Make sure to do a little planning before you start looking for a mortgage. With a some work, you can keep your score in top shape relatively easily as you shop for the right mortgage lender.
“Metaphorically, not letting your lender check your credit is like not letting a doctor check your blood pressure. Sure, you can get a diagnosis when your appointment’s over — it just might not be the right one.” – Gina Pogol, The Mortgage Reports
When you start looking for the right
mortgage provider, shop carefully because your credit score might suffer if you
don’t take care. Each time you apply for a home loan, a mortgage lender will
make a credit inquiry to review your credit history. These inquiries are
reported to the three major credit-reporting agencies: Equifax, Experian and
TransUnion.
If there’s one thing to take away, from
Pogol’s article…”do make sure to share your social security number with your
lender so they can give you accurate mortgage rate quotes instead of just
best guesses or ‘ballpark rates’.”
Mortgage vs Credit Card Inquiries
A hard inquiry generally means you’re
searching for additional credit. “Statistically, you’re more likely to have
debt problems and default on financial obligations when you increase your
available credit. This is especially true if you’re maxed out or carrying
credit card balances and looking for more”, says Pogol.
She continues, “Understanding this,
it makes sense that your credit scores drop when you go applying for
new credit cards or charge cards. Fortunately, credit bureaus have learned that
mortgage shopping behavior does not carry the same risks and they no longer
treat a slew of mortgage inquiries the same way.”
They key point here is that multiple mortgage companies can check your credit report within a limited period of time – and all of those inquiries will be treated as a single inquiry. That time period depends on the FICO system the lender uses. It can range from 14 to 45 days.
What FICO Says
This is what MyFICO says about its algorithms
and how it treats rate shopping inquiries:
FICO® Scores are more predictive when they treat loans that
commonly involve rate-shopping, such as mortgage, auto, and student loans, in a
different way. For these types of loans, FICO Scores ignore inquiries made in
the 30 days prior to scoring.
So, if you find a loan within 30 days, the
inquiries won’t affect your scores while you’re rate shopping. In addition,
FICO Scores look on your credit report for rate-shopping inquiries older than
30 days. If your FICO Scores find some, your scores will consider inquiries
that fall in a typical shopping period as just one inquiry.
For FICO Scores calculated from older versions
of the scoring formula, this shopping period is any 14-day span. For FICO Scores
calculated from the newest versions of the scoring formula, this shopping
period is any 45-day span.
Mortgage rate shopping /
credit score Q&A with Gina Pogol
Do mortgage pre-approvals
affect credit score?
Yes, but only slightly. Credit bureaus penalize
you a small amount for shopping for credit. That’s a precaution in case you are
trying to solve financial problems with credit. But requesting a mortgage
pre-approval without applying for other types of credit simultaneously will
have little to no effect on your score.
Will shopping around for
a mortgage hurt my score?
You have 14 days to get as many pre-approvals
and rate quotes as you’d like — they all count as one inquiry if you are
applying for the same type of credit.
How many points does your
credit score go down for an inquiry?
About 5 points, but that could be lower or
higher depending on your credit history. If you haven’t applied for much credit
lately, a mortgage inquiry will probably have a minimal effect on your score.
How much does a mortgage
affect credit score?
Having a mortgage and making all payments on
time actually improves your credit score. It’s a big loan and a big
responsibility. Managing it well proves you are a worthy of other types of
credit.
What’s the mortgage
credit pull window?
You have 14 days to shop for a mortgage once
you’ve had your credit pulled. Within 14 days, all mortgage inquiries count as
one.
The Final Take-Away
A mortgage credit inquiry does have a small effect on your score, but it’s still worth shopping around to find the right lender. Borrowers can save both money and headaches by doing some work to find the lender that you trust the most.
A strong job market, increased real wages, and historically low mortgage rates should support a solid housing market in 2020, most economists predict.
Believe it or not, the problem will be finding enough homes for buyers, as housing inventory is near all-time lows throughout much of the country.
With low unemployment and interest rates well below
historical averages, the real estate industry is being constrained by shortage
in housing availability, especially at lower price ranges. Not enough homes are
being built, and homeowners are staying put longer, creating a bit of a bottleneck.
With that said, most experts believe it will be a good year
for home buyers – and even better for home sellers.
Let’s take a look at what the insiders are saying about
housing, the Federal Reserve, and mortgage interest rates in 2020….
