Tuesday, December 15, 2009

How Do Credit Reporting Companies Determine My FICO Credit Score?

They have a formula by which they calculate the score of each individual. It’s designed to give them an objective (mostly) method to predict how likely it is that you’ll repay a new loan.

Often, a credit score is referred to as a “FICO” score. Where did this term come from?

From two men named Fair and Isaac! In the mid-1950s, they founded a company called Fair Isaac Corporation. Over the ensuing years, the name got shortened to “FICO.”

Fair, Isaac is a for-profit company, traded on the New York Stock Exchange (NYSE: FI). Their exact formula for calculating credit scores is termed “proprietary;” that is, it’s secret.

Each of the major American credit reporting agencies (CRAs) has a relationship with Fair Isaac. The “Big Three” CRAs are: Experian, Equifax, and Transunion. You can find them easily on the Internet.

In a common-sense world, each CRA would have the same credit score for each person. So, why don’t they? Because they each have different formulas for determining your credit score! That means your score may vary from one CRA to the other!

Each CRA formula is based on experience with millions of consumers. With each credit rating company, the higher your score, the better your credit is rated.

Now, above, I said that the credit formulas are secret. And they are, but we can sketch the general elements of those formulas. So, for example, we know that FICO models analyze these items in your history:

* Past delinquencies
* Derogatory payment behavior
* Current debt level
* Length of credit history
* Types of credit
* Number of inquiries by lenders and others into credit history.

Although the models vary as I stated earlier, the general formula looks like this:

* 35 percent on a borrower's payment history.
* 30 percent on debt.
* 15 percent on how long the applicant has had credit.
* 10 percent on new credit
* Another 10 percent on types of credit.

What Is the Range of FICO Scores?

Keep in mind that the following ranges sometimes change or vary with a particular source.

In general, however, the higher the score, the better your credit rating is, as stated earlier.

At the top end of the range is the perfect score of 850. As you can guess, very few, very rich people achieve this kind of perfection (only 1% of the U.S. population)! They get the lowest and best interest rates and get their loans fast. And why not? From a lender’s point of view, they’re an extremely low risk!

Eleven percent (11%) of the American population has a score of 800. That means they’ll also get lower interest rates and have their loans closed within days (just not as fast as the “perfect people” above).

So, what’s the score of the average American? 720! The interest rate for these individuals will be higher than the two categories above, and it might take days or weeks to close the loan, depending on the market.

It’s when your FICO score gets below approximately the 620 mark that you’re going to have to work harder to get mortgage money from a lender.

Here’s why: With that score, they calculate that borrowers will default on that loan better than half the time! From their viewpoint, it doesn’t make very good business sense to lend money in such situations.

However if they do loan the money, it will carry a higher interest rate to cover the added risk. Of course, in this situations, lenders look very closely at a borrower’s financial history in order to determine whether or not there are any “red flags;” that is, missed payments, late payments, unpaid debts, bankruptcies, etc.

So, there you have it! Now you know how your credit score is calculated. I hope I’ve taken the mystery out of the whole process. If not, contact me today at 402.598.3965 or peg@maloney.com, and I’d be happy to answer your questions about credit and/or mortgages!

Tuesday, December 1, 2009

Why Use the Services of a Real Estate Agent?

"Why Should I Hire A Realtor?"

This question is often asked, especially by homeowners who consider selling their homes by themselves.

The fundamental first answer to this question is that an experienced Realtor is an expert at what he or she does. Through hard work and education, they’ve acquired a set of skills that make the process of home buying and selling a lot easier than it would be by doing it yourself. So, what are the skills in the set I’m talking about?

Well, for one thing, we have the skill of being the go-between. We’re the people who handle people and calls and separate the “wheat” (real buyers) from the “chaff” (non-buyers) without you ever having to deal with such situations. In Internet terms, we make sure you’re not “spammed” with worthless offers and target real deals for you.

We’re also the ones who save you a lot of time by making sure you’re looking at appropriate properties and neighborhoods right from the get-go.

And, speaking of neighborhoods, an experienced Realtor will know them inside-out or will know how to find the latest information on them.

That means he or she can get you into neighborhoods where the crime rate is low or non-existent, find you ones with great school systems, rising property values, etc.

By the same token, an experienced agent will steer you away from neighborhoods where the trends are downward; that is, rising crime, falling property values, and so forth.

And what about the prices of homes? Well, some people believe that we select them for our clients. Not true! We have no way of setting prices. They’re set by the market!

However, we can guide you toward properties that fit your individual needs and are comfortably within your price range. Frankly, it’s not in our best interests to put you into a home beyond your means or that’s not right for you. When that happens, we lose clients and money!

So, we’ll do our best to work within your price range and, based on current information (market supply, demand, etc.), we’ll come up with the best negotiation strategy possible.
Current information can include cost-per-square-foot of homes, ratios of list-to-sold prices, knowledge of the buyer/seller, etc. All this information is gathered by the agent and used to formulate solid offers.

Another important skill experienced Realtors possess is objectivity. We have the ability to stay out of the emotional process that often occurs with the buying and selling of a home. Instead, we present your case in the best light possible, all the while holding your information confidential from any competing interests.

One Realtor skill that’s often not apparent is our ability to network with other service providers (housing inspectors, title companies, etc.).

Professionally, we can’t recommend one specific vendor over another. However, we do keep lists of vendors with excellent reputations as well provide references for the vendors. This service allows you to choose the best provides for your particular situation.

Now, here’s one Realtor skill that everyone truly appreciates – the ability to handle tons of paperwork! Today, purchase agreements can run 10+ pages, and that doesn’t even include all the state and federal disclosure statements that are required in the current market! Heck, a real estate file can end up being 2-3 inches thick with paperwork these days!

And it’s not only the heavy paperwork handled by Realtors; it’s also the attention to detail within that paperwork. It’s their job (or a lawyer’s, depending on the state) to make sure all the information is correct because if it isn’t, it can end up costing the client hundreds of dollars.

So, as you can see, there are many reasons why it’s wise to use an experienced Realtor for the purchase or sale of a home! To find out about the services I haven’t mentioned in this article, contact me today at 402.598.3965 or peg@maloney.com.