Why Too Much Student Loan Debt Could Derail Your Mortgage

According to a recent report by the Federal Reserve Bank of New York, a higher percentage of college graduates have fallen behind on their student loan payments. Many of them will run into problems down the road, when applying for a mortgage loan to fund a home purchase.

Here’s an updated look at the student loan debt “bubble” that is growing in the U.S., and how it can turn a mortgage approval into a mortgage denial.

More Than 20% of Borrowers Delinquent on Student Loan Payments

The New York Fed’s quarterly report revealed a startling statistic that was buried in the footnotes. According to their data, about 11.5% of student loan debt was 90+ days delinquent or in default, during the second quarter of 2015.

But the actual number of borrowers who are significantly behind on their payments could be twice that number — or more. As the Federal Reserve Bank explained it in a corresponding footnote:

“…delinquency rates for student loans are likely to understate actual delinquency rates because about half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.”

That means the actual delinquency / default rate could be 20% or higher. In a separate but related report issued earlier this year, the Federal Reserve Bank of St. Louis put the number even higher. Their analysis suggested “a delinquency rate of 27.3 percent for borrowers with loans in repayment.”

So yes, it’s a big problem. And for those graduates who attempt to buy a home a few years out of college, it could be a bigger problem than they realize.

The bottom line is that student loan debt can affect mortgage loan approval in a negative way. Having too much debt in relation to one’s income (and/or having a history of delinquency and default) can make it much harder to get approved for a home loan. To understand why, we have to talk about credit scores and debt ratios — both of which are very important during the mortgage application process.

Student Loans Affect Your Debt Ratios, and Mortgage Approval

Student loan debt by itself isn’t a mortgage killer. In fact, having a student loan on the books could actually improve your shot at qualifying for a home loan. Or it could throw up additional obstacles for you. The difference has to do with (A) your loan repayment history, and (B) the total amount of debt you carry in relation to your monthly income. These two factors can help or hamper your quest for a home loan.

Student loan debt can directly affect mortgage approval because it influences your debt-to-income ratio, or DTI. This is a numerical (percentage) comparison between the amount of money you earn each month, and the amount you spend to cover your recurring debts — such as student loan payments.

Related: New rule could ease debt requirements

From a mortgage lending standpoint, you have two DTI ratios. The “front-end” number uses housing-related debts only. The “back-end” DTI looks at all of your monthly debts combined (car payments, student loan, credit cards, estimated mortgage payment, etc.). While they’ll look at both numbers, lenders are mostly concerned with your total or “back-end” debt-to-income ratio. After all, it’s a better indicator of a person’s ability to repay a home loan.

Student loan debt contributes to your back-end DTI ratio, and therefore affects your ability to qualify for mortgage financing. Different lenders have different standards where debt is concerned. Many of them draw the “line” somewhere around 43% – 45%. So, by this commonly used standard, a borrower with a total debt-to-income ratio higher than 45% might have trouble getting approved for a home loan.*

Just to be clear, having too much debt can be a problem regardless of how you’ve handled your payments in the past. A borrower with an excessive debt load will likely have trouble landing a mortgage loan, even if he or she has never missed a single payment in the past.

This is just one of the ways student loan debt can affect mortgage approval. There’s another factor to consider as well, and that’s your credit score.

How Your Payment History Affects Your Credit Score

Lenders measure risk in various ways. But the goal is always the same. They want to know how much risk a borrower brings to the table, in terms of default. Borrowers with a history of repaying their debts on time have a better chance of being approved for a home loan. On the other hand, borrowers with late payments, delinquencies and/or defaults in their past could have a much harder time getting approved.

This is another area where student loan debt can affect mortgage approval. And it could be a problem for an increasing number of future home buyers, based on the statistics that began this article.

Mortgage lenders use credit scores to assess risk. A higher score indicates a lower risk of default, and vice versa. So a borrower with excellent credit has a better chance of getting approved for a home loan. Computers generate credit scores based on a handful of scoring factors. Of all the scoring factors they use, a person’s “payment history” weighs the most.

According to myFICO, the company that designed the widely used FICO score, “credit payment history determines 35% of a FICO Score.”

This is another way student loan debt can impact mortgage loan approval. Borrowers with a history of late payments usually end up with lower credit scores as a result of their delinquencies. So lenders see them as having a higher risk of mortgage default. Borrowers in this category tend to have a harder time getting approved for loans, and usually pay more interest as well.

On the other hand, a pattern of responsible credit usage (i.e., paying one’s bills on time) could result in a higher score and a better chance of getting a loan. When it comes to mortgage approval, much depends on the borrower’s total debt load at the time of application, as well as the payment history.

