Just recently, the good folks at the Fair Isaac have drawn back the curtain to give us a glimpse of the real drop in points that each credit mistake will have on your score.  And, it does correspond to the percentage that each mistake will have on your credit score.  The higher the score before the blemish, the bigger the point drop.  Percentages remain the same.

Let’s take a look at the chart that they published:

As you can see, a maxed out credit card will have your score drop by up to 45 points if you started with a 780 score – but only 10-30 points with a starting score 100 points below that.

And, one thing they revealed about this chart is that it made an assumption that the credit user profiled in these numbers has a nice mix of credit, including multiple credit cards, car loans, a mortgage, student loans and installment loans.  In my experience, the less types of credit that you have, the greater a blemish will impact your score.

I think this is very enlightening, especially for those of you around Atlanta that are planning on buying a home or refinancing your home in the coming year.  Maintaining a good credit score is really fairly simple.  Just pay on time, maintain low credit card balances, and accept new credit sparingly.

And, in these tough economic times, there have been a number of people who have asked me about possibly going with a debt consolidation company to help get out of those credit cards that are so easy to run up significant balances on.

My advice is to avoid that at all costs – and if needed, call and negotiate with your creditors yourself.  The reason is that even though you are trying to do the right thing and pay the bills, just with some help, your score will drop between 45 and 125 points – and from a mortgage perspective, you will be penalized just as if you declared Chapter 13 bankruptcy.

A whole other thing is credit repair (as opposed to debt consolidation).  And you can do that yourself, or you can use a reputable company that specializes in helping you clear up items on credit that need corrected.  If you are interested in that, just contact me.  I have worked with various companies that do this credit repair over the years, and know the good from the scammers.

So, if you are wanting to buy or refinance a home around Atlanta, this information should take some of the mystery out of the credit scoring models.

Related posts:

1. Do Credit Scores Really Matter?
2. Considering A Debt Consolidation Loan
3. American Express…Bank!

No.  Well, Yes.  Um, Not quite yet.

I have had several Realtors and many borrowers ask the question, “Can I use the $8000 First Time Home Buyer Tax Credit as a down payment?”

First, I did have some borrowers claim their tax credit when they filed their taxes around April 15.  And they received the money, even before they bought their home.

Once taxes are filed, however, then the home buyer can either ammend the filed return using form 1040X, and file the IRS Form 5404 to claim the tax credit this year; or they can wait until they file taxes for 2009.  Either way, the home buyer will need a Settlement Statement to file.

Then, HUD got involved.  Then they didn’t.  And a lot of confusion has sprung up around that in the past few days.  You see, HUD issued a Mortgagee Letter on May 11 stating that buyers can claim the Tax Credit and use it as the Down Payment on a home at the closing table.

Then on May 13, that Mortgagee Letter disappeared from the HUD website – so the tax credit cannot be used as the down payment.

What happened is that HUD jumped the gun.  In principle, they said, it is okay to bring the tax credit to the closing table to serve as the down payment.  In practice, however, entities and means to get the tax credit to the closing table are not available/approved.

So, my best guess is that we will see this revisited by HUD in the very near future; but for now it is not possible.  The next best thing? Have the first time home buyer get a loan from family, from 401(k), etc, and bring that as the down payment.  Then, file the ammendment to the 2008 tax return, and reimburse the donor for the down payment a few weeks after closing.  So, if you are buying a home around Atlanta, and you have not owned a home in the past three years, then you are a first time home buyer, by definition, and sooner or later you will receive the tax credit, if all other criteria qualify.

Related posts:

1. First Time Home Buyers Will Be Happy
2. Georgia Veterans Still Get the $8000 First Time Home Buyer Tax Credit
3. Come Join Us For This Gwinnett Co. $8000 Tax Credit Event

We’ve all heard that Credit Default Swaps (CDS) were at the root of the problem.  But when the one offering the explanation begins to define CDS and the WHY of the problem, our eyes glaze over and we begin drifting off, wondering who will be voted off American Idol this week.

This is a bit technical, but this article by Felix Salmon is well thought-out to be a good, palitable explanation.

