Real Estate Appraisals - Ten things most people just don't understand about them

Most of us will have a real estate appraisal done at some point in our property-owning lives, and yet, as common as that experience is, there are many misconceptions about what an appraisal is, why one is needed, and how truly it reflects the value of our homes.

Let's take a look at some basic questions and some common confusions about those appraisals:

1. What is an appraisal?
2. Are there different kinds of appraisers?
3. Why get an appraisal?
4. The different types of home appraisals
5. Who owns an appraisal?
6. What's the difference between appraisal and assessment?
7. How long is an appraisal good for? 
8. Appraisal?  Home Inspection?  And the difference is?
9. The final estimate of value
10. Don't like the appraisal?  Not fair, not accurate?  What you can do 

If you have any questions that are not covered by this article, I'll be happy to answer your specific questions in the "Ask an Appraiser" thread in the forum.

1.  What is an appraisal?  

It is an estimate of value based on data gathered by the appraise, a process that  is done through an inspection of the subject property, then comparing that property  to recent sales of  similar houses located in like neighborhoods, as close to the subject property as possible.
Before we move into a detailed explanation of the inspection, data gathering and reporting aspects of an appraisal, let's look at more information.

2.  Are there different kinds of appraisers?  
A residential real estate appraiser starts out as an apprentice, taking basic required appraiser coursework and working for two years under the direct supervision of a fully licensed appraiser.
A licensed appraiser covers single family homes up to a million dollars and can also appraise multi-family buildings up to four units.   A certified residential appraiser does those too, but also deals with properties over $1M.  A certified general appraiser can do both residential and commercial properties and is often called on for appraising complex properties.
"I have an in-home business - a daycare.  So, do I have to get a commercial appraiser or can a residential appraiser do my appraisal?"  Absolutely.  We'll talk more about this in a future article.

3.    Why get an appraisal? 
If you are buying or refinancing a home, the lender will want an appraisal done as he needs an impartial, professional opinion of value on the property to protect his equity in the property.  If you default on payment, the lender can be assured of recouping the value of his loan to you.
If you're thinking about selling your home, you may want an appraisal to get an idea of the home's value before talking to a realtor or attempting a for-sale-by-owner.  Appraisals are also done in divorce situations and for estate planning and  settlement purposes.
We usually get a surge of requests just after a town has done a property tax revaluation, as people question their steeply increased assessments.    Because the purpose of the appraisal is key, we work under somewhat different guidelines when doing an appraisal for a lender versus doing a private one for a homeowner, an attorney or an accountant.
"My husband and I are getting a divorce.  Should I have my own appraisal done?"  Wise idea, although ideally both your husband's and your appraisal should come in at similar values.   BUT, this raises an important point:  an appraisal is done under the direction of the person ordering it; thus, your husband may instruct his appraiser that he is looking for a conservative value, while you might want your appraiser to look at the high end of the value range.

4.  The different types of home appraisals
While appraisals requiring both an exterior and interior inspection of the property are the norm, an
exterior inspection only, called a drive-by, may also be ordered.  Obviously not as comprehensive, a drive-by is likely to be used when there's little question about the value of the home supporting the loan amount requested.

5.  Who owns an appraisal?   
This is one of the trickiest and stickiest areas we deal with.  The person (or company) ordering the appraisal owns it, and all the information contained in that report.  We cannot release any of that information to anyone else - period -  without written authorization from the orderer.

"But, wait a minute, I paid for the appraisal.  And now you're saying you can't even tell me what the final  figure is?"  That's right.  We often get the homeowner who wants the house and the broker who wants the sale calling to see if the property appraised, came in at the value necessary.  We absolutely cannot release that information to anyone but the lender, and then the lender can share the appraisal with the client, the realtor, etc.
"My deal feel through with lender ABC, and now I'm going with XYZ.  Would you please send them a copy of your appraisal."   Nope, can't do that.  ABC owns that appraisal and it cannot be re-assigned.
6.   What's the difference between appraisal and assessment? 
First, these two types of home valuation are done for different purposes and within different time frames.  Assessments are done on a town-wide basis usually for purposes of equitably levying taxes.
Revaluations of a town's residential properties, in our home state at least, are mandated every ten years to reflect ongoing market factors  and new trends in the values of new and older homes, waterfront properties, condominium projects, even the newer age-related (Plus 55) communities.
An appraisal focuses on a specific property and ideally pegs its value to similar houses that ideally have sold within the past six months, and which are within a mile of the subject property.  Needless to say, those parameters aren't always workable.
For example, when we appraise a multi-million dollar property with deep waterfrontage, we may have to go way up and down the coast of Maine to find truly comparable properties.  And of course the same applies when we're appraising homes in small  rural towns that may not have seen many home sales in the past year, let alone of houses like the subject.
Second, the final figure in an assessment may only be a percentage of the total value of the property.  What does that mean?  An assessment ratio means that the figure your hometown places on your property may only be 80% of what was determined to be the fair market value when the valuation was done.

