make your payments.

Part 4 of our 5 part series: It's surprising how many consumers make the same credit scoring mistakes over and over again. In an effort to educate consumers on credit and credit scoring, we've compiled 5 common credit scoring mistakes into a list that defines each mistake and explains why they are bad and how to avoid them. We will be releasing one per day. Here is:

Credit Mistake #4: High Revolving Utilization on Your Credit Cards

Most consumers believe that making your payments on time is all it takes to have good credit and earn great credit scores.

What they don't realize is that almost a third of your score is determined by how much you owe on your credit card accounts. If you have high balances on your credit card accounts, you're credit scores could be severely impacted by your revolving utilization.

In order to score the most possible points in this category, I advise keeping your revolving utilization at 10% or less.

Don't be fooled when you hear some of these celebrity experts telling you that 50%, 30% or even 25% is best.

While 30% is considerably better than 50%, 10% or less is ideal. The lower the utilization percentage, the better your score will be. (*To read more about revolving utilization and how it's calculated, please read the revolving utilization bullet in Mistake #1.)