It’s also important to realize that these factors can be deal-breakers on their own, or in combination with one another. For example, a borrower with a reasonable debt-to-income ratio but a pattern of late payments might be turned down for a home loan. Likewise, a borrower with a good credit score and a pattern of paying bills on time might be turned down for having too much debt. When you combine these negative factors (a high DTI and a bad credit score), it can put mortgage financing even further out of reach.

The Bottom Line for Borrowers

Does student loan debt affect mortgage approval? Absolutely. But it’s not necessarily a deal-breaker by itself. In fact, having a positive payment history on loans and other forms of credit could improve your chances of getting a home loan.

On the other hand, borrowers with delinquencies or defaults in their past could face additional scrutiny when applying for a mortgage loan. And it seems as though more and more college graduates are headed down this path.

* The debt-to-income standards mentioned above reflect industry trends at the time of publication. But those numbers are not set in stone. Lenders can, and often do, make exceptions for borrowers they feel are good candidates for a home loan. So don’t be discouraged by anything covered in this story. This article is meant to educate future home buyers on the connection between student loan debt and mortgage approval. It is not the “final word” on the subject, nor does it constitute financial advice.

Summer Mortgage Rates Enter 4% Range; First Time Since November

Home buying activity typically picks up during the summer months, as families with school-age children attempt to move while school is out. But rising mortgage rates could cause some buyers to put their plans on hold. According to the latest survey data reported by Freddie Mac, summer mortgage rates are 0.21% higher than they were at the start of 2015.

Earlier today, Freddie Mac released the results of its latest mortgage lender survey. According to that report, the average rate for a 30-year fixed mortgage loan rose to 4.08%. That was a slight increase over the previous week’s average of 4.02%, and an increase of 21 basis points (0.21%) since January 1, 2015.

5 things home buyers should know this summer

The average rate for a 15-year fixed mortgage also rose this week, climbing from 3.21% to 3.24%. Five-year ARM loan rates are still hovering around 3%, while the average for a 1-year ARM is at 2.52%.

Summer Alert: 30-Year Mortgage Rates Rise Above 4%

For the first half of 2015, the average rate for a 30-year mortgage hovered below 4%. This is based on the weekly market survey conducted by Freddie Mac. But at the start of the summer, long-term mortgage rates rose into the 4% range.

During the second week of June, the 30-year average rose above 4% for the first time since November of last year. Long-term mortgage rates have been hovering in that range for the last few weeks, with a slight upward trend.

Federal Reserve Waits for 2% Inflation

Summer mortgage rates are still very attractive. They have remained at or near historically low levels for many months, largely in response to the Federal Reserve’s stimulus program.

While the Fed does not directly control mortgage rates, its stimulus measures do have an indirect influence. For several years now, the Fed has been purchasing mortgage-backed securities and holding the federal funds rate near 0% in order to stimulate a sluggish economy.

The question is, when will the Fed change its current policy, and how might this affect mortgage rates going forward?

At their last regularly scheduled committee meeting, Fed officials stated they were content to preserve the status quo for now. They also said they would likely raise the federal funds rate when inflation hits 2%. That’s the key benchmark that will cause them to adjust their monetary policy.

According to the Federal Open Market Committee (FOMC), an inflation rate of 2% “is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment.” Their monetary policy is designed to keep inflation at around 2% over the medium term. So when U.S. inflation rises to this level, the Fed will likely raise the federal funds rate. This could eventually lead to an increase in long-term mortgage rates as well.

Many analysts expect the central bank to adjust its monetary policy in September, during their fall committee meeting. But we’re getting into the weeds of speculation here.

Creating Urgency Among Home Buyers

The bottom line is that summer mortgage rates are rising, and they could rise further between now and the end of 2015. This is creating a sense of urgency for many home buyers, especially those who are in housing markets where home prices are also rising. When home prices and mortgage rates rise at the same time, it greatly reduces housing affordability. So, from a purely financial perspective, home buyers might be better off making a purchase sooner rather than later.

Disclaimer: This story contains summer mortgage rate trends and other data that are deemed reliable but not guaranteed. It also contains forward-looking statements about the economy in general. We make no claims, guarantees or assertions about future trends within the mortgage industry or the broader economy.

Interest-Only Home Loans More Common in 2015, But Just as Risky

Imagine having a home loan where you only had to pay the interest each month, while ignoring the principal. Sounds great, right? It would certainly reduce the size of your monthly payments, freeing up cash for other purposes.

There is such a loan. It’s called the interest-only mortgage loan, and it appears to have made a comeback over the last couple of years. In 2015, a number of lenders are offering this type of product.

But if they sound too good to be true, that’s because they often are. Here’s what borrowers need to know about these high-risk mortgage products.

Interest-Only Home Loans Defined

As the name implies, an interest-only home loan is one where the borrower pays only interest for a certain period of time. During this time, none of the monthly payments are applied to the principal. Therefore the principal amount borrowed (and due) remains the same.

