MONEY Credit Scores

The One Graph That Explains Why a Good FICO Score Matters for Homebuyers

young couple outside of home
Ann Marie Kurtz—Getty Images

An analysis from an economic policy group estimates that tight credit standards may have prevented 4 million consumers from getting mortgages since 2009.

When it comes to buying a home, there’s a lot more to the process than just finding an affordable home for sale and having enough money for a down payment. Most people need loans to finance such a large purchase, but even as the housing market has rebounded from the foreclosure crisis and low property values of 2010, mortgages remain very difficult to acquire. A report from the Urban Institute, a Washington-based economic-policy research group, concludes that 1.25 million more mortgages could have been made in 2013 on the basis of conservative lending standards practiced in 2001, years before the housing bubble began to inflate.

Whether or not a lender approves a borrower for a mortgage depends on several factors, like income and outstanding debt, but looking at the credit scores of mortgage borrowers during the last several years shows just how tight the market has been post-recession. Here’s how it breaks down.

Urban-Institute-FICO-Score-distribution

The Urban Institute estimates that the stringent credit score standards for mortgage origination resulted in 4 million mortgages that could have been made (but weren’t) between 2009 and 2013. From 2001 to 2013, consumers with a FICO credit score higher than 720 made up an increasingly large portion of borrowers, from 44% of loans in 2001 to 62% in 2013. Consumers with scores lower than 660 made up 11% of borrowers in 2013, but they represented 28% of home loans in 2001.

The study authors note that their calculations do not account for a potential decline in sales because consumers may not see homeownership as attractive as it had been before the crisis.

“Even so, it is inconceivable that a decline in demand could explain a 76% drop in borrowers with FICO scores below 660, but only a 9% drop in borrowers with scores above 720,” the report says.

On top of that, the authors found that tightened credit standards disproportionately affected Hispanic and African-American consumers. In comparison to loan originations made in 2001, new mortgages among white borrowers declined 31% by the 2009-2013 period, 38% for Hispanic borrowers and 50% for African-American borrowers. Loans to Asian families increased by 8%.

Millions of Americans are still feeling the impact of the economic downturn on their credit scores, because negative information like foreclosure, bankruptcy and collection accounts remain on credit reports for several years. Rebuilding the credit and assets necessary to buy a home takes time, particularly in such a tight lending climate, but by regularly checking your credit — which you can do for free on Credit.com — and focusing on things like keeping debt levels low and making loan payments on time, you can start making your way toward a better credit standing.

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This article originally appeared on Credit.com.

MONEY buying a home

‘Boomerang’ Buyers Set to Surge Back Into Housing Market

Normandy Shores open house for sale, Miami Beach, Florida, 2014
Jeff Greenberg—Alamy The Miami area is one that could see an influx of 'boomerang' buyers—those who lost a home to foreclosure but are ready to get back in the market.

More than 7 million homeowners who suffered a foreclosure or short sale during the housing crisis are poised to become buyers again.

Over the next eight years, nearly 7.3 million Americans who lost their homes in the housing crash will become creditworthy enough to buy again, according to a new analysis.

RealtyTrac, a real estate information company and online marketplace for foreclosed properties, estimates that these “boomerang buyers”—those who suffered a foreclosure or short sale between 2007 and 2014—are rapidly approaching, or already past, the seven-year window “conservatively” needed to repair their credit.

This year, the firm expects, more than 550,000 of these buyers could be in a position to get back into the market. The number of newly creditworthy individuals will then top 1 million between 2016 and 2019 and gradually decline to about 455,000 in 2022.

Screenshot 2015-01-27 10.30.07

RealtyTrac notes that the return of these former homeowners could have a strong effect on housing markets with a particular appeal to the boomerang demographic: areas with “a high percentage of housing units lost to foreclosure but where current home prices are still affordable for median income earners” and a healthy population of Gen Xers and Baby Boomers, “the two generations most likely to be boomerang buyers.”

Based on those criteria, the analysis targets metro areas surrounding Phoenix (with an estimated 348,329 potential boomerang buyers), Miami (322,141), and Detroit (304,501) as the most likely to see an uptick in return buyers.

Chris Pollinger, senior vice president of sales at First Team Real Estate, told RealtyTrac that previously foreclosed Americans shouldn’t rule out another try at homeownership. “The housing crisis certainly hit home the fact that homeownership is not for everyone, but those burned during the crisis should not immediately throw the baby out with the bathwater when it comes to their second chance,” Pollinger said.