"The town has my house assessed for $100,000, yet your appraisal came in at $275,000.  How can that be?"  Well, the assessment could be based on seriously outdated figures, especially considering the hot market and rapidly accelerating values of the past few years.  And, the assessment may only be a percentage of the originally determined value.
An appraisal is a more accurate reflection of what you could reasonably expect to sell your house for in today's market.

7.  How long is an appraisal good for? 
It can be used for a lending decision up to a year after completion, but in today's challenging real estate environment, a lender might not want to go over six months.  But, that can be handled through a re-certification of value, so that the borrower doesn't have to pay for a whole new report.
It is important to note here that an appraisal's estimate of market value is always stated as of a specific date, the date the property was physically inspected.
"For Pete's sake, the new garage is almost done, the materials are all here,and the appraiser could certainly see that."  Homeowners really struggle with this one, especially if they're building a new house and those last little things aren't quite done at the final inspection.  They want us to consider it, report it, done based on their good intentions.  Wrong!
Legally, we must say only what we see when we're seeing it.   It's a snapshot of the property as it is at that time, period.   Suppose there's a fire, a flood, or the contractor walks off the job... it's very easy for a home's value to change drastically in 24 hours.

8.  Appraisal?  Home Inspection?  And the difference is?  
Big, very big!  For an appraisal, we look at things that may present health or safety issues such as a cracked foundation, exposed wires or broken plumbing.  Our reports include only "readily observable items and surface observations."
While we make sure there is running water and a functioning heating system, we don't test those mechanical systems, and we don't make recommendations beyond repairs needed to address any observable health/safety deficiencies. 
Home inspectors and appraisers have very different licensing requirements, in states that even require a license for home inspectors!

9.  The final estimate of value
This is the bottom line, the only line a lender, broker, home seller or others really care about, the final figure for the estimated market value of the property.
While we appraisers have been accused of reading chicken innards to arrive at that figure, we have do have clear, consistent guidelines we must follow, with professional discretion of course.  Appraisers countrywide use a standard forms and the most common type of report for a single family home is the 1004, developed by Freddie Mac and Fannie Mae.
Because these two entities are the biggest mortgage lenders/backers in the country, they've determined the industry's standard reporting criteria.

10.  Don't like the appraisal?  Not fair, not accurate?  What you can do 
Ask questions and discuss with the appraiser what you don't understand or what you believe are discrepancies, errors.  We're not infallible!  (Sorry, guys, I know that'll come as a shock!)  But, accept, too, that the appraiser approaches things from a very different perspective than the broker, lender or homeowner does, and that's our job!
"The house right next door sold two months ago for $23,000 more than the value the appraiser put on our house, and we have a two-car garage that house doesn't have."   Ahhh, yes, we do hear this frequently.  But, that neighboring house may have substantially more space, an updated kitchen/baths,  a finished basement or any number of other amenities that offset any value the garage would add, differences that aren't perhaps obvious at a glance.
"I had an appraisal done and the jerk didn't even count the family room, two bedrooms and bath in the basement!"  So just what do we appraisers look at and look for when we inspect your house?  How do we compare your house to others?  How do we decide how much an extra bay in the garage or an updated kitchen is worth?  Stay tuned!  In my next article, I'll detail the process.  And tell you why those basement rooms don't count!
If you have any questions that are not covered by this article, I'll be happy to answer your specific questions in the "Ask an Appraiser" thread in the forum.

Don’t fear the small mortgage lender

Mortgage lenders come in all sizes, ranging from RBC – the biggest in the country – to tiny wholesale lenders and credit unions.
When it comes to entrusting a company with your biggest debt, odds are, name recognition matters to you. Consciously or subconsciously, people gravitate to well-known lenders partly because there’s a feeling of safety in “big.”

