Albert Einstein On Predicting Interest Rates (true story)
When Einstein died and went to heaven, the doorman told him his room was not ready, and that he had to wait in a dormitory with others. So, he was led to a dorm and introduced to his roommates. The doorman said, “Here is your first roommate. He has an IQ of 180.” “That’s wonderful,” Einstein said, “we can discuss mathematics!” The doorman then said, “here is your second roommate. He has an IQ of 150!” “That’s wonderful!” says Einstein. “We can discuss physics!” And finally, a third man walks up to Einstein and says, “I’m your last roommate and I’m sorry, but my IQ is only 80.” Albert smiles back at him and says, “So, where do you think interest rates are headed?” (I think of this “true story” every time somebody tries to predict interest rates, and I share it as a reminder of just how difficult it really is 😊)
5 KEY CREDIT REMINDERS
#1 – Consumer credit scores are not the same as mortgage credit scores.
Borrowers often share their credit scores with us, as if those scores are set in stone. Those scores, however, are often generated by online “consumer” oriented scoring models that are much less stringent than the scoring models mortgage lenders employ. As a result, the consumer-scores are often much higher than the scores mortgage lenders obtain. This is a problem because credit scores significantly affect interest rates, so it is misleading for us to estimate someone’s interest rate based on their consumer score. I blogged more about this here.
#2 – Credit inquiries = much ado about very little.
Borrowers zealously protecting their credit are often far too concerned about “credit inquiries.” As we remind readers often, borrowers can have unlimited inquiries from multiple mortgage lenders within a 45 day period and the scoring models will treat all of those inquiries as a single inquiry. In addition, inquiries often have only a negligible effect on credit scores that disappears altogether after 90 days – particularly for borrowers with strong credit. This article from the CFPB provides a bit more info: What exactly happens when a mortgage lender checks my credit? (consumerfinance.gov)
#3 – Lenders need to run their own credit reports to pre-approve borrowers.
Borrowers who are concerned about inquiries often ask us if we can pre-approve them without pulling credit. Our answer is “no” because all lenders have to pull their own internal credit reports to provide data for our automated underwriters (“DU” for Fannie Mae and FHA; LP for Freddie Mac). This is an automated process; lenders are unable to simply type in data from a credit report generated by another lender or entity. I blogged about this here.
#4 – Credit scores affect interest rates.
Credit scores can easily impact a borrower’s interest rates by as much as 1%, so it is important to come to the mortgage table with as high of a score as possible. This is also one of many reasons why we can’t simply quote a rate to borrowers without pulling their credit. I blogged about all of the factors that affect a borrower’s interest rate here.
#5 – Credit repair often pays for itself quickly.
Because credit scores affect interest rates so much, credit repair often pays for itself very quickly. It is also cheaper and easier than many borrowers might suspect.
- Option #1: Rapid re-scores. This the most basic of credit repair options. It typically involves the lender running “what if” scenarios to see how paying down balances will improve credit. Borrowers can then provide proof that balances are paid down and obtain a rapid re-score from the major credit bureaus. These re-scores cost a few hundred dollars typically and take from one to two weeks. Note that we typically do not pursue score improvements until borrowers are in contract for a variety of reasons.
- Option #2: Full credit repair. For borrowers with more serious credit issues, particularly if they involve incorrect data and misreporting, we often recommend a credit repair company. Full credit repair, however, can take several months and cost much more than a rapid re-score, but fees depend on the amount of work required. A repair company that we often recommend is Scorewell, as they have done great work for a large number of our borrowers.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167