The interest-only payment period does not last forever. The borrower will have to pay off the full principal at some point. In most cases, the interest-only period last for 5 to 10 years, but there are other product variations as well.

Home buyers use these loans to minimize their monthly payments during the first few years of the repayment term. These products are commonly used by borrowers who expect their income to grow over the coming years. For instance, a recent college graduate who lands a good job with high income potential might use an interest-only home loan to reduce the monthly payment during the first few years, until his or her income increases.

But this is where the interest-only mortgage can come back to haunt you. If the expected income growth does not occur, the borrower could be stuck with an unaffordable home loan. That’s because the monthly payments could eventually increase, when the interest-only period expires.

Making a Comeback in 2015

Interest-only mortgage loans were all the rage during the housing boom years of the late 1990s and early 2000s. They faded from use when the housing market collapsed, because they’re essentially a riskier type of mortgage. And lenders were doing everything to reduce risk in those days.

Now, in 2015, interest-only home loans seem to be making a comeback. More lenders are offering them these days, despite the bad reputation they earned during the housing collapse.

But the prevalence of these loans doesn’t change the fact that they are full of risk. Borrowers who fail to sell or refinance the home before the interest-only period expires could see a huge jump in their monthly payments.

Consumer Protection Agency Calls Them ‘Toxic’

The federal government actually warns borrowers away from interest-only home loans. This alone should raise some red flags in the minds of would-be borrowers. But despite such warnings, many borrowers embrace these products as a way to reduce their monthly payments.

It’s true, an interest-only mortgage can reduce your monthly payments. But that’s only because you’re ignoring the principal. You’re putting off the actual debt until a later date, which often causes problems down the road. At some point, the remaining loan balance will be amortized for a shorter period of time, thus increasing the size of the payments.

The Consumer Financial Protection Bureau (CFPB) has lumped interest-only products into its definition of “toxic loan features.” They’ve also excluded these products from their definition of a Qualified Mortgage (QM), a home loan model that is designed to reduce the amount of risk passed on to the borrower.

According to a 2013 press release that explained the new QM rules, CFPB officials stated: “The rule also protects borrowers from risky lending practices such as ‘no doc’ and ‘interest only’ features that contributed to many homeowners ending up in delinquency and foreclosure after the 2008 housing collapse.”

In a separate but related news release, CFPB said their new rules were designed to protect consumers from “irresponsible mortgage lending” and “toxic loan features,” such as an interest-only payment structure.

‘Payment Shock’ Associated with Interest-Only Mortgages

It begs the question: Why has the government worked so hard to shield consumers from these mortgage products? What makes them so “toxic” and “risky”? It has to do with the long-term behavior of the loan.

In the short term, interest-only loans almost seem to good to be true. You take out a mortgage to buy a house, and you basically blow off the principal debt for a while. You only pay the interest that is due each month, reducing the size of your monthly payment. This makes the loan more affordable and allows you to buy more house. But only in the short term.

Over the long term, it makes the loan more of a risk. That’s because you’ll eventually have to tackle the principal, and this could cause the size of your monthly payments to increase significantly.

Unlike a traditional fixed-rate mortgage loan, where the interest rate and monthly payments stay the same, an interest-only home loan can lead to higher monthly payments down the road. When the interest-only period expires, the untouched principal is factored in and there’s a shorter amortization period as well. So the borrower might have to repay the entire outstanding principal in a shorter period of time, resulting in much higher payments.

In some cases, the monthly payments rise beyond the borrower’s ability to repay, resulting in financial hardship or even foreclosure. This is referred to as “payment shock.”

Bottom line: Interest-only home loans aren’t always bad. In some cases, they can actually work out to the borrower’s advantage. The point is that they are much riskier than a traditional fixed-rate mortgage loan, where the borrower chips away at the principal from day one. You really have to know what you’re getting yourself into, when using one of these products. So buyer beware.

10,000 Phoenix, Arizona Homeowners Eligible for HARP Refinancing

Thousands of Phoenix, Arizona homeowners could refinance into a mortgage with a lower interest rate, thereby saving money each month — but many of them don’t even know it. This has prompted the federal government to launch an awareness campaign designed to educate eligible borrowers.

According to a government report released in May, approximately 18,000 Arizona homeowners are currently eligible for the Home Affordable Refinance Program (HARP). Roughly 10,000 of these homeowners are located within the Phoenix metro area, Arizona’s densest population center.

The Home Affordable Refinance Program

The HARP program offers refinancing options to people who wouldn’t otherwise qualify, including those with little or no equity in their homes. In fact, Arizona homeowners who are currently upside down in their homes (meaning mortgage balances exceed their house values) could still qualify for refinancing through HARP.