Even when a smaller lender has tantalizing rates and the best terms, homeowners sometimes tend to avoid it if they don’t know the name. An oft-cited reason for that is fear that the lender will go out of business. And that is certainly not unprecedented.
If we’re talking about “prime” lenders – i.e., those catering to more creditworthy customers – the list of extinct lenders includes companies like Abode Mortgage, Citizens Bank, Dundee Bank, Maple Trust and ResMor Trust. Mind you, most of these lenders were purchased by others.
Just recently, we buried another lender. FirstLine, once one of the biggest mortgage companies in the country, closed its doors Tuesday after 25 years in business.
People worry about lenders closing down for one main reason: they’re scared the lender will force them to repay their mortgage early. In reality, however, that rarely happens with prime lenders.
The bigger risk has been with subprime lenders. In fact, some subprime borrowers have even lost their homes in cases where they couldn’t refinance elsewhere after their lender shut down.
But if you’re a qualified borrower with provable income, do you really need to be worried if your lender goes out of business?
“Not at all,” says Boris Bozic, president and chief executive officer at Merix Financial.
“I always find it fascinating that people are concerned about smaller lenders,” he adds. “We’re not deposit takers. We’re giving money, not taking money. The risk is all ours.”
Many second- and third-tier lenders get their funding from large financial institutions and that funding is fairly stable, Mr. Bozic says.
“Even if a company were to run into financial difficulties, the vast majority of the time there are backup servicers in place.” This sort of contingency planning is almost always required by the parties funding a lender’s mortgages.
If a lender were to close, Mr. Bozic says another financial institution would simply take over the mortgage.
When a lender sells your mortgage to another party, you just keep making the same payments like nothing happened – albeit to a different company, in some cases. The new lender is generally required to honour the terms of your old mortgage contract, Mr. Bozic says.
The one thing that will change is the renewal offer you receive at maturity. Generally, the new owner of your mortgage will be the one making your renewal offer. That could be good or bad depending on how competitive the new lender is. But smart consumers always shop their lender’s renewal offer anyway, so this isn’t a major issue.

Overall, the probability of a lender disappearing is low. On its own, it’s not enough reason to avoid a less prominent company.
That’s especially true when the lender has the best deal in the market – which is the case with many smaller lenders today. If you can find a 0.10 percentage point lower rate, you’ll save roughly $1,200 over 60 months on a standard $250,000 mortgage.
If you’re interested in getting the best rate possible, you need to be open to saving money with a smaller mortgage company. Just be sure to get independent advice so you can sidestep the ones with onerous contract restrictions. Examples of those include fully closed terms, costly penalty calculations, porting restrictions, refinance limitations, and so on. Some lenders have rather unpleasant fine print, but that’s true for micro and mega lenders alike.
There are certainly reasons to choose a major bank or large credit union for your mortgage, including branch accessibility, integrating your mortgage with your banking or credit line, and access to other financial products. But it’s rarely necessary to shun lesser-known lenders for fear they’ll close and leave you stranded.

6 Ways You Might Be Hurting Your Credit Score

If you've been trying to boost your credit score--which is a good idea, since people with higher scores tend to pay lower interest rates on loans--you might be going about it all wrong. It turns out that many people don't know just what helps, and hurts, their credit scores. Here are six ways you might be accidentally damaging your score:


1. Avoiding credit altogether. While living a debt-free life sounds like a good idea, it can actually make it harder to take out a loan when you want to. That's because lenders look for experience with managing debt--they want to see that you can make consistent, on-time payments each month--before deciding whether or not to issue you any more of it.
 [The Dangers of Avoiding Credit]

2. Comparison shopping. While checking around for the best price is a savvy move in theory, in practice, it can ding your score. When you call different lenders to check on mortgage rates or auto loans and they issue you a quote, they first check your credit history with the credit bureaus. That can look like you're preparing to take on too much debt, which concerns lenders. While the impact isn't huge, it can hurt people with limited credit histories more, because they don't have much experience to balance out the negative impact from the credit checks.



3. Closing accounts. After paying off a credit card debt, you might be tempted to shut down the account for closure. But that move can actually hurt your credit score, because lenders look for experience with long-held accounts. If you've had that credit card for a long time, consider hanging onto it even after you pay it off, because it reflects well on your ability to manage credit over time.

4. Lowering your credit limit. While you might want to lower your credit limit, especially if you share a card with someone you think might overspend, such as a spouse or college student, to prevent a card from racking up a huge bill, think again, because lowering your credit limit can hurt your credit score. That's because you appear more credit-worthy if you are using only a small portion of your overall available credit.
In fact, if your total debt on a card approaches the credit limit level, then your score can get dinged. People with the highest credit scores tend to use about 10 percent of their total credit limits.