Related posts:

1. The Housing Crisis Root Cause
2. The Credit Crisis: A Real Life Example
3. Mortgage Crisis Abated! (Almost)

And, we’ve all done it.  ”Well, just this time, because things are tight, and I am sure I will be able to pay off this balance next month…”

We wake up one day six months later with a large credit card balance hanging over our heads – and a news cycle that constantly reports that the President or some economist is stating how bleak the economic future could be, the deficit is at an all time high, and wondering if super inflation is just around the corner.  Then it sets in: heartburn.

A quick solution

Well, it used to be commonplace, and perhaps too much so, to roll everything into a new, low-rate mortgage. That said, if you find yourself in that position and have some equity in your home, a debt consolidation refinance could be a good option.  

monthy cash flow savings

The above chart shows a real example of a loan I closed for a client just recently.  I will explain each line, briefly.

1. The top number represents their prior mortgage payment + minimum credit card payments for the cards that we rolled into the new loan.  
2. The Second line is the new mortgage payment, with the credit card balances rolled in.
3. Line 3 is the monthly cash-flow savings from month 1.
4. Then come the closing costs to close this loan for the client.
5. And the last line represents the number of months to break even.

Related posts:

1. Debt Consolidation Refinance Getting (Even More) Difficult
2. Investment Property & Debt Consolidation Change
3. And Inflation is Here

Here is a link to information on the tax credit for first time home buyers.

It is effective for any home purchased between January 1, 2009 – December 1, 2009.  And, the credit is equal to 10% of the purchase price of the home, up to a maximum of $8000.  For informational purposes, the definition of a first time home buyer is anyone who has not purchased a home in the previous 3 years.

So, if you have been on the fence about buying your first home around Atlanta, this should be enough to push you over the edge.  Home prices are at their lowest point in years, mortgage rates are at their lowest point in 37 years, and you get $8K tax credit for buying.

The market’s great.  Jump in.

Related posts:

1. First Time Home Buyers Will Be Happy
2. First Time Home Buyer Definition
3. $6500 Tax Credit, If You’ve Lived in Your Home 5 Years

One thing that got cut – in half – today was the proposed $15K tax credit for home buyers, as reported in the WSJ.  It will now be 10% of the purchase price, up to $7500.  But, unlike the existing $7500 tax credit for first time home buyers, this one does not need to be repaid.

So, is the glass now half full for home buyers around Atlanta?  Or half empty?

We will see if it makes it to the final bill in any version, then you can decide.

Related posts:

1. First Time Home Buyers Will Be Happy
2. The New and Improved First Time Home Buyer Tax Credit
3. The Best Time to Buy Your First Home – And Collect $7500

And the authors of the article had an interesting way of spelling out just how much that is, in terms we can all get our arms around:

The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office data, and is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.

That is a lot of cash. You know, economists and government officials continue to state how important it is for Americans to begin spending money on consumer items again, in order to jump-start the economy.  One thing is for sure, Government is not asking us to do anything that it’s not willing to do first.  And a fine example of spending the Government is setting!

I have said this before, but these bailouts feel more and more like an average American household applying for and getting a new Discover card – even at 0% interest for the introductary period – then transferring the AmEx balance that has been so bothersome to the new Discover.  Then, later that weekend, going to the mall with a new lease on spending, with the 0-balance AmEx card in their wallet.

A better example may be to severly cut spending, to limit salaray increases on…members of congress, and to make the first step to saving on spending and making a dent in the federal deficit.  (I know, deficit’s aren’t always bad, they can be a catalyst to an economy.  I get it.  But the limit was surpassed some time ago.  About the time that foreign governments began questioning the sanity of continuing to purchase our debt).

What can we do as Georgians living in our homes, raising our families?  We could picket.  But that won’t do any good, in my opinion.  So, practical things that we can do are:  

• Pay off non-preferred debt (i.e. any debt that does not carry with it a tax benefit. Read, credit cards, car loans, student loans, etc)
• If ‘paying off’ debt is not possible in the short run, then roll it into a new, low-interest mortgage loan.  This is not the ideal long-term plan, but it solves the short-term goal of getting monthly cash flow to it’s maximum.
• Save the difference in savings, until you reach 6 months household expenses.
• Cut superfluous expenses, and save the difference in a liquid account.

Related posts:

1. The Magic Number 7
2. A History of Bailouts
3. Debt Consolidation Refinance Getting (Even More) Difficult

So, what can they do that will have any effect?  Plenty.  And from this article form Yahoo Finance page, it appears the Fed may begin to buy up other consumer debt securties, such as car notes, student loans and credit card debt-backed securities.  Just like they are buying up Mortgage Backed Securities, which is what is causing mortgage rates to remain as low as they have. Sort of an artificial low.

