Important Facts You Should Know About Lending

1. If I put down a certain amount of money on a house, I won’t need to show any income in order to qualify for a mortgage. FALSE

In the state of Pennsylvania, in March 2011, the governor of Pennsylvania outlawed “no income or stated income loans.” All mortgages in the state of Pennsylvania require income verification going back 24 months.

2. If I put down 30% or 40%, my credit score and credit history do not matter. FALSE

Although the interest rate will not increase if a down payment of 40% or more is provided, an underwriter for a lending institution will still scrutinize the payment history and usage of credit in determining a borrower’s ability to pay a mortgage.

3. It only takes two months to establish credit. FALSE

If alternative sources of credit are not used in determining a borrower’s ability to repay a debt, it takes seven months on a credit card or any other type of installment debt that is newly established, to create a score on our credit bureau system. It may show a payment history but not enough to generate a score.

4. Is it true that no credit is better than bad credit? FALSE

It is required to have a credit score in order to purchase a house and obtain a mortgage. There are some exceptions where they will allow alternative sources of credit such as rental references, utilities and cell phone bills to determine a borrower’s willingness to repay a loan. If not, a buyer must show a positive history.

5. Shouldn’t I charge up the new card and pay it off to show a good credit history? FALSE

When we pull credit reports, we see the final balance on the last billing cycle. If you charge it up and pay it off, all we see is the card appears maxed out. This brings the scores down. The proper way to get the highest score possible is to use the card for a small item once per month. This shows minimal use of consumer debt, which brings the scores higher.

6. Is my Credit Karma score the same as the one you pull? SOMETIMES

What most people don’t realize is that Credit Karma shows consumers what their score will be when they are applying for credit cards.  That system shows a different algorithm which is used in determining a borrowers credit profile.  Most consumers don’t have access to the same scoring system used for mortgages. It doesn’t mean that we lowered your score when running your credit, it just means that the scores aren’t the same in the two systems.

Could This Be Another Housing Bubble on the Horizon?

We all remember 2008, but do you know what events led to the housing crash? There were a few fundamental issues that caused the sudden housing market correction. The first issue was that there was an oil rise per barrel. This raised the cost of gasoline as a trickle-down effect causing a consumer scare or fear of gas prices increasing to upwards of $5 per gallon. The gas price scare caused long distance commuters to rethink their plans of moving into neighboring states, particularly New Yorkers and North Jersey residents from moving to Pennsylvania. As this phenomenon occurred, homeowners weren’t able to sell their homes. This caused demand for housing to fall, and thus house prices started to decrease.

With the initial need for housing years earlier, and rising home prices, lenders came up with creative types of financing to keep up with the strong consumer demand. Adjustable-Rate Mortgages with rising rates, No Doc loans (where buyers didn’t have to provide income documents to qualify), and low credit scores loans. Sometimes requiring little to no money from potential borrowers made home ownership affordable to almost anyone. Although, this influx of new buyers impacted the market and fueled the frenzy of ownership, these loans proved to be unsound. Initially, these unconventional types of financing didn’t have a negative effect. As new buyers were finding it difficult to keep up with the monthly payments, most were able to sell their homes quickly to get out of their debt, and some even made a profit. The increase in prices masked certain hidden fundamental issues. In particular, those who had questionable mortgages, were the first ones affected by the diminishing demand for housing. With a sudden lack of buyer demand, home values started to decrease. The house of cards collapsed and there was a flood of foreclosures entering the market when consumers couldn’t keep up with the payments. The current housing market going into 2021 seems similar in some ways but is yet quite different.

Due to many changes in lending, all loans require sound lending decisions, with more conservative underwriting standards. This has increased the high quality buyers in today’s market. The interest rates are at an all time low with many mortgages below 3%. (Rates were over 6% in 2008). Oil and gas prices are on the lower side, and the US Government has put stop gap measures in place to keep the economy stable. With no unforeseen catalyst changing in the near future, this housing market doesn’t appear to have a looming bubble to cause it to collapse.