Here are the top 10 areas that could see a boom in boomerang buyers:

RealtyTrac

 

MONEY real estate

103-Year-Old Texas Woman Fights to Keep Her House

Man in suit holding foreclosure signs
Pamela Moore—Getty Images

An elderly woman is battling a bank that's trying to foreclosure on her.

A 103-year-old Texas woman is fighting to keep her home after she let her insurance lapse, a CBS affiliate in the Dallas/Fort Worth area reports. Myrtle Lewis told CBS she accidentally let her insurance expire and renewed it after noticing the mistake, but the gap in coverage apparently violated the loan agreement for her reverse mortgage. Now, OneWest Bank, which holds the loan, is attempting to foreclose on Lewis.

It’s unclear if it was mortgage or homeowner’s insurance, and when contacted by Credit.com, a public relations representative for OneWest said the bank declined to comment on Lewis’s case. One thing is clear: Lewis is worried about losing her home. In the interview with CBS, she said it “would break my heart.”

Lewis took out a reverse mortgage on the home in 2003, when she was 92. Reverse mortgages are a type of loan for homeowners ages 62 and older, allowing senior citizens to use the equity they’ve built in their properties without making monthly payments. Repayment is deferred until the borrower dies, moves or sells the home, but the homeowner is still responsible for paying taxes, insurance and any other fees associated with maintaining their home. A 2012 report from the Consumer Financial Protection Bureau said 10% of reverse mortgage borrowers face foreclosure because they fail to pay taxes or insurance.

Missing insurance payments may not seem like a huge deal, especially if you correct the mistake, but it is. It’s not unheard of for homeowners to face foreclosure because of something seemingly small, like unpaid homeowners’ association fees, but there are serious consequences for not upholding your end of a loan agreement. Foreclosure will also negatively affect your credit for years.

A focal point of the CFPB’s 2012 reverse mortgage report is that these loans need to be better explained to and understood by borrowers, and it found that many lenders were deceptively marketing reverse mortgages to senior citizens. Lewis’s case may be in the process of unfolding, but no matter what happens, her story is a good reminder to consumers that there’s often not room for error with large loans. It’s crucial to understand your responsibilities before putting your financial future and well-being on the line.

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This article originally appeared on Credit.com.

MONEY Housing Market

The 5 Cities That Have Recovered Most—and Least—From the Recession

Some areas have rebounded nicely since the financial crisis. But many have not.

On Wednesday, the Department of Commerce announced the U.S. economy grew a healthy 4% in the second quarter of 2014. The good news aligns with other positive economic signals, like an increase in hiring, and suggests the nation as a whole might be on the road to recovery.

Unfortunately, this rosy picture hasn’t been shared equally across the United States. Some areas have recovered well, while others have struggled. A new report from personal finance social network WalletHub highlights which municipalities have made the most progress toward normalcy since the downturn, and the areas that still have a way to go. To compile the list, WalletHub analyzed 18 economic metrics for the 180 largest U.S. cities, including the inflow of college-educated workers, the rate of new business growth, unemployment rates, and home price appreciation.

Here are the results.

Most Recovered Cities

Klyde Warren Park, Dallas, Texas.
Trevor Kobrin—Dallas CVBHome prices in Dallas have shot up since the crisis, bolstering the city’s economy.

1. Laredo, Texas

Over the past seven years, this Southern Texas city’s median income has increased 5% while the population has surged 13%. State-wide bankruptcy is down, and new business growth is up.

2. Irving, Texas

Irving, sandwiched between Dallas and Fort Worth, earned high marks for rising median income (up 6% since 2007) and a decreasing ratio of part-time to full-time workers. The area has seen more college-educated workers moving in.

3. Fayetteville, North Carolina

More workers moved from part-time to full-time gigs in this city than any other place. Plus more college-educated workers are coming than going, helping the population spike over 14% since 2007.

4. Denver, Colorado

The Mile High City has seen a 12% jump in median income since the financial crisis. Most impressively, it’s one of the few areas to have seen home prices completely recover (and then some) from the housing crash.

5. Dallas, Texas

Dallas is still dealing with an increased ratio of part-time to full-time workers, but median income is up nearly 4% and home prices have appreciated a shocking 17% since the housing bubble burst.