HOUSING
“The housing market appears poised to take a leading role in real GDP growth over the forecast horizon for the first time in years, further bolstering our modest-but-solid growth forecasts through 2021,” said Doug Duncan, Fannie Mae’s chief economist. “In our view, residential fixed investment is likely to benefit from ongoing strength in the labor markets and consumer spending, in addition to the low interest rate environment.”
Affordability
Current research shows that housing has actually become more
affordable this year, despite home appreciation and tight inventory. Affordable
homes are possible thanks to lower mortgage rates and greater purchasing power.
For the average home buyer, month-to-month housing costs are
lower than they’ve been at almost any point in the last three years because
real wages are up and interest rates are down.
The trade association for real estate agents predicts
moderate growth in the housing market and continued low mortgage rates.
They believe that new-home sales are expected to rise to
750,000, an 11 percent increase that puts them at a 13-year high. Existing-home
sales will continue to be held down by lack of supply, rising modestly to 5.6
million, a 4 percent increase.
The national median sale price of an existing home is
expected to grow to $270,400, an increase of 4.3 percent from 2019.
Here’s what CoreLogic sees regarding appreciation for 2020:
Rents Rising
Rents are rising and will likely continue to accelerate in 2020,
according to the latest market report from Zillow.
Apartment rents grew 2.3% year-over-year, driving the median
U.S. rent up to $1,600 per month. At the same time, housing values showed the
lowest growth since February 2013, and inventory of for-sale homes fell.
With fewer homes on the market, national rent growth is
projected to rise in 2020.
Single-family rents rose 2.9% year over year, according to
CoreLogic’s Single-Family Rent Index, which measures rent changes among
single-family rental homes, including condos.
As you might expect, now is not good time to be a renter,
especially when you consider the missed opportunity on home appreciation.
Historically Low Inventory
According to the 2020 National Housing Forecast from
Realtor.com, the national housing shortage will continue in 2020, possibly
reaching historic low levels.
The graphic below shows where inventory is today relative to
other times over the last 35 years:
“The market is still years away from reaching an adequate
supply of homes to meet today’s demand from buyers,” Realtor.com’s senior
economist George Ratiu says. “Despite improvements to new construction and
short waves of sellers, next year will once again fail to bring a solution to
the inventory shortage.”
THE FEDERAL RESERVE
Many consumers believe that the Federal Reserve sets mortgage interest rates. Interestingly, that’s not the case….the Fed doesn’t make mortgage rates, they are driven by the bond market market on Wall Street.
The Federal Reserve surely influences mortgage rates, but they don’t set them. You can find out more on that here…
For the Federal Reserve, manipulating the Federal Funds Rate
is one way to manage its dual-charter of fostering maximum employment and
maintaining stable prices. So, when the
Fed lowers or raises the Fed Funds Rate, interest rate markets generally move
in that direction.
Quantitative Easing and Interest Rate Manipulation
The Federal Reserve started re-purchasing Treasury Bonds in
September of 2019, something which they have not done since 2017.
Blogger Craig Eyermann does a fantastic job of defining Quantitative
easing: “(QE) is an extraordinary monetary policy that the Federal Reserve
implemented during the Great Recession to stimulate the economy after it had
cut interest rates to zero percent by purchasing government-issued debt
securities, such as U.S. Treasury bills and bonds, to get the effect of
additional cuts to interest rates. As a result of its QE policies, the Federal
Reserve became one of the largest single creditors to the U.S. government at a
time when the size of the national debt was surging.”
What many experts generally agree upon is that the Fed has
utilized QE to keep interest rates low, especially considering they lowered the
Federal Funds rate 3 times in 2019.
What all of this means is that, essentially, the Fed is trying to maintain
a relatively low interest rate environment…which should be good for mortgage
rates in general.
Voting Membership Changes
The Federal Open Market Committee (FOMC) consists of twelve
members–the seven members of the Board of Governors of the Federal Reserve
System; the president of the Federal Reserve Bank of New York; and four of the
remaining eleven Reserve Bank presidents, who serve one-year terms on a
rotating basis.
This year, there are four presidents rotating out that voted
in 2019: Boston (Eric Rosengren), Chicago (Charles Evans), KC (Esther George),
St Louis (James Bullard).
The new four presidents that are rotating in for 2020 are:
Cleveland (Loretta Mester), Philly (Patrick Harker), Dallas (Robert Kaplan),
Minneapolis (Neel Kashkari).
The make up of the 2020 Fed is a bit different that 2019, as
three of the new members are generally in favor of lower interest rates, and
only one (Mester) has been open about raising the Federal Funds rate.
