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Good morning, my name is Jim Sahnger and I am with Palm Beach Financial Network. I want to thank you for taking time to meet with me. My purpose for being here is to share with you some pretty important information on how the lending landscape has changed in light of the mortgage market meltdown we saw last year.

My objective is to leave you with some ideas and information, that if used properly, will put dollars in your pocket and help you to convert and keep buyers on the hook this year.

If the information I’m going to share with you today could help you close just one more transaction this year, would you want to hear it? What if it could help you with one more per quarter or even one every other month? This information is that valuable!

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Do you remember seeing the commercial where the guy was running around with the number 619 on his forehead? Everywhere he turned, he either saw 619 or it was tattooed on him somewhere. When that commercial ran I laughed, not at the commercial itself but at the fact that it said it was drilling people looking for loans. If you go back to when this commercial was running, 18 to 24 months ago, everyone was getting a loan. Today, it’s an entirely different scene.

So, what does a credit score below 620 cost? Well, a borrower wanting a $360,000 mortgage should be prepared to pay anywhere from three to four hundred thousand dollars or more! Yes, depending on the scenario, one may have to pay more than what they borrowed in the first place - over and above what they would normally have to pay!

If a homebuyer and find him or herself limited to a budget, as most of us are, a low score can diminish their buying capacity by 12-28%. Think about it: if they are looking at a $400,000 home, they could be knocked all the way down to a purchase price in the high $200,000s simply because of a low score. Ouch!

How does this affect Realtors? Simply put, the lower the FICO score of your average home buyer and seller, the lower your average sale will be, if they buy at all, and the lower your commissions will be for the year. Ask yourself this question: If one buyer wanting to purchase a home for $400,000 walks away because they have a score of 610, what did it cost you? Up to $28,000 and possibly more if you are the listing agent on that particular property as well. This is a lot of money!

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Whoa! I hear you. Tell me a little more about these FICO scores. OK. Simply put, a FICO score is a three-digit number that assists lenders in determining the probability that a borrower is going to go into default. Lately, you can’t read the paper or turn on the TV without hearing that people are getting foreclosed on in record numbers today and many of them had lower FICO scores when they obtained their loan.

The scoring model was developed by Fair Isaac Corporation in the 1960s and adopted by all the credit bureaus. Every person gets three scores and for the purposes of mortgages, the one that counts is the middle score. Scores can range anywhere from 350-850 with the objective being a score in the higher range.

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Now if I’m you, I’m sitting here asking, “What’s the deal?” Well, the subprime meltdown of 2006 and 2007 left a mark. A big one! Consumers faced with rising payments due to resetting ARMs have gotten into trouble. Combine that with falling property values and homeowners have been walking en masse.

When the mortgage-backed securities that these loans were packaged into started to get recognized as not delivering, particularly at how they were represented, other investors started either calling for their money back or issued margin calls. In cases where the loans were sent back to the originator or the loans in the pipeline were being devalued after they were locked, it forced many companies and hedge funds to close.

The alarming part of all of this was how quickly it all happened and the fact that it was no longer just subprime companies being impacted. In August 2007 alone two top 30 mortgage companies, First Magnus and American Home Mortgage, went down. To date, over 200 major companies are gone, eliminating tens of thousands of jobs in the process not counting all the smaller shops that bit the bullet too.

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Now that we know a little bit about what happened, what do we need to know about FICO scores? Let’s first look at the scores from a simple excellent-to-poor rating. While many people want to strive for the 800 club, anything above a 720 is considered excellent. While it will never hurt you to go higher, for most scenarios, once you reach a 720 you are in the best shape. Some lenders may reward a borrower for going higher but most will not. The bottom line today is that lenders expect people to have great credit to get the best rates.

The other two scores to keep in mind are 680 and 620. If borrowers fall below either of these they will pay more - not only in the mortgage arena but in other all areas of credit also: think credit cards, car loans and even automobile and homeowners insurance. All of these entities look at scores and grade them accordingly. People with lower scores will pay more than those with higher scores.

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You might be wondering why it is that lenders feel so compelled to charge someone more for a lower FICO score. Let’s take a look at FICO scores from the perspective that you were going to personally lend someone some money. If I were to ask you to borrow $5,000, you would want to know whether I was a pretty good bet to repay you, right? Of course you would.