5. Opening up a retail card account to snag a discount. It might sound logical to open up that department store card so you can get the 10 percent discount on your purchase--but doing so could hurt your credit score. That's because opening up new accounts can set off a red flag that you're taking on too much debt, which can send lenders running in the other direction.

[Why Seniors Are In Trouble With Credit]

6. Maintaining a small credit card balance from month-to-month. Making only a minimum payment on a credit card, or paying anything below the full amount due, leads to more debt along with interest and fees. But some people carry that debt anyway, because they erroneously think it shows they can manage and maintain their accounts. To lenders, though, it can just look like the borrower is getting in over his head, which can eventually trigger higher interest rates on the account. So pay off that monthly balance whenever possible, and as soon as possible.

Given all these misconceptions, it's no wonder that credit reports can be extremely confusing. In fact, a survey by ING Direct found that only five parents out of 1,042 could correctly identify many common behaviors, including closing old credit card accounts and never having a credit card, as damaging to credit scores. (But over 80 percent knew that paying bills late or paying a mortgage late could ding their scores, and seven in 10 correctly named "exceeding a credit limit" as a bad idea.)

[Related: A rapid rescore can fix your credit score in a hurry]

The survey also revealed that many people falsely believe that recommended behaviors, including checking credit reports, can hurt scores. But financial experts recommend checking your credit report once a year, free of charge, at AnnualCreditReport.com. You usually have to pay to obtain your actual score, but getting the report alone will allow you to check for mistakes.
Take time to take care of your credit, and you'll thank yourself when it's time to take out a big loan.

The Dangers of Avoiding Credit

My 25-year-old coworker thought she had done everything right when it came to protecting her credit. She paid off her student loans early. When she does use a credit card, she pays it off in full each month. And she’s never been late on a monthly bill. Her credit score was over 750, which is considered excellent.

Despite that stellar record, multiple lenders turned her down for a mortgage earlier this year. The reason, they told her, was that her credit record was simply too light. Since she had paid off her student loans and didn’t use much credit elsewhere, they had no way of knowing whether or not she would be responsible with a mortgage. In other words, she was being penalized for living a relatively debt-free life. To make matters worse, one of the lenders told her that because she was shopping around so much for a loan, the multiple inquires into her credit report were starting to negatively impact her score.

Her experience gets at one of the great weaknesses of our credit reporting system: In order to borrow money, you have to have already borrowed money. That’s the only way you can demonstrate that you are “credit-worthy,” as the credit reporting bureaus put it. To get to the bottom of this conundrum, I spoke with Rod Griffin, public education director for Experian, one of the big credit reporting bureaus. Here are two truths and four myths about credit reports:

Truth: Having little experience with credit can make it hard to take on a mortgage.
The first thing lenders look for when assessing whether or not they want to give someone a mortgage is their credit history, says Griffin. That means you need to have open, active credit accounts in your name in order to demonstrate that you can handle credit.

Truth: Comparison shopping can hurt your credit score (a little).
For large purchases such as mortgages or auto loans, lenders expect consumers to shop around, so credit bureaus lump inquires that happen within a certain time period (usually 14 to 30 days) together. That means they have only a minimally negative impact on your credit report, says Griffin, so consumers don’t need to worry about shopping around, and in fact, it’s probably a good idea to do so.
But when someone—such as my young coworker—has a limited credit history to begin with, that minimally negative impact can make a bigger difference. And in fact, on her credit report, it says she’s been dinged for having “too many inquiries in the last 12 months.”
So what can someone in that situation do? The only solution is to wait it out, says Griffin. “You need to demonstrate over time that you handle your debts well, and that will be reflected in positive credit scores.”

Myth: Paying off your loans early hurts your credit report.
When you pay off a loan, your credit history is updated to reflect that, but it is still considered useful information and, because it’s positive, typically stays on your credit report for 10 years, says Griffin. (Negative information, such as a delinquency, only stays on your report for 7 years.)
But lenders have their own criteria, which is the problem my coworker likely ran into. Her lenders required her to have at least three open, active accounts for 24 months or longer, and her student loans didn’t count since they were paid off.

Myth: Your credit accounts need to be in your name only to strengthen your history.
You can build up your credit history with your parents’ help if they are willing to share a credit card with you, for example, or add you as an authorized user onto their accounts. “That’s a good starting point,” says Griffin. You can also put utility bills and other accounts in your name, even if your parents are the ones footing the bill.

