UNDERSTANDING CREDIT SCORES
THE IMPACT OF YOUR CREDIT SCORE ON YOUR MORTGAGE LOAN
A credit score is a number between 350 – 850 on a scale created by the Fair Isaac Corporation (FICO). This number is known as your FICO® score, and it is used by lenders as a snapshot of your credit history and a summary of risk involved to lending to you.
A higher FICO score equates to less possible risk to lenders, and generally a lower interest rate to you as a borrower.
A lower FICO score equates to more possible risk to lenders, and generally higher interest rates to you as a borrower.
Your FICO score can easily be your best possible asset to obtaining home financing at competitive rates, or it can be an obstacle to securing a loan or credit.
Your credit score matters. When you apply for a home loan with American Pacific Mortgage, we will check your credit score for you as part of the pre-application process. What factors go into determining a credit score?
Your credit score changes as new information is updated in your credit report. There are five primary factors that determine this constantly updating score. Here is what the credit reporting agencies are looking at, and what you can do to optimize your score.
PAYMENT HISTORY - 35% OF TOTAL SCORE
Late payments can have a negative impact on your credit score. Recent late payments will result in more lost points than older late payments, since this factor is weighted to the most recent activity. The frequency and severity of late payments will also come into play; a 90-day late is considered worse than a 30-day late payment. Over time, your older late payments will have less of an impact on your credit score, since your most recent payment history is a better reflection of your credit risk.
Optimize your credit score by making sure all bills are paid within 30 days of the due date.
UTILIZATION RATE - 30% OF TOTAL SCORE
The ratio of your credit balance to your available limit is known as the utilization rate. The utilization rate of your individual cards and culmalitive limit of all your cards are taken into account when considering your credit risk. Your credit score may improve when your balance to limit ratio is below 30%, and you may lose points for balances exceeding 30% of your limit.
Optimize your credit score by paying credit cards down below 30% of their limits, or by requesting an increase in your limit to improve your utilization rate.
LENGTH OF HISTORY - 15% OF TOTAL SCORE
An established credit history is favorable when considering your credit risk. Your credit accounts have an overall age that goes up and down over time as you open new accounts. Opening new accounts will reduce your overall credit age, and will generally lose you points the first 12 months after a new account has opened. The next 12 months an account is neutral on your credit report, and will start to earn you points after 24 months of on-time payments.
Optimize your credit score by keeping your older accounts open – even if you have paid that card off. Unless a paid off account is costing you in annual fees, it is providing positive points as an established account. Try to use that card at least once every 6 months to keep the account open and active, and then maintain your good history with on-time payments.
TYPE OF CREDIT - 10% OF TOTAL SCORE
To maximize the points on your credit score, creditors like to see a mix of account types. A good mix of account types demonstrates your credit worthiness and a reduced credit risk. Different credit types include installment loans, such as mortgages and auto loans, and revolving credit (credit cards).
Optimize your credit to get the highest scoring in this category with one major installment loan (mortgage or HELOC), one additional installment loan (auto), and a minimum of three revolving accounts. Mortgage paid off? No problem. A home equity line of credit (HELOC) can be a smart tool to optimize your credit score. Use a HELOC for any number of expenses and pay it off the following month.
INQUIRIES - 10% OF TOTAL SCORE
Each year, you can request a free copy of your credit report from the major reporting agencies. This sort of inquiry is considered a “soft” inquiry, and has no negative impact on your score. Credit inquiries requested from an employer with your permission also fall within this soft category.
The type of credit inquiries that will impact your credit score are “hard” inquiries. A hard inquiry occurs when a lender pulls your credit. If you are applying for new credit cards from multiple lenders in a short period of time, each inquiry counts as an individual hard inquiry, and will result in lost points on your credit score. However, if multiple lenders pull your credit for a single new account, like a mortgage, all of these inquiries are counted as one hard inquiry.
Optimize your score by sharing personal information only when necessary to complete a borrowing transaction, and limit the amount of accounts that you apply for at a time. Inquiries will reduce your score for 12 months, but remain on your credit report for 2 years.
*Note: American Pacific Mortgage Corporation is not a credit repair company; this information is for information purposes only. We are not licensed credit repair specialists or counselors.
UNDERSTANDING HOME EQUITY
THE IMPACT OF HOME EQUITY ON YOUR MORTGAGE LOAN
You hear the phrase “home equity” used a lot when discussing your mortgage loan options, but what is it, exactly? Consider equity an equation describing the value of your home and the claims against it.
Changes to either of these variables can impact the amount of equity you have in your home.
As the appraised, fair market value of your home increases, so does your equity. If the appraised value of your home decreases, the amount of equity also decreases. If you pay down the principal balance of loans on your home, your equity increases. As you borrow more against your home, your equity may decrease, depending on the market value.