According to a fact sheet published by the Federal Housing Finance Agency (FHFA), HARP is the only program that allows underwater Arizona homeowners to refinance their home loans.

HARP eligibility
HARP eligibility (enlarge)

To be eligible for this program, Arizona homeowners must be current on their mortgage payments at the time of application. Additionally, the existing mortgage loan (the one being refinanced) must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.

Homeowners must not have had any late mortgage payments within the last six months, and no more than one late payment within the last year.

The infographic on the right (courtesy of HARP.gov) explains who might be eligible for mortgage refinancing through HARP. You can click the image to enlarge it.

The program deadline was originally scheduled to expire at the end of this year. It was recently extended through the end of 2016. This gives Arizona homeowners additional time to take advantage of the refinancing benefits offered by HARP.

Thousands of Phoenix, Arizona Homeowners Are Eligible

In 2014, the Federal Housing Finance Agency (FHFA) began a series of outreach events in key cities across America. The agency is mainly focusing on metro areas with the highest numbers of eligible borrowers — places like Atlanta, Detroit and Miami. They recently added Phoenix to the list.

On June 12, FHFA officials held a town hall-style meeting at the Arizona Capitol Museum in Phoenix. The outreach event gave community leaders the tools and information they need to reach out to homeowners across the state.

According to government statistics, around 10,000 homeowners in the Phoenix metro area currently qualify for HARP, and could therefore save money on their monthly payments by refinancing into a lower rate.

The agency’s message boils down to this: Eligible homeowners in Arizona could refinance their existing mortgage loans through HARP and save, on average, more than $2,400 per year. That’s because today’s mortgage rates are lower than those assigned to many home loans across the state of Arizona.

By refinancing into a loan with a lower interest rate, homeowners can reduce their monthly payments and the total amount of interest paid over time. This could add up to significant savings over the repayment term.

But the low mortgage rates we’ve seen in recent weeks might not last long. Last week, the average rate for a 30-year fixed home loan rose to 4.04%, up from 3.87% the week before. Many experts believe they will continue rising between now and the end of this year. Such a trend would close the refinancing “window” for many homeowners.

According to FHFA director Melvin Watt, Arizona homeowners “who are current on their mortgage, but have little equity in their homes … can still join the 3.3 million Americans who have saved money by refinancing through HARP.”

To learn more about this program, or to find out if you are eligible, visit HARP.gov.

2016 Mortgage Rate Forecast: A Slow But Steady Climb Ahead?

Freddie Mac, the government-owned corporation that buys and sells mortgage securities, recently issued a mortgage rate forecast for 2016. By their estimation, the average rate for a 30-year fixed home loan could rise steadily between now and the end of 2016, perhaps climbing to 5% by next fall.

This latest rate prediction was part of a broader report issued by Freddie Mac, the “May 2015 U.S. Economic and Housing Market Outlook.” The report also looks at GDP growth, home price appreciation, mortgage loan originations, and other economic factors. But it’s the 2016 forecast for mortgage rates, in particular, that we will focus on here.

2016 Mortgage Rate Forecast Calls for Gradual Rise

The economists at Freddie Mac expect mortgage rates to trend upward through the second half of this year and into 2016. They are also predicting some volatility in long-term interest rates when the Federal Reserve changes its stimulus policy, which could occur in the fall of 2015.

 Where we are now: When this story was published, on May 24, 2015, the average rate for a 30-year fixed mortgage was 3.84%. It has been hovering below 4% all year.

What they expect: According to Freddie Mac’s 2016 mortgage forecast, rates could climb above 4% later this year, and rise steadily toward 5% in 2016. They expect the average rate for a 30-year fixed mortgage to be somewhere around 5.2% by the end of 2016.

Will the Housing Market Falter Under Higher Rates?

How will the housing market change if mortgage rates do in fact rise steadily through 2016? This is the question on the minds of many economists and housing analysts. And with good reason. In the spring and summer of 2013, mortgage rates rose sharply and slowed home sales as a result. Could we see the same pattern later this year?

According to the Chief Economist’s office at Freddie Mac:

“Rising rates and continued house price appreciation will squeeze affordability even in today’s low cost markets. Housing looks strong enough to weather moderately rising rates, but we need real income growth to support home buyer demand.”

The problem is compounded in high-cost real estate markets. In pricier markets, rising home values and interest rates put homeownership that much further out of reach.

‘Significant Volatility’ Starting in the Fall?

For the last few years, the Federal Reserve has kept the federal funds rate near zero percent. (This is the rate banks use when transferring balances to each other overnight.) They’ve done this to increase access to credit and spur the housing market toward recovery.

But now that the housing market and the broader economy are healing, Fed officials are talking about raising the funds rate. This would likely lead to an increase in mortgage rates as well, particularly the long-term rates used for 30-year fixed home loans.