Myth: College students should take out lots of credit cards to build up their credit report.
While college is a good time to wade into the credit waters and learn how to use a credit card responsibly, there’s no need to take on multiple cards, and in fact, taking on too much debt and failing to make payments will hurt your credit report. Limited and responsible use is probably best. That’s why Griffin and others in the credit industry are worried that the new Credit Card Act, which places restrictions on college students’ access to credit cards, could ultimately hurt young people’s ability to build their credit histories.

Myth: You need to take on debt in order to take out more debt.
It’s not a history of debt that you need, but a history of credit. That subtle distinction makes a big difference, because it means you don’t need to rack up credit card bills, you just need to use a credit card and pay it off each month, for example. “Credit and debt aren’t the same thing,” explains Griffin.
My coworker’s story has a happy ending. She was able to eventually buy a condo in the building she liked, but only with her parents’ help. Because of her limited credit record, lenders required a 20 percent down payment from her. It took her extra time (and her parents’ support) to save that much, but eventually she did, and now she’s a homeowner—with a beefed up credit record.

Why Seniors Are in Trouble With Credit

It might be time to help your parents—and grandparents—check their credit reports.
A new study, published in the CSA Journal, found that seniors are racking up greater amounts of debt and also face more problems on their credit reports than younger consumers. One in three people across all age groups reported finding some kind of mistake on their credit reports, and a greater percentage of seniors (36 percent) found errors. In one in four cases, the errors were significant enough to make an impact on credit scores.
The study also found that younger consumers were more likely to track their credit reports, while just one in four seniors did so. According to the Society of Certified Senior Advisors, which publishes CSA Journal, seniors should regularly check their credit reports, especially since they tend to have lower risk tolerance and lower earning power. Consumers can access their credit report for free at AnnualCreditReport.com.
Here are some tips to make sure your credit report is accurate:

• Get an annual checkup. Obtain a copy of your credit report—it's free once a year—at AnnualCreditReport.com. You have to pay to obtain your actual score, but getting the report alone will allow you to check for mistakes. And don’t fall victim to a site that requires payment for a credit report and then automatically enrolls you in a credit-monitoring service.

• Fix errors. Credit bureaus are required to correct errors by law. If you see a mistake, contact them, either through their website, over the phone, or by letter, to explain what's wrong. The Federal Trade Commission recommends including copies of any documents that support your position as well as the copy of the report itself, with the errors circled. The FTC offers a sample dispute letter on its website.

• Maintain a paper trail. Keep copies of everything you send to the bureaus, and request a return receipt at the post office so you know they received your mail.

• Beware of credit-improvement scams. Dozens of companies offer to help you improve your credit score for a fee, but the easiest (and cheapest) method involves a pretty basic technique: Pay all your bills on time, stay well under your credit limits, and keep accounts in good standing over many years.
If you’re not happy with your current credit rating, here are some easy ways to give it a boost:

• Pay your bills slowly and steadily: The surest way to boost a credit score is to pay bills on time and keep accounts in good standing over many years. Avoiding credit altogether can do more harm than good, since lenders want to see that consumers have experience managing credit accounts.

• Don’t co-sign for a friend or relative: Even spouses can harm each other’s credit by co-signing for a credit card. Once your name is on account, you’re responsible for it, even if you break up. So limit your exposure to that risk by avoiding co-signing accounts whenever possible.
Despite rumors to the contrary, having a good job does nothing to boost a credit score. In fact, income has no effect whatsoever on a score. The only thing that matters is your credit history—whether you pay your bills on time.
If you do run into financial trouble and have to resort to filing for bankruptcy, your credit score can begin to rebound after one year of making on-time, regular payments. Then, after seven to 10 years, it can fully recover.

The bottom line: Use annualcreditreport.com once a year to check for any errors on your report and pay bills on time. Consider helping any older relatives to do the same.