Most experts agree that this board will opt for lower rates than
previous administrations.
MORTGAGE INTEREST RATES
The average rate on the 30-year fixed mortgage is hovering
in the low 4% range as we enter 2020, a full percentage point lower than where
it was a year ago. Low rates are boosting already strong demographic demand
drivers in the market.
Many prognosticators are stating the average fixed rate might
well fall into the mid 3% range in 2020.
That would be the lowest annual average ever recorded in Freddie Mac
records going back to 1973.
Why are lower rates expected? Let’s take a look…
Reasonably Low Inflation
As stated earlier, mortgage rates are set by bond investors
who keep a watch on inflation as a gauge of the yields they are willing to
take. Rising inflation eats into their returns and leads to higher mortgage
rates. In a low-inflation environment, like today, they can still make money
while taking low yields, which translates into low rates for borrowers.
Inflation has been extremely low over the last year and a
half – and most experts (including those that sit on the Federal Reserve Board)
are not seeing many new inflationary indicators, either.
This means that interest rates should stay low, unless inflation rears
its ugly head.
Recession Fears
Many, like me, were predicting a recession in 2019 , but it
never really emerged. Unemployment stayed low and corporate profits continued
to rise.
With that said, a recession at end of 2020 still possible,
but may be delayed into 2021 due to some financial engineering by the Federal
Reserve.
A couple of things to keep in mind…
Manufacturing already struggling
Shipments have been declining
Yield curve was inverted earlier this year (this
inversion has happened before every single recession on record)
The key metrics to watch will be an uptick in initial
jobless claims and the overall unemployment rate
When recession eventually comes, rates will significantly decline.
Stocks – Longest Expansion in History
The U.S. is officially in its longest expansion, breaking
the record of 120 months of economic growth from March 1991 to March 2001,
according to the National Bureau of Economic Research.
The economy has been on a growth spurt since June 2009 and
now surpasses the previous record expansion set between March 1991 and March
2001 before the dot-com bubble burst.
The decade-long expansion has been fueled by job growth,
record-low unemployment rates and low interest rates.
There were 21.4 million jobs created during the expansion
after a loss of 9 million during the recession.
Overall household wealth — which includes home values, stock
portfolios and bank accounts minus mortgages and credit-card debt — spiked 80
percent over the last decade.
At the same time, some experts worry that a recession is on
the horizon as history suggests that expansion can’t continue forever. Other
causes for concern are the US-China trade and tariff dispute and a sluggish
global economy.
“It’s unusual to have gone so long without a recession”
when looking at the economic data going back to the 1950s, said David Wessel,
director of the Hutchins Center on Fiscal and Monetary Policy at the
Brookings Institution.
As mentioned previously, if there is a recession, rates will most
definitely come down even more.
In Conclusion
2020 looks to be a positive one for both buyers and sellers,
although the market would clearly be considered a “seller’s market”, because
inventory is so low.
However, because real wages are up, home affordability is
up, and interest rates are forecasted to remain low, buyers are in a great
position to purchase. It just might take
a little more negotiations to agree upon the purchase price!
Home prices have slowed a bit in some areas, but they continue to climb in the majority of markets in the U.S. Inventory is stubbornly low in many parts of the country, but even with these factors, now is actually a good time to purchase.
Believe it or not, research shows that housing has actually become more affordable this year, despite home appreciation and tight inventory. Affordable homes are possible thanks to lower mortgage rates and greater purchasing power.
“Affordability is about the best it can be compared to what it is likely to be over the next few years. So, in that sense, it’s a good time to buy right now if you have the financial means.” –Lawrence Yun, Chief Economist, National Association of Realtors
However, this positive development may not last for too much
longer. That’s why it pays to hunt for homes and mortgage rates now, as waiting
could prove expensive.
Martin highlights a Black Knight study (found here) that shows “housing affordability hit nearly a three-year high in September.” Other findings from the report include:
The drop in mortgage rates since November has
been enough to amp up buying power by $46,000 while keeping monthly principal
and interest (P&I) payments the same
The monthly P&I needed to buy an
average-priced home is $1,122. That’s down about $124 a month from November
2018, when interest rates were near 5%
Monthly P&I payments now require only 20.7%
of the national median income. That marks the second-lowest national
payment-to-income ratio in 20 months
Martin writes “that last point may be the most important. For the average home buyer, month-to-month housing costs are lower than they’ve been at almost any point in the last three years.”
Why Is Housing More Affordable Now?