Least Recovered Cities

Newark, New Jersey
FlickrNewark, New Jersey is still struggling to come back from the financial crisis.

1. San Bernardino, California

This Southern California city ranks as the farthest away from a full recovery. Both income and housing prices have dropped since 2007, with median income down 4%, and home prices down 43%. San Bernardino’s ratio of part-time to full-time jobs has also gone up nearly 14%.

2. Stockton, California

This Northern California inland area isn’t doing so well either. Incomes are down. Home prices have severely depreciated (down more than 43% from seven years ago), and the foreclosure rate is close to 18%.

3. Boise City, Indiana

Residents of Boise City have suffered an 8% drop in their median income since the crisis. Despite there being increasingly more full-time work opportunities, relative to part-time roles, new business growth remains far below its pre-recession level, down roughly 11%.

4. Newark, New Jersey

The median income remains down almost 5% in this urban area, adjacent to New York. Homes have been hit hard too. Housing prices are about 41% lower than they were in 2007.

5. Modesto, California

This town, which neighbors depressed Stockton, also hasn’t been able to break out of its post recession funk, likely because home prices remain down about 35%, and new business growth almost 9%.

MONEY mortgages

Behind on Your Mortgage? You May Be Eligible For Some Help

A new settlement with one of the nation's largest lenders may provide you with some much needed help on your mortgage.

The $540 million SunTrust Mortgage agreed to pay last week in relief to distressed homeowners is the latest in a series of settlements authorities have reached with major banks over their role in the financial crisis since 2012. Is it too late to claim any of that money? Here’s what you need to know.

Who is eligible for a loan modification?

If you’re underwater, or struggling to make your payments, two lenders have relief funds remaining under their settlement agreements. Ocwen Financial agreed in December to spend $2 billion to slash mortgage balances for underwater homeowners. If you have an Ocwen loan, or one from subsidiaries Homeward Residential Holdings and Litton Loan Servicing, call Ocwen at 800-337-6695 or email ConsumerRelief@Ocwen.com.

SunTrust Mortgage will provide $500 million in relief to underwater homeowners. Call SunTrust (800-634-7928) or email through the SunTrustMortgage.com support page.

What if I’ve already lost my home?

Ocwen and SunTrust are paying $125 million and $40 million, respectively, to customers who already have lost their homes to foreclosure.

Eligible Ocwen customers lost their home between Jan. 1, 2009 and Dec. 31, 2012; SunTrust borrowers lost their homes between Jan. 1, 2008 to Dec. 31, 2013. A settlement administrator will contact you, according to the Consumer Financial Protection Bureau. If you have changed your contact information since your foreclosure, the CFPB advises you to update your information with your state attorney general.

I’m not a SunTrust or Ocwen customer. Can I get any help?

The five major banks that were part of the 2012 National Mortgage Settlement already have given away their settlement money. But you still may qualify for other assistance. Contact a credit counseling agency approved by the Office of Housing and Urban Development (HUD), says Melinda Opperman of Springboard Credit Management. (Find one near you at HUD’s official website.) Approved agencies, like Springboard, can put you in touch with relief programs in your area—their counseling is free.

Additional information

CFPB’s Ocwen fact sheet and common questions.

CFPB’s press release on the SunTrust settlement.

TIME real estate

Nearly 10 Million Mortgaged Homes are Still Underwater

Mortgage Bankers Association To Release Weekly Mortgage Market Index June 12
Daniel Acker—Bloomberg /Getty Images

A new reports estimates some 18% of mortgaged homeowners are stuck with homes worth less than their debt, and that's an improvement over previous quarters

A collapse in housing prices has trapped nearly 10 million U.S. homeowners in homes worth less than their mortgages, according to a new report by real-estate price tracking website, Zillow.

The report estimates that in the first quarter of 2014, 18.8% of mortgaged homeowners were stuck in homes that would sell at a loss. That marks an improvement over the final quarter of last year when 19.4% of home mortgages were underwater and a significant improvement over the 2012 high of 31.4% — but still leaves nearly 10 million households struggling in negative equity.

The report estimates that another 10 million homeowners have 20% or less equity on their homes, known as “effective negative equity” as homeowners can’t draw enough home equity to swallow the costs of selling the home and moving upmarket. Many home owners rely on home equity to fund the broker’s fees and meet the next home’s down payment.