A rapid rescore can fix your credit score in a hurry

A few credit score points can mean the difference between a good mortgage rate, a lousy one or getting a loan at all. But take heart: If errors are dragging down your score, you can get them fixed, just in time for your much-anticipated closing.
Rapid rescoring, a practice employed by mortgage lenders and brokers to help lift clients' scores to qualify for better loans, allows borrowers to get accurate information updated into credit files within a few days, rather than waiting weeks or months for the credit bureaus to do it on their own.
That faster timetable could save you thousands of dollars on your loan. In the 2012 mortgage market, "Raising someone's middle FICO score from 699 to 720, for example, will save 1.25 percent in fees," says Joe Parsons, a senior loan officer at PFS Funding in California.  "In our residential mortgage practice, we frequently do rescores for borrowers. The cost is minimal, and the improvement in mortgage pricing is very significant."
"When you're in a tight lending environment, every single point counts," adds Karen Carlson, director of education for the nonprofit Florida credit counseling agency InCharge Debt Solutions. That's especially true, she says, if you have a middle-of-the-road credit score and are hoping to take advantage of today's record-low interest rates. "It's hard to qualify for a loan, but if you qualify, the rates are phenomenal," she adds. 
How rapid rescoring worksA rapid rescore is essentially "an unofficial updating of the credit file," says Wayne Sanford, president of the Texas-based credit consulting firm New Start Financial.
For example, if you pull your credit reports and see that there are legitimate errors on them that are pulling down your credit score, a rapid rescore can help you get those errors corrected much faster than if you tried to dispute them yourself.
"If you try to do it yourself by doing a dispute directly with the bureaus, then they have 30 days, technically, to investigate the dispute and get back to you with an answer," says Mindy Leisure, director of product development for Advantage Credit, a Colorado-based company that provides rapid rescoring services for loan officers.
However, if you have a rapid rescoring service get the errors corrected for you, they'll provide proof to the credit reporting agencies that the errors are bogus and have your credit score recalculated to reflect the changes, usually within a few days.  
Your mortgage broker may also recommend a rapid rescore if you have high balances on your credit cards and just need to add a handful of points to your score to get the loan you want. "Loan officers have access to something called a 'what-if' simulator," says Sanford. "A what-if simulation is basically a mathematical model that the mortgage companies work with to say, 'What if they paid off their credit card?'"
If a loan officer sees that you can boost your score by enough points to qualify for a lower-interest loan, he or she may ask you to pay down your credit cards to below 30 percent of your credit limit and have you print out proof of your new balance.
That information will then be expedited to the credit reporting agencies so they can update your file without waiting for the credit card issuer to report your updated information. "There are some credit cards that report to the bureaus at the beginning of the month, some at the end of the month, some only every other month," says Leisure. "By doing a rapid rescore, we can get that information corrected within three business days."
For Byron Nelson of Dallas, getting his score updated faster meant getting approved for a home loan that he may not have qualified for otherwise. Just seven points shy of his target credit score, Nelson paid down one of his credit cards and sent the proof back to his lender, which initiated a rapid rescore. Having previously raised his credit score from the low 500s to the mid-700s, the approval that he received soon after was a major victory. "It just changed my life, drastically, for the better," says Nelson.  

Rapid rescoring is not credit repairProponents of rapid rescoring are quick to point out that it's not a form of credit repair -- an industry whose bad apples promise, illegally, to erase accurate negative information from consumers' credit reports. Rapid rescoring should only be done through a mortgage broker or lender. "I'd be a little leery actually of anything that offered a rapid rescore directly to the borrower," says Leisure. "That almost borders on credit repair and when it comes to credit repair, I just say 'no.'"
Typically, a rescore costs between $25 and $30 per updated account. However, your mortgage lender or broker is supposed to pay for the service, not you, says Leisure.
  That's because credit reporting agencies view rapid rescore requests as an "expedited dispute process," she says and, under the Fair Credit Reporting Act , borrowers aren't allowed to be charged for disputing inaccurate information. "A lot of loan officers will tell you they are not aware of this, but they are," she adds. "It even states on our forms that the mortgage company fills out to request a rescore that the borrower cannot be charged for it."
It's also important to remember that the only information you can dispute is inaccurate information, says PFS Funding's Parsons. "What we find is when somebody's got a low credit score, they have lots of excuses for why this [negative information] is on their report," he says. However, you can't explain away accurate blemishes, such as missed credit card payments.
Nor can you make them magically disappear. "A lot of people don't realize that," he adds. They will pay off a delinquent account and expect it to fall off their report. However, it doesn't work that way, he says. When it comes to negative but accurate information, all you can do is wait up to seven years for the negative information to disappear.

Quick updates for a fast-moving world 
The good news is if your complaint is legitimate, you have a good chance of getting it rescored when you need. That's a big deal for consumers who are used to faster answers, says InCharge Debt Solution's Karen Carlson.
"In today's world of apps and instant feedback and real-time data, I think that rapid rescoring is something that people are going to expect," says Carlson. As people get used to on-demand answers, waiting a month or more for a credit score to be recalculated just isn't going to cut it. "Consumers are demanding these real-time updates in order to achieve their financial goals," she adds.