You don’t have to remember any equations to understand equity. To put it simply, your home can gain equity in the following ways:
Cash used for down payment
Extra payments made toward principal balance
Appreciation of your home’s fair market value
WHAT CAN YOUR HOME EQUITY BE USED FOR?
You can pull the equity that you have earned in your home and use it for any purpose that you need. You may find that your equity is the perfect tool to pay off high interest debt, loans, or overdue bills. Your equity may be used to repair and remodel your current home, or used as a down payment on a vacation or investment property. Your equity may be the lifeline to protect you during periods of hardship or unemployment, or the ticket to the vacation or retirement that you have been waiting for. The equity in your home belongs to you, and you can do with it whatever you choose.
HOW DO YOU GET YOUR HOME EQUITY?
If you want to access the equity in your home, contact one of our American Pacific Mortgage expert loan advisors to discuss how your equity can be put to work for you. One of the things your advisor will present to you are the various options in which you can get your equity.
A Cash-out Refinance
A Home Equity Line of Credit (HELOC)
A Home Equity Loan
UNDERSTANDING HOME APPRAISALS
THE IMPACT OF A HOME APPRAISAL ON YOUR MORTGAGE LOAN
A home appraisal determines what your home is worth in the current market. This fair market value will determine how much equity you have in your home, and the amount that lenders are willing to lend on your home. Appraisals are not just for home purchases, your lender may request one for your refinance mortgage loan as well.
WHAT IS THE HOME APPRAISAL PROCESS?
Your lender will ask a state-licensed and lender-approved professional to assess your home and determine its fair market value. The report submitted by the appraiser will tell the lender if the property value supports the requested loan amount, and can affect the amount that they are willing to lend.
The appraisal report will contain information such as the home’s legal description, size, shape, age, and condition. The appraiser will perform a complete visual inspection of the home’s interior and exterior areas, inspect the neighborhood, and inspect comparable sales on the street.
The inspection of comparable sales, or “comps” will help the appraiser to see how your home compares to other homes in your neighborhood that have recently sold. Your home value may be adjusted higher or lower than the other comparable homes depending on how it matches. Swimming pools or additional rooms at your home may bring additional value to your home if the comparable did not have them.
We have the answers to your appraisal questions. If you want to know whether your loan will require an appraisal, what to expect during the appraisal process, or whether certain features of your home will be counted towards your value, ask us. There are no questions too small for our loan advisors at American Pacific Mortgage.
WHEN YOU ARE READY TO GET STARTED, HERE IS A COMPREHENSIVE LIST TO GUIDE YOU THROUGH THE MORTGAGE LOAN APPLICATION PROCESS
While this list covers most of the documents that a lender might require, it may be customized for your specific situation. Your American Pacific Mortgage loan advisor can give you an individualized picture of the specific documents your loan will need.
LIST OF REQUESTED DOCUMENTS
Financial and income documents
Most recent pay stubs covering the last 30 days
W-2s for the last two calendar years
Two most-recent statements for all checking, savings, CD, money market, and/or securities-brokerage accounts (please include all pages)
Most recent statements for all retirement accounts (IRAs, SEP-IRAs, 401-(k)s or 403-(b)s)
Most recent statement of stock options, employee stock option purchase plans, and similar if you’re using them as part of the down payment or for closing costs
Federal tax returns (1040s) for the last two calendar years; please include complete returns with all schedules filed
YTD Profit & Loss Statement if you’re self-employed or an independent contractor
All federal K-1s, partnership returns (1065s) and corporate or S-corp. returns (1120s or 1120-Ss) for the last two calendar years
Mortgage, real estate tax, and insurance premium statements for all properties currently owned
Leases on all rental properties you may own, if applicable
Complete bankruptcy papers, if applicable
Divorce decree and settlement statements, if applicable
Proof of identity
State-issued driver’s license or passport showing your date of birth to satisfy Patriot Act requirements
If not a U.S. citizen: a resident alien card (front and back); resident alien application or H1B or L1 Visa plus passport as applicable
SOME THINGS TO CONSIDER
BEFORE YOU BEGIN THE APPLICATION PROCESS, BE MINDFUL OF ACTIONS THAT MAY IMPACT YOUR ABILITY TO GET THE MOST COMPETITIVE RATE ON YOUR LOAN
Do not make large purchases on credit, open new credit card accounts, or closes credit accounts or credit lines.
Do not change jobs if possible during the loan process, or your loan may need to be re-approved.
Avoid moving money unnecessarily from one account to another. If you do need to move money, be sure that there is a clear paper trail. Make copies of deposited checks, deposit receipts, and wire transfer orders. Any large deposits should be well documented.