FICO Scoring Formula Change – Will It Affect Your Ability To Buy A Home?

A new revision to the FICO scoring formula will soon be rolled out. In fact, two of the three credit bureaus have already admitted to the new rules. In effect the credit balances that you carry will matter more than ever to the scoring, but luckily your little missteps will count less.
This update to the credit scoring system (called FICO 08) has been delayed for several months, but it finally will be rolling out early in 2009. It offers a few advantages to the consumers but also includes some serious new risks. The new scoring system is supposed to do a better job of predicting defaults than the classic FICO that we are used to.

Somewhere between 75% and 90% of national lenders use the FICO system to evaluate the credit worthiness of applicants. It is reported that FICO 08 is even more sensitive than the classic FICO to how much of your available credit that you are actually using. If a credit card issuer reduces your credit limit then you could see your credit scores plunge, even if you are not carrying a balance over from month to month.

Also the new formula responds more negatively if your number of open accounts falls, as is the case currently when the card issuers are closing or deactivating accounts that are not used much (those accounts are not very profitable, but still offering risks to the card companies). Your FICO 08 scores can go down with just this reduction of open/available credit.

On the other hand, many changes to the new system are not bad . FICO 08 does provide some improvements, including:

Collections – The new formula does ignore some of the small collections (garbage) that can occur if the original debt is less than $100.00. This is a way overdue improvement.

Credit missteps – The new formula is less punishing to people who have had a repossession or account charge-off as long as the more recent activity is problem free.

Authorized users – The new formula will be factoring in some limited number of authorized user accounts (used by some to improve their own account scores), but supposedly ignore additional ones if they materially affect the score.

Installment loans – The new formula is even more sensitive to the mix of revolving credit (cards, etc) and installment loans (homes, cars). Preference is given to the installment type loans over the revolving type loans and the scores will reflect this preference.

Credit inquiries – This is still a confusing issue, with many experts on both sides. Some believe the new formula will allow more inquiries without punishing the score, while others say this is not true. The best path is still to be very conservative on who and how often your credit is searched

Closing Escrow – Finally, The House Is Yours!

An escrow closing is the pinnacle of the real estate transaction. It signifies legal transfer of title (ownership) from the seller to the buyer and the completion of all conditions set up as part of the escrow.

Generally, ownership is shown through a grant deed. This deed is recorded with the County within one working day of the escrow holder’s receipt of loan funds from the buyer’s lender. This recording completes the transaction and is what is commonly known as the “close of escrow.”

Prior to this and once all of the conditions of escrow have been satisfied, and escrow officer or your real estate agent will inform you of exactly the date escrow will close.

After the escrow officer has verified with the County Records Office that the documents have recorded and legal transfer of title has occurred, the final closing papers are disbursed (usually within one day of close). The final acts of closing the file, preparing statements, and the disbursing of any remaining funds is the end of the escrow. At this time you may or may not be receiving the keys. Depending on how the purchase contract was set up, it may be as long as three days before you are allowed to move in. Reference the first page of the purchase agreement, paragraph 3b, to determine when you will be given possession.

To obtain keys, we will contact you to arrange a drop off or pickup. We hope that you will take this time to check out the place, order a pizza, break out a bottle of wine, and spend some time warming up to your new home. There’s still plenty of work ahead with the move in but this is the perfect time for a little celebratory break. Congratulations, you’ve earned it!

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Loan Funding- Show Us The Money!

During the process of buying or selling a piece of real estate, most buyers require a loan in order to purchase the property. There comes a time in the transaction when the money is ready to be exchanged for ownership of the property. Funding of the loan is essentially the transfer of money from the lender to the seller of the property. Actually it is transferred to our third party escrow but for simplicity purposes we can think of it as being transferred to the seller.

After you review and sign your loan documents, the escrow company will send them back to the lender. A final review by the lender’s underwriter takes place and if everything looks good according to the underwriter, the lender will notify the escrow company that they are ready for funding. In other words, the lender is ready to send over the money to complete the purchase of the real estate.

At this time or preferably before, the escrow company will instruct the buyer to bring all necessary closing money (i.e. closing costs and down payment) into escrow to be held until funding. Most of the time when the loan is funded the actual money for the loan is wired over in just a few minutes but in order to fund the loan all conditions and instructions set up in escrow must have been met. This dotting of the i’s and crossing of the t’s is usually what delays the actual funding from happening. Many times underwriters will take a hard second look at the borrower’s financials that may delay the funding a few days. For this reason, we encourage buyers to get their entire loan application and supplementary materials to the lender as quickly in the escrow process as possible.

As you can see, in most real estate transactions funding is a very significant event in the process and a critical component to purchasing your home. Now that you know what the funding process is all about, the only thing left is the closing and recording. You’ll learn about this final step in our next tutorial.

Purchase Agreement Contingencies - A Buyers Emergency Escape

When you wrote an offer to purchase your prospective home, you more than likely had a few safety nets put into action should the deal go sour. These safety nets are known as contingencies and are considered normal buyer protection in our purchase agreements.

The most common contingencies are to:

• See all disclosures from the seller


• Inspect the property


• Obtain acceptable financing for the property


• Have the property appraise at a value equal to or greater than the purchase price

If for any reason you are unable to obtain any of the above, or have an issue with them, no matter how small (ie unacceptable interest rate on loan, too many repairs, or low appraisal) within the first 17 days of the transaction, then you most likely will be able to cancel the entire agreement with zero penalty.

There does come a time in the transaction, usually after the 17th day, that the buyer will need to be ready to remove all of these contingencies of sale. We call this the "release of contingencies" and usually send the buyer a form to be signed stating that they are satisfied with respect to all of the above conditions, are electing to proceed with the transaction, and realize that backing out or failing to close escrow from this point forward could lead to the forfeiture of their deposit.