Underwater borrowers threaten to leave a lingering chill in the housing market, the study’s authors concluded. “The unfortunate reality is that housing markets look to be swimming with underwater borrowers for years to come,” said Zillow Chief Economist Dr. Stan Humphries.

MONEY

The Economics of Ditching Your Mortgage

For a recent story I did about underwater mortgages, I spoke with a lot of people who owe more on their mortgage than their homes are worth. Inevitably, these people would acknowledge the option of just walking away: giving up on paying the mortgage and leaving the house to foreclosure. Just as inevitably, they would quickly add, “I would never do that.”

There seem to be two camps on walking away. First, there are those who think it unethical and shameful for a person to default on an obligation. And second, there are those who think walking away is nothing compared to the wrongs committed by bankers who profited from making bad loans and the Wall Street firms who gambled with mortgages. (Readers from each camp are debating the issue in the comments section of a recent More Money post.)

Putting aside ethics for a moment, I wonder about the economics. At what point does it make financial sense to default?

For borrowers who are more than 25% underwater — particularly in higher-priced homes where negative equity can top $100,000 — not walking away is economically irrational, writes Arizona law professor Brent White in a paper published in February. “Once one is 40% or more underwater,” he argues, “the financial logic of strategic default is frequently overwhelming.” Given the state of the housing market — one out of four homes are underwater — it’s surprising that more people aren’t just moving on and leaving the keys behind, he says.

Several variables play into the mathematics of default. One is the spread between your mortgage payment and area rents — what you’d pay to rent a comparable house. Others are the amount you’re underwater and the outlook for real estate recovery in your area.

To see how all these numbers might come together, take a look at this scenario from Indianapolis financial planner Michael Kalscheur, based on the situation of a family he helped:

Let’s say you owe $315,000 on a $375,000 home that’s now worth $225,000. Your payment is $2,600 a month, but you can probably rent a decent place for $1,600 a month.

Option One: You walk away. At the end of seven years — when the foreclosure is gone from your credit report — you’ll have saved $84,000 in payments by living in that rental home.

Option Two: You stay in your home. Assuming, perhaps optimistically, that housing prices start appreciating again at their traditional 3% rate, your home will after seven years be worth about $275,000, and you’ll have paid down your mortgage to perhaps $260,000. In other words, you would have paid $218,400 over seven years to have $15,000 in home equity. (But, you might ask, doesn’t the mortgage-interest tax deduction have a value for non-defaulters? Well, real estate pros say the value of writing off interest payments on taxes is easily cancelled out by the expenses of maintaining a home and selling it.)

Now, Moody’s Economy.com report says 62% of major metropolitan areas will return to pre-recession peak housing prices by 2015. So if you live in one of these areas, and your loan terms aren’t too painful, it’s probably best to ride it out. But what if you bought near the peak in some of the hardest-hit areas of Florida, Nevada or California — which aren’t predicted to retake those heights until 2030, or even 2040? Then making a house payment is equivalent to renting, since you’re not building equity.

And what are the economic repercussions of the damaged credit score you’d end up with by walking away? A foreclosure, whether strategic or not, stays on your credit history for seven years, although its impact on your credit score declines over time. In the short run, someone with a 780 credit score will see that cut by as much as 160 points, according to Fair Isaac’s myFico; that can affect everything from insurance premiums to your employment. But if you keep all your other bills paid up, your score can begin recovering in as early as two years.

Clouding the economics, however, are certain misguided beliefs. Many mortgage-payers, says White, overestimate the speed with which home prices will bounce back, as well as the negative impacts of a foreclosure. Yet the sense of fear, shame and failure associated with default, and the belief that we are responsible for paying our obligations, are for most of us simply too strong.

I know the families I interviewed felt that way, many of whom were simply victims of bad timing. I could also feel their frustration over the fact that for them, their house would never be an opportunity to build wealth.

Can you imagine yourself strategically defaulting on a home? Take the survey below.

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MONEY

Homeowner Barricades Self in Foreclosed House

A 53-year-old Ohio man facing foreclosure has sealed himself inside his home, refusing to leave until banks end foreclosures and evictions. According to The Toledo Blade:

“Through an agreement with the Wood County Sheriff’s Office, he was to have been out of the house on U.S. 20 in Stony Ridge by midnight yesterday, but instead, members of the Toledo Foreclosure Defense League, an organization he co-founded, helped seal him inside. A cell phone – and the hole in the front window – are his only means of communication.”