Most analysts expect the Fed to increase rates in the fall of 2015, in conjunction with their September 16 – 17 committee meeting. If that occurs, we could see higher mortgage borrowing costs toward the end of this year and into 2016.

This is partly why Freddie Mac has issued a 2016 mortgage rate forecast calling for steady increases. But it’s not the only reason. Economic growth at home and abroad also play an important role in long-term interest costs.

Purchase Loans to Dominate the Market Next Year

When mortgage rates rise, home refinancing activity tends to taper off. That’s because higher borrowing costs reduce the potential for savings over the long term. So fewer and fewer homeowners are able to refinance successfully. That’s what we could see in 2016, according to the Mortgage Bankers Association (MBA).

In its most recent forecast, released earlier this month, the MBA stated the following:

“For 2016, we expect $791 billion in purchase originations. However, rates will likely continue to rise and cause refinances to decline to $379 billion for a total of $1.17 trillion in origination volume in 2016.”

That’s roughly a 70/30 split between purchase loans and refinance loans, respectively. As a result of this market mix, lenders will likely put most of their efforts (and marketing budgets) into attracting home buyers, as opposed to homeowners.

Disclaimers: This story contains a mortgage rate forecast for 2016, based on Freddie Mac’s analysis. Keep in mind these are only predictions. It’s an educated guess about how mortgage rates might behave in the future, based on current conditions and anticipated events. As a result, these forward-looking statements should not be used for financial planning purposes. They are provided for educational purposes only. Third-party data and commentary included in this story are deemed reliable but not guaranteed; they do not necessarily reflect the views of the publisher.

HARP and HAMP Program Deadlines Pushed from 2015 to 2016

The federal government’s Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP) were originally set to expire in December 2015. The Federal Housing Finance Agency (FHFA), which oversees the venture, announced today that the popular mortgage refinancing and modification programs will be extended through the end of 2016.

According to a recent announcement, homeowners now have until December 2016 take advantage of these government-backed programs.

FHFA Director Melvin Watt announced the deadline change earlier today, when speaking to members of the Greenlining Institute 22nd Annual Economic Summit.

According to Mr. Watt:

“…we have also made decisions about the status of modification and refinance programs that are currently scheduled to end on December 31, 2015.  This enables me to announce today that FHFA has decided to extend the Enterprises’ participation in the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP) for an additional year, until the end of 2016.”

These programs are very popular among homeowners who are trying to reduce their mortgage costs and/or avoid foreclosure.

Home Affordable Refinance Program (HARP)

The Home Affordable Refinance Program, or HARP, was launched in 2009. It is one of the two main programs that make up the Obama Administration’s “Making Home Affordable” program (HAMP is the other one).

Through this program, homeowners who might not otherwise qualify for a mortgage refinance due to equity losses or other factors can refinance their homes and secure a lower interest rate. Homeowners can also use HARP to switch from an adjustable-rate mortgage (ARM) loan to a more stable and predictable fixed-rate loan.

There are other refinancing programs available for homeowners in 2015 and 2016. But HARP is unique. According to an FHFA fact sheet, it is currently the only program that offers refinance loans to homeowners with negative equity. Upside down homeowners (those who owe more on their mortgage loans than their homes are worth) are often able to refinance through HARP. Traditional refinancing programs, on the other hand, are generally not available to such borrowers.

As for eligibility, HARP is limited to homeowners whose existing mortgage was sold to Freddie Mac or Fannie Mae on or before May 31, 2009.

Additionally, homeowners seeking a HARP refinance loan must be current on their mortgage payments. Borrowers must not have had any late payments within the last six months (at the time of application), and no more than one late payment within the last year.

The HARP deadline has been extended several times in the past. The program was originally scheduled to expire in December 2015, but the deadline has been pushed back until December 2016. This gives eligible homeowners another year to take advantage of the program, by lowering their mortgage rates and possibly switching from an ARM to a fixed-rate loan.

Home Affordable Modification Program (HAMP)

The Home Affordable Modification Program, or HAMP, is another key part of the federal government’s long-running “Making Home Affordable” initiative.

HAMP is designed to help homeowners who are at risk of foreclosure, by giving them more affordable and sustainable monthly payments on their loans. It is open to homeowners who have already defaulted on their mortgage loans, as well as those who are at risk of defaulting in the near future. It is essentially a government-backed foreclosure avoidance program.

To be eligible for HAMP in 2015 or 2016, the homeowner’s existing home loan must have been originated on or before January 1, 2009. As with HARP, the borrower’s current loan must be owned by Fannie Mae or Freddie Mac (or be serviced by a participating mortgage company).

The deadline for HAMP was also extended until December 2016.

Learn more: Homeowners who want to learn more about the government refinancing or modification programs can visit KnowYourOptions.com (a website owned and operated by Fannie Mae) or MakingHomeAffordable.gov, which is the official program website.