Well, in looking at this chart, you can see that if my FICO score was over 800, Fair Isaac and Company, the Las Vegas of the credit world, will tell you that you can be 99% sure that I will pay you back or as illustrated here for you, there is only a 1% chance I’m going to default on my loan with you. If my score falls into the range of say 550-559, you might see your money and you might not. The scores will tell you that I only have a 49% chance of repaying you. And finally, if my scores are below 500, forget it. You only stand a 17% chance of getting repaid. So, as the scores fall, it’s easy to see why someone would want to charge a higher rate of interest.

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So what are the real costs of a low credit score? It can be a lot! If you take a look at the MyFICO home page, they have it broken down into several areas, but I’ll look at three here. If nailing a score of a 760 is considered a baseline here, falling below it will cost a borrower anywhere from 24,000 to as much as $432,000 over the life of their mortgage. This doesn’t even count the additional costs that can stem from credit cards and insurance.

Depending on one’s situation, it would not be difficult to see where someone could be forced to pay more than $500,000 more in interest and insurance charges by simply mismanaging their credit!

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There have long been additional charges for mortgages depending on the layer of perceived risk from a lender. For example, if someone were purchasing investment property, the interest rate or points charged have always been higher than if they were purchasing a primary residence. Typically a borrower will pay at least 1.5 more points in cost or .50% more in rate for a mortgage on an investment property.

This is a chart representing some of the different fees that can be levied for different loan scenarios. As you can see, it can be quite daunting. I hope you can also see why today, if a borrower calls a lender and asks, “What is your rate?” the answer is virtually impossible to determine without first asking some questions. So, advise your buyers that the next time they ask a lender this question if they are simply offered a rate with out additional questions they should run and run fast!

Think about when you were in grade school and everyone was playing tag and one person jumped on another then everyone on the playground jumped on. What was that called? Yeah, piling on! That’s just what Fannie Mae and Freddie Mac announced they are doing.

Borrowers whose scores fall below either 720 or 680, depending on the type of loan they obtain, will be paying more. The only question is, how much? At the very minimum, a borrower will have to pay .25 point more if they are financing over 70% of the value of the property. In some cases, the borrower will be forced to pay as much as 2.00% in the form of costs or as much as 1.00% in interest rate!

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Now that we know the price someone could pay by having a low score, it’s important to have a better understanding of how these scores are calculated so borrowers can work to keep theirs as high as possible.

In essence there are five general components of a FICO score. One thing to remember, it’s not just whether you pay your bills on time. In fact, I have seen cases where someone has never had a late payment and had scores in the high 500s. As we see here, the results from having a clean payment history, just wouldn’t serve you well enough.

Payment history is merely 35% of the score. The amount owed, or the way the credit is handled, accounts for another 30%. The length of time cards or other credit accounts have been opened comprises another 15% and new credit and the types of credit used account for another 10% each.

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So we now know that whether or not one pays their bills on time, accounts for 35% of their FICO score. This is a sizeable portion so it’s incredibly important to keep scores at their highest levels.

One missed payment on an account can cost someone over 50 points on their score. This is a huge hit! Here is something else to think about that you might not have considered before - paying a collection account that’s over 2 years old can also hurt a credit score. This is because it would be viewed as recent negative credit. Simply showing that an account is or has been past due can also hit a score for over 50 points.

Many people think that after 7 years, derogatory marks will automatically be removed from a credit report, this is not always true. They must be disputed to get the best results.

And finally, this is a big one I often see, many people think that a divorce decree indicating that an ex-spouse is responsible for making payments will help them if there are late payments showing on those accounts. It will not. The only sure-fire way to protect someone is to have all accounts that were previously jointly-owned, closed and to place the existing debt in the responsible person’s name.

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Managing one’s debt, or how much outstanding credit someone has, accounts for another 30% of a credit score. What I mean by this is the ratio of someone’s credit balance to their available credit limit.

Think of it this way, if there is $10,000 of available credit on charge cards and they are maxed out, this is bad and will hurt a score. To maintain scores on revolving accounts, one would want to keep their balances below 50% of their limits, or $5,000 in this example. To raise credit scores, one should keep their balances below 30% of the limits, or $3,000 in this example. These balances need to be maintained at these levels for a minimum of 3-6 months before applying for a loan.

People are better served if they don’t consolidate debt. It is actually better to keep the total debt spread out amongst all cards. So if your buyer just got that new 0% interest card, as much as they want to dump all their balances onto this new card, doing so will hurt their score if the new balances exceed 50% of the available limit. Keep this in mind, it’s not just the overall accounts with balances but also each card with a balance.