After the contingency release is complete, a buyer is starting to turn the home stretch toward owning this new piece of real estate. And while the remaining length of track may be short, it is the stretch where most deals are either made or broken. We'll do everything we can to make sure you are able to make it across the finish line with your new home.

Look for our next article on insurance for the first thing we can do to get you there.

Appraisals - How Much Is This Home Worth?

Appraisals are very easy and simple to understand so we are going to keep this one short. Within the first 17 days of escrow buyers will need to have their lender order an appraisal to prove to the bank's investors that the property is worth at least as much as the loan they will be writing on it. Appraisers work for the lender but are often paid by the buyer via closing costs. The cost for an appraisal can range from $300-$600 depending on size, type, and location of property.

Appraisers are licensed and will visit the house, look at recently sold homes in the area, and combine this information with general market trends to determine a fair market value for the home. There is no need for a buyer to meet an appraiser at the property.

Many buyers confuse appraisal with inspection. Think of it like this:
Inspectors check for physical defect in the property, work solely for the buyer, and do not discuss value of the property.

Appraisers work solely for the lender and speak mainly about the value of the home based on recent sales.

In order for you to get a loan to purchase your home, it will need to appraise at least at the value of the loan you are proposing taking out. If it doesn't, you will either have to make a larger down payment or need to renegotiate the purchase price. If none of the above are possible, you will need to cancel escrow.

Very rarely do appraisals come in way above the purchase price as this can create major problems if the seller then has second thoughts. Since they work for the lender, their main job is to ensure that the lender is secured by property value not to give the seller an accurate estimate of his properties value.

Now that appraisals are out of the way, we are excited to bring you our next article on real estate contingencies.

Repairs - What Can You Ask For? What Can Happen?

So you've been through the comprehensive inspection report detailing all of the shortcomings of your soon to be new home. At this point, it is natural to feel a little apprehensive about proceeding with the transaction as there is undoubtedly more wrong with the home then you initially thought. This is a normal feeling and in most cases a night or two of sleep will help to put it all in perspective. Remember, most all of the homes on the market are used and do have some defects so it will be an impossibility to even find a home with zero areas of concern. The same also goes for new construction and probably even the property you are currently living within.

The real purpose for a home inspection is awareness. That means you, the buyer, now have the knowledge about the various shortcomings with your property and can make the best decision possible.


What Options Are There After A Home Inspection

Ask For Repairs - Most standard sellers will be open to making a few repairs to the property in order to ease buyer concern. Of course, the property is privately owned so the owner does not necessarily have to do any repairs and some will not. All of this depends on the motivation and general disposition of the properties current owner. It is common practice for buyers to ask for items listed as health and safety issues to be remedied before proceeding. Items such as exposed wiring, broken glass, unstrapped water heaters, and other potential hazards are the most commonly asked for repairs.

How much can you ask for? You can ask for as much as you like, and your certainly not limited to health and safety items, but generally 5-10 items is what we would consider average. Again, the chance of you getting these items fixed will depend on many factors including: the negotiations leading up to the escrow, the sellers feelings toward the buyer, market conditions, and the overall condition of the property. For example, a seller who has endured endless price negotiations leading up to escrow may have such ill feelings towards the buyers that he will not do any repairs to the property. This is also known as selling "as-is."

Ask For Credit - Sometimes in addition to or in lieu of asking for repairs, the buyer will ask for a cash credit to fix the problems on their own. Again, good judgement should be exercised here as it is not likely for a buyer to recieve a credit for a broken pool heater when the seller had been crediting the buyer for it in the negotiations leading up to escrow. Cash credits, on the other hand, can be advantageous as the buyer will be able to fix the problems in any manner they like without worrying about the seller picking an unqualified "low ball" contractor for quick fix. The buyer is not bound to use the money for repairs, in fact, they are free to spend it any way they see fit.

Proceed With The Sale - The above solutions can lead to the continutation of sale when both parties can arrive at a mutually beneficial arrangement. Sometimes, there are so few problems with the home that the buyer is just ready to proceed without any repairs. Other times the buyer will know going into escrow that asking for repairs will be pointless and if don't see any major issues, they also elect to continue on with the transaction. After a home inspection it is perfectly acceptable to continue on with the sale of the home with zero talk of repairs.

Cancel Escrow - Every once in a while the inspection will reveal more problems than the buyer can handle and the buyer will simply cancel escrow without penalty and continue on looking for another property.

Bank Owned And Short Sale Property - With bank owned property, the simple fact is that it is often sold "as-is" from outset so any hopes a buyer may have for repairs will be fruitless. Banks very rarely will acknowledge any information about the property given the unique way in which they acquired title to the property. Since it was acquired through foreclosure, they may have never been given any disclosures about the condition of the property and therefore are not willing to vouch for its shape.

Occasionally, banks will offer cash credit for repairs but they certainly are not under any obligation to do so. In fact, many banks price their properties so well that they recieve multiple offers and may be completely unwilling to accomodate a buyer asking for credit because they have so many backup buyers.

Short sale sellers may be more willing to do repairs and credits but this is often overshadowed by the slow process it may become to ask for considerations. Often times, asking for repairs can kill any time sensitive approval the bank has given so it may not be wise to demand them. More often than not, the price on short sales and bank repo homes is so competitive that it just may not matter to a buyer. This is obviously a good time to consult with your real estate agent about the overall value of the deal.


Some Other Ideas

When you do decide to continue on with a transaction, it would be an excellent idea to keep a copy of the inspection report so that you have some idea of problems you may want to look at remedying in the coming years. This advice alone will pay dividends when it comes time to sell your home.

Look for our next article on understanding your homes appraisal.