Home Buyers With No Credit Scores Could Face Additional Hurdles

Yesterday, the Consumer Financial Protection Bureau (CFPB) Office of Research published a report that showed one in ten adults in the U.S. have no credit scores.

For some folks, this is a non-issue. If you tend to pay cash for everything and avoid lenders altogether, your credit score is basically meaningless to you. But for home buyers who need a mortgage loan to finance their purchase, having no credit score could create additional hurdles during the mortgage application and approval process.

When a Home Buyer Has No Credit Score

Consumer credit scores are computed based on information found within a person’s credit reports. The reports compile financial data relating to credit card use, auto loans, and other forms of borrowing. Credit-scoring systems like FICO and VantageScore turn this data into a three-digit number.

Mortgage lenders use these scores to determine the risk and “creditworthiness” of a particular borrower, and also when assigning the interest rate on a loan. The problem for some home buyers is that they don’t have enough of a credit history to produce a score.

According to the CFPB study released yesterday:

“If a consumer does not have a credit record with one of the NCRAs or if the record contains insufficient information to assess her creditworthiness, lenders are much less likely to extend credit. As a result, consumers with limited credit histories can face substantially reduced access to credit.”

As mentioned, mortgage lenders use credit scores such as FICO and VantageScore when deciding whether or not to lend, and how much to charge. Borrowers with higher scores are viewed as a lower risk to the lender, and therefore have an easier time qualifying for home loans. On the flip side, borrowers with lower scores have a harder time getting approved for mortgage loans, and they usually end up paying higher interest rates if they do get approved.

Then there are those home buyers who don’t have a credit score at all. The Consumer Financial Protection Bureau puts these people into two broad categories — “invisible” and “unscorable.”

  • Invisible: According to CFPB, these are people who have no records maintained by the Nationwide Credit Reporting Agencies (NCRAs), and therefore no score.
  • Unscorable: These are consumers who have a credit record that doesn’t contain enough information to produce a three-digit score. Mortgage lenders refer to this as a “thin file.”

In both of these cases where a home buyer has no credit score, the mortgage lender might have to look at alternative data to make a lending decision. And there have been some recent advancements in this area.

Using ‘Alternative Data’ to Make a Lending Decision

It has long been known that many consumers don’t have credit scores. The CFPB simply added some hard data to the conversation. The U.S. credit-reporting companies (Experian, TransUnion and Equifax) have been exploring ways to use “alternative data” to fill credit reports and generate scores.

In a traditional report, the data used for scoring comes from credit card accounts, student loans, auto loans, retail charge cards and the like. The alternative approach is to use utility payments, rent payments, and other non-credit and non-loan types of payment history. This would at least show lenders how responsible (or irresponsible) a person has been with his or her obligations in the past, even in the absence of loans and credit cards.

The idea is to give mortgage lenders some way to measure risk, for home buyers and loan applicants who do not have a credit score for one reason or another.

FICO, the company that created one of the most widely used credit-scoring systems in the U.S., recently announced it was starting a pilot program to increase the number of consumers who could be assigned a credit score based on alternative data, such as utility and phone bills.

According to Jim Wehmann, executive vice president of scores at FICO:

“FICO’s focus is on expanding access to credit; not simply scoring more people. Our approach also addresses a paradox for people seeking their first traditional credit product – you often need a credit history before you can get traditional credit.”

These and similar efforts could benefit financially responsible home buyers who don’t have credit scores.

Editor’s note: Mortgage shoppers without credit scores should not be discouraged by all of this. Lenders have been working with such borrowers for many years, for as long as the scoring systems have been in place. As mentioned in this story, there are alternative methods for determining a person’s creditworthiness. While it might create some additional hurdles, it is rarely a cause for rejection on its own.

Arizona Down-Payment Assistance Program Turns Renters Into Homeowners

Arizona was one of the states hit hardest during the housing crash. But it’s now well on the road to recovery. Home prices across the state have been rising steadily for several years now. Prices have risen so much, in fact, that many Arizona home buyers are having trouble affording down payments. The Arizona Housing Finance Authority (AzHFA) has stepped in to help such residents, by offering a down payment assistance grant program for qualified Arizona home buyers.

The new program is called Home Plus, and it’s aimed at renters who want to buy a house but lack the funds needed for a down payment. AzHFA officials are quick to point out the program is designed for creditworthy individuals who can afford the monthly payments associated with a mortgage loan.

Here are some additional details for Arizona home buyers seeking down payment assistance:

Home Plus: Down Payment Assistance for Arizona Buyers

Working with various partners, the Arizona Housing Finance Authority provides 30-year fixed-rate mortgage loans to qualified home buyers. The loans come with a down payment assistance grant equal to 4% of the amount being borrowed. (Example: For a mortgage loan of $200,000, an eligible borrower could qualify for a grant of up to $8,000.)