It is also important for credit users to be aware of their card limits. Going over the limit, even by $1, is seen as being reckless, and the scoring models see it as a violation of a user agreement, even if the charge was approved.

If one has a Home Equity Line of Credit it’s very important to make sure it is being reported as a mortgage, not just another revolving account. The reason is that many people have their HELOCs maxed out and for scoring as we have said, this is bad.

Finally, cards that are not being used should not be closed. While this is contrary to popular belief, closing out accounts could lower overall credit limits and could impact the ratios used for scoring. Also, cards that are unused become unrated and the benefit of having them help one’s scores may be lost so it may be in a person’s best interest to use their credit cards.

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While not as important to the model but very important if someone is really close to a needed score, is both the length of someone’s credit history and the types of accounts in their profile. So what is important here again is accounts that are not being used should not be closed.

Recently done away with is the ability for a person to share someone else’s credit. Now, if someone is added as an authorized user to a charge card, they will no longer receive the benefit of using that account to improve their score. This was previously known as piggybacking onto someone else’s credit. If you know someone that is an authorized user of credit, think spouse or child, their score will no longer be improved by the good paying habits of the other person. If someone is currently in this situation, they need to start building their own credit profile, as quickly as possible.

The type of credit that someone has does matter. Think in this case, revolving charge cards, mortgages, and installment loans. The more diverse the credit profile, the better.

As far as the number of charge cards someone should carry, the optimal number is 3 to 5 cards for the best score.

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Inquiries occur whenever someone has their credit pulled for the intent of acquiring new credit. This accounts for 10% of a person’s score. There are two types of inquiries. There are what as known as hard inquiries, when someone applies for credit, and soft inquiries. A soft inquiry is when a person pulls their own credit. Only hard inquiries negatively impact credit scores.

Inquiries will impact a score for a period of one year and the degree of the hit can be anywhere from 2 to 30 points, depending on the score at the time of the hit. An inquiry will have a greater impact on a lower score than on a higher one.

Do you know when you get a charge card offer in the mail and it says you are pre-approved? Well, I hate to tell you, you are not! Nope, the only thing that has happened here is that the creditor has asked for a group of people whose scores fall within a particular criteria for the purpose of offering credit. Once the application is sent in, then credit is pulled and the score will suffer as a result.

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Just because someone has a low score does not mean it’s a life sentence. They have not been sent off to credit jail. There are definitive steps to take towards managing someone’s credit to higher scores. The first thing is to know what’s on the report. Buyers should pull their own credit, including all 3 scores. They need to get a report that covers all three bureaus - TransUnion, Equifax and Experian. This is because not all creditors report to all bureaus.

Then they want to verify that all the information is being reported accurately. And finally, they want to dispute all incorrect information.

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As a Realtor and someone that is in the business of serving people, now is not the time to hand out the cards of three lenders. Quite the contrary, you want to make sure you have one “go-to” lender you can count on who has a wide variety of mortgage products to choose from, is an expert in underwriting and in credit analysis and this is very important, has credit repair professionals as partners. Finally, you want to make sure the lender you count on is both local and accountable to the community.

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I recommend that you have meetings with all your sellers and buyers as soon as possible. Its very important to make sure that they have had their credit reviewed by an expert and that they do so every 3-6 months to ensure they are in the best credit shape or are aware of the possible penalties for not being so.

Pre-qualifications in today’s time are worthless. Insist on getting your clients pre-approved and keep in mind that pre-approvals are typically good for 120 days.

Finally, do not accept a pre-approval from someone you either do not know or is not local!

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The next steps I would take are: 1) meet with your sellers and inform them of what’s currently taking place in the mortgage market; 2) get them checked out and make sure they are willing to do what it takes to sell their property and 3) promote the heck out of them to the buyer’s agents and other Realtors. Let them know you truly have someone that is hot for an offer and is ready to go.

For buyers, I would do the same. Get them pre-approved, not pre-qualified, and then direct them to realistic sellers. With inventory levels so high, I wouldn’t waste their time showing them property where the seller may not be hot.

Then, just as you would promote a hot listing, promote your buyers the same way. Let people know you have a buyer that is hot and ready to go. Market them in the same way to get them into a home before they get either frustrated or read the papers and think they should wait for prices to fall further.

I am here to work for you. If you’d like, I would be happy to help you in any consultation you will have with either a buyer or a seller. In many cases a seller may open up to me where they may not with you. I’ll help you get them closed!

Once again, my name is Jim Sahnger and I want to thank you for taking the time to allow me to show you what is currently going on the in the mortgage and credit world today.

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