The interesting this in the article cited above is that the Fed may buy up long-term Treasury securities.

Huh? Doesn’t that strike you as the the same as an average American paying off one credit card balance with a new credit card, to allow more room for spending on the original card?  That was my first impression.

So, we will see.  The thing to watch for in the Fed comments is a fear of increasing inflation.  I do not expect that at all at the end of this meeting, but the mere mention of inflationary fears will send mortgage rates up. Anything else, should be good for rates.  Should is the key there, since the Fed is treading into unchartered waters, and there is no telling how investors will respond.

Related posts:

1. Lehman Down; Is It Time to Lock Your Rate?
2. The Magic Number 7
3. ‘Bailout’ with a ‘B’, or was that a ‘T’?

Inflation, essentially, is caused by a money supply that outweighs the goods and services being offered for those dollars.

So, I happened upon this article, by Adam Hamilton, in which the author makes a very compelling case for the reasons that the inflation that is coming is going to be big and ugly.  He almost argues that the CPI numbers that measure inflation may be being under-reported, on purpose.  Interesting, and if that is the case, then that under-reporting will not be possible once the inflationary causes begin to hit main street. Here is a quote:

Inflationary expectations hurt the stock markets, and weak stock markets hurt the economy as the stock panic abundantly proved. Scared citizens are not only harder to rule over, but they won’t vote for politicians’ reelections and they won’t be able to shoulder as big of tax burden to pay for politicians’ grand spending plans.

And inflation just around the corner is not good for a populus that has a slowing economy.  We have all read about (and hopefully not experienced) the growing job losses, and an anecdotal phenomenon that I am seeing, is a growing number of employees taking pay cuts instead of incurring layoffs.  Interesting.

Preparing for Big Inflation

The author of the article that I cited above suggests some things to do to prepare for and ride out the coming inflationary period.  For those, just read the article.  He is an investment advisor, so his suggestions are geared toward stocks, commodities and other investments.

I, of course, am not an investment advisor.  If anything, I could be called a debt advisor, since that is what I deal in – helping people set up and manage the largest indebtedness that most people will take on in their lifetimes.

My advice, then.  Take full advantage of these artificially low interest rates, and refinance the home.  If you have unsecured debt such as credit cards, student loans or car loans, and you have the equity in your home to do so, then roll those debts into a new home loan in the high 4% to low 5% ranges, depending on how you qualify.

Then, get on that budget and savings plan that you have always talked about, even though it means cutting back a little on the nice things that you enjoy.  And, if need be, do some things to bring in a little extra income.

But the refinance part, do it quickly. The reason is two-fold.

1. First, mortgage rates are artificially low right now, because the Fed is the main player buying Mortgage Backed Securities (MBS) – those bonds that drive the mortgage rates.  They are planning on buying MBS through the end of June, 2009.  Once they stop buying, watch for rates to take off like a missle.
2. And, second, when we do see inflation take hold, mortgage rates rise as bonds are shunned.  The reason is that bonds and inflation mix like oil and water.  They don’t.  In fact they can’t, because by definition bonds offer a fixed rate of return on an investment.  And that fixed rate, say 4%, is diluted more and more as inflation rises.  If inflation is at 4%, then the real return on that 4% bond yield is…nothing.  Right, inflation cancels the yield on the bond.  So what if inflation hits 6%?  Bonds are negative, and have to rise to compete.

Related posts:

1. The Fed, Inflation and Rising Rates
2. The Fed May Have Another Trick Up It’s Sleeve
3. The Fed vs. Inflation

I read an atricle recently that rhetorically asked, “Is GM a carmaker, or a Bank that makes cars?”.  I would link to the article, but I cannot remember where I read it.  Point is, what the question asked in jest now has had all doubt removed.

That is significant, because it gives GM access to the TARP Funds (Troubled Asset Relief Program), and to the short-term Fed discount window.  Neither are a bad thing, when just a couple weeks ago GM and the other car makers were sitting before congress, looking like Oliver Twist asking, “More, please?”

Related posts:

1. American Express…Bank!
2. The TARP that Didn’t Cover
3. Hope for Homeowners Not Providing Much…Hope