Military service members could qualify for an additional 1% in down payment assistance money, for a total of 5% of the loan amount.

According to AzHFA, the money is provided in the form of a “non-repayable grant” and can be used for both the down payment and closing costs. This is a key point, because closing costs can easily add up to thousands of dollars and must be paid out of pocket in most cases.

The assistance offered through this program will make homeownership possible for financially responsible Arizona home buyers who lack the upfront cash needed for down payment and closing costs.

Program Highlights and Eligibility Requirements

Arizona home buyers who wish to apply for down payment assistance must meet the requirements outlined below, at a minimum.

  • The home being purchased must serve as the borrower’s primary residence (as opposed to a second home or vacation property).
  • The borrower’s income should not exceed $88,340.
  • The price of the home being purchased must not exceed $353,360.
  • All home buyers participating in the program must complete an educational course prior to closing. Web-based home buying courses offered by mortgage insurance companies like Genworth Financial and MGIC are acceptable, as are the courses offered by other HUD-approved education providers.
  • The mortgage loan must be provided by one of the Arizona Housing Finance Authority’s approved lenders. Participating lenders will help home buyers navigate the process and register for the down payment assistance grant.

This program offers 30-year fixed-rate mortgages. Borrowers can choose between an FHA-insured loan, a “regular” conforming loan, or the VA and USDA programs. A credit score of 640 or higher is required in most cases, with a 680 score requirement for borrowers who make smaller down payments.

More information: For a list of approved educational courses and mortgage lenders, and for other important details, visit https://housing.az.gov/. Interested parties can also contact Dirk Swift, the program administrator, at (602) 771-1091, or by email: dirk.swift@azhousing.gov.

Please note that the Home Buying Institute is merely reporting on this program. We do not have any additional information regarding down payment assistance grants for Arizona home buyers, or the specific requirements for such programs. For more information, please use the reference and contact information provided above.

Latest Mortgage Rate Forecast Suggests Possible Increase in Fall 2015

What will mortgage rates do through the spring and summer of 2015, and into the fall? That’s what many home buyers and homeowners want to know. After all, rates have been hovering near historic lows for months now. But how long will the party last?

To get some insight into the matter, we turned to one of the most well-informed mortgage rate forecasts available anywhere, the “U.S. Economic and Housing Market Outlook” provided by Freddie Mac.

Mortgage Rate Forecast: Is September 2015 a Key Date?

Each month, Freddie Mac publishes a housing and mortgage market forecast. The company’s economists look at current conditions and offer some well-educated guesses as to where the market is headed. They make predictions for 30-year mortgage rates, among other things.

According to their latest forecast, issued earlier this month, the folks at Freddie Mac feel that mortgage rates will inch upward between now and the end of 2015. They mentioned September 2015, in particular, as a possible milestone for rate movement.

Why September? Because that’s when the Federal Reserve is expected to raise the federal funds rate, which they’ve kept near 0% for the last few years. If the Fed does indeed take this action, it could lead to a rise in long-term interest rates, including those applied to 30-year mortgage loans.

According to the Office of the Chief Economist at Freddie Mac:

“Mortgage rates will likely stay low over the next few months as market participants await the Federal Reserve’s decisions on whether and when to raise its short-term policy rate … our forecast calls for mortgage rates to drift slightly higher over the next six months, increasing more around September when we anticipate the Fed will begin raising rates.”

Of course, no one can predict the future with complete accuracy. This is especially true when dealing with the Federal Reserve, a famously tight-lipped group. The bottom line on this is that there’s a good chance mortgage rates will climb between now and the end of 2015, especially if the Fed lifts the funds rate in the fall. If this occurs, home buyers and refinancing homeowners could face higher mortgage costs.

Where We Are, And Where We Are (Possibly) Going

Yesterday, Freddie Mac reported the average rate for a 30-year home loan fell to 3.65%, down slightly from the week before. Thirty-year loan rates have been hovering in this range for weeks, and they’ve been below 4% all year. But the company’s mortgage rate forecast issued in May 2015 hints at higher borrowing costs down the road.

Economic and mortgage forecast
Freddie Mac’s long-range economic outlook (enlarge)

If the outlook chart shown above is any indication, the average rate for a 30-year mortgage loan could climb above 4% by fall 2015. That’s still relatively low, compared to historical averages, but it’s an increase nonetheless. And that’s enough to put it on the radar of future home buyers and mortgage borrowers.

In many parts of the country, rising home prices are a bigger concern for home buyers than rising mortgage rates. Home prices rose significantly over the last two years, especially in California, the Southwest, and in major metro areas across the country. While home-price appreciation has slowed, economists are still predicting additional gains through the end of 2015 and into 2016. This is something buyers should keep an eye on.