Lawrence Yun, the chief economist for the National
Association of Realtors, states that lower mortgage rates right now are helping
to offset higher home prices.
“Assuming you put down 20% on a median-priced home, your
monthly mortgage payment would be $1,070 at this time last year. That’s
assuming a 4.7% mortgage rate at that time,” he says.
Today, your monthly payment on that same home could be down
to $990 — $80 less — even though you would have paid more for the home thanks
to rising real estate prices.
Will This Trend Continue?
Yun, and many other economists, believe that mortgage rates
will likely remain attractive through 2020.
“But then they will rise, which will knock off many buyers
from the pool of eligible purchasers,” predicts Yun.
Should You Act Now?
Please do reach out to me so we can analyze your current situation to see if a home purchase might be in your best interest. Based on the data, now is really the time to get started…and it would be my pleasure to help you.
Let’s talk credit, as it’s so important. Your FICO scores can determine whether you are able to purchase that home or not, and save you a good deal of money on the rate you’re going to pay if your scores are good.
Of course, you want to make your payments on time, but how can you actually improve your credit score in a relatively short period of time? What can you do?
Here are a few things that you might be able to do relatively quickly and improve your scores…
Lower The Balances
It’s a good idea to keep the balance you owe on any of those
accounts below 30% of the credit line. If you have a credit card with $1000
limit on it, keep your balance to $300 or less.
Increase The Trade Line
So, what if your balance is higher than that and you can’t
bring it down? Well, go to that credit card issuer and ask them if they’re
willing to give you a higher limit. By bringing the limit up, the amount you
owe becomes a smaller percentage of your limit. That will help your score.
Don’t Close Accounts
One key thing to remember, don’t close off any credit lines
that you have from the past. That’s good history that you’ve built up. You want
to keep that good history. It’s like getting straight A’s in high school and
not wanting to show the report card. Keeping good history will help your credit
score.
Collection Accounts
Finally, think about some of those collection accounts –
only if they’ve popped up. If the seven-year reporting period is up (starting
from when you first went delinquent with the original debt), dispute the debt
from your credit report. Any proof you have regarding the first date of delinquency
will strengthen your dispute.
When All Else Fails
If you’re not able to get the collection account removed from your credit report, pay it anyway. A paid collection is better than an unpaid one and shows future lenders that you’ve taken care of your financial responsibilities. Once you’ve paid the collection, just wait out the credit reporting time limit and the account will fall off your credit report.
If you have more questions about your credit and how it impacts your ability to finance a home, please do reach out to me, as it would be my pleasure to help!
If you’re shopping for a home today, you know it can be hard work. You might not find something right away and it’s easy to become frustrated and fatigued.
Sometimes buyers get discouraged and say, “Let me take off a few months, maybe I’ll come back 6 months later.”
Some, on the other hand, think that the market might weaken shortly or that interest rates will fall even further…and are trying to essentially “time the market” Is that the right strategy?
The Cost of Waiting
Here’s the potential problem with that thinking…while you
might want to take time off and away from your search, the market isn’t taking
time off!
The cost of waiting to buy is defined as the additional funds it would take to buy a home if prices & interest rates were to increase over a period of time.
The market is quite good in terms of appreciation right now in California and Arizona. The forecasted growth in value is 2.4% in just the next 6 months; let’s quantify that.
The Numbers
A home worth $300,000 today would be worth $7,300 more in 6 months. Additionally, if you were planning on putting the same percent down, you would have to borrow more because the home is more expensive.
What about interest rates? Rates today are at very attractive levels, so does it make sense to wait for rates to go down further…and what if they don’t?
No, the monthly savings with a lower rate are nice but are
dwarfed by the missed appreciation and amortization, and it would take many,
many years to recoup what you would have lost.
One other thing to consider…if rates drop significantly after your purchase, you can always refinance in the future to take advantage of that lower rate.
Today’s Data
Here’s the data from FHFA – see how the forecast is for
nearly 5% appreciation in the year ahead. The longer you wait, the more you
miss out on appreciation and the more expensive you new purchase will be.
Stick with it, keep shopping, and you will find something. Don’t hesitate to reach out to me with questions, as it would be my pleasure to help!
Thomas Eugene Bonetto
Mortgage Loan Originator
NMLS: 1431961
About The Coach
Tom Bonetto has been helping his customers and players achieve their best for nearly 30 years. His goal is to provide both a superior customer experience and tremendous value for both his business associates and his players alike.
The views expressed are my own and do not necessarily reflect those of Starlight Mortgage.