The dangers of using your home as your retirement nest egg

Somewhere out there, maybe on a block near you, is a couple nearing retirement who sees dollar signs when they think of selling their home. For them, that for-sale sign on the front lawn doesn't just represent a business transaction but rather the dream of living out their golden years in style by living off the proceeds.

Using your home as your sole retirement nest egg might be common a financial strategy these days, but it's also a risky one, say two Canadian financial experts.
"In the last five, 10 years we've seen real-estate prices go up dramatically, but they don't always go up," says financial advisor and portfolio manager Clay Gillespie, managing director at Rogers Group Financial. "Real estate is like any equity market; it will have its peaks and troughs.
"In the last five years housing prices have done better than most other assets; it seems like the only way you can make money. But that isn't always the case. It's a risky strategy because doesn't allow you to retire and generate income when you want to do it; you have to time it with the market."
Demographics will make home sales harder
Although many Canadians have done well in the recent past selling real estate, the strategy is only going to get dicier in the coming years because of shifting demographics.
When Baby Boomers are ready to sell, there may not be enough qualified buyers to purchase their homes, explains Assante Capital Management Ltd. senior financial planner Adrian Spitters.
The biggest group of potential buyers will be the Boomers' own kids, a group known as the Echo Boomers or the Millennial Generation. They're smaller in number than the boomers themselves, and many have stretched their resources to qualify for their first home using minimum down payments at historically low interest rates.
"They are now tapped out," Spitters says. "They will simply not have built up enough equity to even consider moving up when the Boomers are ready to downsize.
"When you have a potential mass wave of sellers trying to downsize their homes to shore up their retirement portfolio at a time when house sales are slowing and there are not enough buyers willing to or able to absorb the inventory of homes for sale, house sales will stagnate and prices will suffer."
Mortgages matter
Making matters worse is the fact that a lot of boomers will still be carrying a mortgage as they head into retirement. According to TD Canada Trust's "Boomer Buyers Report", only half of those surveyed have paid off their entire mortgage. Of those with a mortgage, three-quarters still owe 40 per cent, and one quarter still have a long way to go, having paid off less than 25 per cent.
"If they don't have much saved up for retirement and are still carrying a mortgage when they retire, how are they going to fund their retirement from their home? It only takes one marginal home owner who's desperate to push the prices down," he says.
"These retiring Boomers will have few options to fund their retirement. They will have limited ability to tap into their home equity to supplement their retirement income. This may leave them with few options, forcing them to sell their home, downsize, and pay off their mortgage. In some cases they may need to rent, since they may not have enough equity in their home to fund a retirement portfolio after downsizing."
Twenty per cent of Canadians are going into retirement with debt higher than $100,000, a Rogers Financial Group survey found.
"It's unwise to just use housing as your only means for saving for retirement," Gillespie says. "You have to do other asset classes. You have to have some government pensions, RRSP savings, and your own savings. There's no silver bullet.
"The problem with real-estate investment is you can't sell 1/20^th of your home," he adds. "It's not the panacea people make it out to be."
Advice for first-time home buyers
For younger people looking to get into the market, Spitters suggests being patient and building up as much of a down payment as possible by maxing out tax-free savings accounts.
"There's a false belief that the government is going to keep interest rates low and that housing prices aren't going to fall," he says. "There's a mentality now that you better buy before you get priced out of market, but don't rush into it. That could be a financial trap for people with interest rates going up.
"Real estate is cyclical, just like the stock market."

Reverse mortgages a necessity for many retirees

Not long ago borrowing against your home to meet basic living expenses was unthinkable for most retirees.