Disclaimers: This story contains mortgage-rate forecasts and predictions through fall 2015. Forward-looking statements such as these should not be viewed as facts. They are the equivalent of an educated guess. This story contains third-party data that is deemed reliable but not guaranteed.

New Mortgage Documents for 2015: Loan Estimate and Closing Disclosure

Two new mortgage documents are coming on August 1, 2015. The Loan Estimate form and the Closing Disclosure forms are designed to give consumers a clearer picture of their borrowing costs.

Mortgage shoppers should see the full cost of a loan at the time they apply, and have a more detailed breakdown a few days before closing. These have long been the marching orders given by federal financial regulators. And for the most part, they’re followed. Lenders typically provide a Good Faith Estimate (GFE) form when a person first applies for a home loan, followed by a “HUD-1” Settlement Statement shortly before closing day.

But starting in August 2015, these all-important mortgage documents are being replaced. The Consumer Financial Protection Bureau (CFPB), one of several government agencies that regulate the mortgage lending industry, has set a date for the implementation of two new mortgage documents. These forms are very important to borrowers, and for two different reasons:

  • The new Loan Estimate form helps borrowers understand the full cost of the mortgage, including fees and interest. It can be used during the shopping process to compare “apples to apples.”
  • The new Closing Disclosure form helps borrowers know what to expect on closing day, and how much cash they’ll have to bring to the table.

Here’s what you should know about these new mortgage documents coming in August 2015:

The ‘Loan Estimate’ Form Helps You Comparison Shop

As its name implies, the new Loan Estimate form is designed to give borrowers an approximated view of the full cost of the mortgage loan.
2015 Loan Estimate Form
In this context, “full cost” means that the form shows the various fees and charges that can inflate the amount of money due at closing.

View a sample Loan Estimate form (PDF)

Many home buyers are surprised by the different lending fees that can pile up along the way. There’s a fee for everything, from the initial application to the final document preparation. The Loan Estimate form offers an estimated breakdown of these various charges that will be due at closing.

More importantly, it shows the amount being borrowed, the interest rate being assigned to the loan, and whether or not there are prepayment penalties.

This form standardizes the loan estimating process, which makes it easier for consumers to comparison shop when getting quotes from different lenders. Lenders must provide this document within three days of the application.

The new Loan Estimate form replaces the early Truth in Lending Statement and the Good Faith Estimate, two documents that often contained duplicate information. By rolling two documents into one, and by presenting the information in a more consumer-friendly manner, CFPB hopes to reduce confusion and better prepare borrowers for the closing process.

The ‘Closing Disclosure’ Form Prepares You for Closing

The new Closing Disclosure form helps borrowers prepare for the actual costs that will be due at closing. Think of it as a finalized, and therefore more accurate, version of the Loan Estimate.
2015 Closing Disclosure Form
Borrowers must receive the Closing Disclosure at least three business days before the scheduled closing date. This gives them time to review the document and prepare a check for the total amount needed to close the loan.

Here again there are two documents being replaced by one, in an attempt to simplify and streamline the communication process. The new Closing Disclosure coming in summer 2015 will replace both the final Truth in Lending statement and the HUD-1 settlement statement.

View a sample Closing Disclosure form (PDF)

As with the previous document, the goal here is to reduce confusion and provide clearer information to consumers. The revised 5-page form provides a detailed breakdown of the money due at closing, and it shows where that money is going.

Educating Consumers and Avoiding Surprises

The creation of these new mortgage documents was driven by three overriding goals. The CFPB wanted to (1) improve consumer understanding of the mortgage process, (2) simply comparison shopping, and (3) help people avoid “costly surprises at the closing table.”

I have carefully reviewed these documents, and they do seem like they will help in these three areas. If borrowers read these forms carefully (and ask questions when needed), they will have a much better understanding of their closing costs and overall loan structure.

The Product of Much Research and Planning

These new mortgage documents were not designed on a whim. They are the result of extensive planning and research. The CFPB actually conducted what amounts to usability testing, to see how consumers would react to the revised forms. Their research showed that consumers understood the new Loan Estimate and Closing Disclosure forms better than their predecessors. This was true even for people who had never been through the mortgage process before.

During the overhaul process, CFPB solicited feedback from mortgage professionals and the general public. They also held review and discussion panels to gather additional feedback. It seems their efforts have paid off. According to their research, “participants who used the CFPB’s new forms were better able to answer questions about a sample loan – a statistically significant improvement of 29 percent.”

While some in the mortgage industry malign the new documents as overzealous bureaucracy and micromanagement, the Home Buying Institute applauds CFPB’s efforts to simplify the mortgage disclosure process for consumers. It’s a step in the right direction.