The homeowner, Keith Sadler, and several supporters from the TFDL have set up a video feed and a Twitter feed to get their message out. The Sentinel-Tribune reports that Sadler has publicly fought foreclosure in the past:

This is not the first time for Sadler to take bold action against foreclosures, being arrested previously for disrupting a sheriff’s sale of foreclosed property in Lucas County. His actions there were not successful in getting Lucas County to declare a moratorium on foreclosures, but he is hoping to have more success in Wood County.

“We’re not leaving the home till we get a moratorium on foreclosures, or until we’re dragged out,” Sadler said.

The case is the latest in a string of frustrated homeowners going to extreme measures when they lose their home to the bank. In February, another Ohio man bulldozed his house before turning the property over, and several homeowners from around the country are accused of setting fire to their homes in the face of foreclosure.

Is Sadler’s move crazy? Or has he simply come up with an effective way to bring greater attention and sympathy to struggling homeowners?

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MONEY

Foreclosure Is Hitting Well-Off Families, Too

Who is falling into foreclosure? The Florida Association of Realtors wanted to find out, so it commissioned an analysis that cross-referenced three years of foreclosure filings with demographic data. The study focused only on primary residences; the idea was to ignore investors and speculators, looking instead at people who’d bought homes to live in themselves.

Some of the findings about foreclosed homeowners were pretty interesting:

  • 20% of the filings went to households with more than $100,000 in annual income.
  • 15% of homeowners had college degrees; another 8% went to graduate school.
  • 92% were married, and 65% had children.
  • 35% of homeowners who received a foreclosure filing had lived in their homes for more than 10 years. These were not people who’d bought too much house, but more likely people who lost their jobs and suddenly couldn’t afford the payments.

Personal interviews with homeowners, said the Realtors, indicated that it was very rare for just one financial setback to lead to the foreclosure. The group’s vice president of public policy, John Sebree, called this the “plus one” effect: It wasn’t just a high-interest-rate, high-payment subprime loan that might have caused a foreclosure; it was a bad loan and then a job loss. Alternatively, it wasn’t a job loss that caused an affordable loan to go bad; it was a job loss and a health issue. (For more insight, you can read the full report.)

Have you or someone you know gone through a foreclosure? How complicated were the causes? Post your comments below.

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MONEY

Homeowners Abandoning Houses En Masse

A pair of studies released Thursday found that more homeowners are choosing to let an underwater home go into foreclosure, despite their ability to continue to make payments. Researchers at the University of Chicago and Northwestern University found that 31% of foreclosures appeared to be strategic, up from 22% in last year.

As the number of borrowers who walk away from their mortgages increases, the social stigma associated with foreclosure has started to wane, experts say. “It can be a very logical decision based purely on economics, numbers and returns,” says Keith Gumbinger, of HSH Associates, a mortgage publishing website. “Is there better value to me to abandon this home and rent another one for less money?” A quarter of all borrowers — 11.3 million homeowners — were underwater on their mortgages at the end of 2009.

A Morgan Stanley report, also released Thursday, found that strategic defaulters tend to have higher credit scores, larger loan balances and more recent mortgages than those who remain in underwater homes. From an economic perspective, it makes sense for borrowers who are more than 25% underwater on their mortgage to consider walking away, says Paola Sapienza, a finance professor at Northwestern’s Kellogg School of Management and a co-author of the study.

Borrowers who are up-to-date on their payments but underwater may also be walking away in protest after seeing government programs and bank policies aimed at their delinquent neighbors but offering little assistance for them, Gumbinger says. The Chicago study found that the probability of strategic default increases by 23% when homeowners learn that their neighbor with negative equity has received a partial loan for forgiveness.

Strategic defaults do not come without consequences for the borrower. A borrower with a 780 credit score could see his score fall 150 points after walking away. But if he keeps his credit pristine otherwise, he could be back in prime range — and be able to purchase a home — within two or three years, says Craig Watts, a spokesman with the credit scoring firm Fair Isaac.

Let’s put credit scoring aside for a moment and think about the moral dimension. You can find thoughtful arguments both for and against strategic default. What do you think of the ethics of walking away from an underwater home, even if you have the means to pay?

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