Times have changed.
With equity markets slumping, bond yields in the doldrums and longer life expectancy, the first wave of Baby Boomers is finding itself short on cash and long on life — and that's why they're turning to reverse mortgages.
Establishing a reverse mortgage to meet those needs hits home — literally. The family residence is often the inheritance parents hope to pass along to their children, but financially it could be the only practical alternative.
A home is the biggest investment for most Canadians and, depending on its location and other circumstances, it may be the most lucrative. The Canada Mortgage and Housing Corporation estimates the average Canadian home appreciates in value each year by an average 5.4 per cent over a forty-year period — and, while short-term home values will rise and fall — they believe the long-term trend will continue.
What is a reverse mortgage?
A reverse mortgage allows property owners to tap into their home equity in a safe, tax-efficient manner. The homeowner receives payments from a lender using the property as collateral. It's reverse because the bank pays you, and not the other way around.
Plan members also retain legal ownership and can remain in their homes as long as they wish.
The full amount, plus interest comes due when the home is sold by the owners or as part of their estate when they pass away.
It's tax-free because the sale of a principle residence is not taxed.
Like traditional mortgages, the borrower assumes the risk of higher borrowing rates in the future. Plan members can choose to make regular payments on the interest or add them to the total amount owing.
Also, like a tradition mortgage, reverse mortgage customers are exposed to the double-risk of rising mortgage rates and falling property values.
The Canadian Home Income Plan, or CHIP, is the dominant player in the Canadian reverse mortgage market. CHIP allows homeowners 55 years or older to borrow up to fifty per cent of the current appraised value of their homes. Plan members can borrow in lump sums or regular advances over time.
CHIP's borrowing rates are structured much like a traditional mortgage — fixed or variable for different periods of time - but are generally higher. Unlike traditional mortgages total interest payments grow and compound as the reverse mortgage grows along with the total amount borrowed. CHIP guarantees that the amount owed will never exceed the appraised value of the home.
CHIP makes a lot of its money on fees - set up costs, appraisal fees, legal fees, administrative costs and penalties for leaving the plan early.
Home equity line a better alternative?
However, there is a cheaper way to borrow against your home through a secured line of credit, also known as a home-equity line of credit. Home equity loans made headlines recently following a federal government crackdown on the total amount that can be borrowed against the equity in a home from 85 per cent to 80 per cent.
Considering the dual risks of higher interest rates and lower house prices even 80 per cent is a dangerous amount to borrow against your home, and that's why a home equity loan requires financial discipline.
Unlike a reverse mortgage, which is only required to be paid off when the house is sold, the amount owing on a home equity loan is callable at any time by the lender in some cases. In other words, the bank can technically demand repayment in full any time, forcing the homeowner to sell.
To establish a home-equity line of credit the home owner must pay legal and appraisal fees but the borrowing rate is often half to one per cent above the bank's prime rate depending on the lending institution. Unlike a reverse mortgage the borrower must pay at least the interest owing on a home equity loan — but you can get around that by borrowing the payment on your line of credit.
Borrowing against your home in any manner is not for everyone and is not the only option for homeowners who are tight for cash. Homeowners who wish to remain homeowners can simply downsize to a cheaper home and live off the difference.
Many retirees choose to sell their homes and rent. All that cash can be invested in a more diverse portfolio of securities and decrease the individual's reliance on the value of a single asset.

Could your Mortgage be an Asset?

That massive amount of debt you call a mortgage could be an “asset” in the near future.
It sounds far-fetched but imagine a scenario where you sign a 10-year fixed rate mortgage at 3.89% and five years from now rates have climbed to 6% and variable rates are not much lower.
You decide it’s time to sell. Someone buying that property would very likely be interested in taking over your payments — they might even pay more for your home knowing how much they’ll save on interest.
Mortgage assumptions, as they are called, have virtually died in this time of falling interest rates. Why would you possibly want to take over somebody’s existing mortgage when you can get a lower rate today?
“I remember the days clearly,” says Glenn McQueenie, broker/owner of Keller Williams Referred Realty, about when the terms of your mortgage were a key part of any home purchase. “In the early 1990s a lot of people had 15%, 14%, 13% mortgages.”

A number of different scenarios played out back then. Often the sellers would buy down the mortgage rate so the buyer could qualify for financing — something one bank official said they are unlikely to approve in this day and age.

Then there were the homeowners with a mortgage as low as 9% — try not to laugh. Those people had something to sell. “If there were two properties side by side and one had assumable financing at 9% compared to one at 13%, there would be a bigger draw to the 9%,” says Mr. McQueenie. “We didn’t have a lot of multiple offers back then, so this would get you more showings.”
The realtor expects we are going to see more people willing to assume mortgages and working that into any deal is going to make the negotiating skills of agents more important. “These have been more low-skilled times for realtors,” he says.
One of the factors that could drive this issue is the sudden influx of people who have been taking on a 10-year mortgage. In the past, consumers have shown almost no interest with the Canadian Association of Accredited Mortgage Professionals saying the market for 10 year products is less than 1% of all mortgages.
But people in the industry say that doesn’t take into account the last six months as the 10-year mortgage rate dropped below 4% and banks and discounters started promoting the offering.
“We have more clients going into the 10-year than ever,” says Paul Roberts, a mortgage broker with The Roberts Group, adding one advantage of the 10-year is consumers only have to pay a penalty of three months interest to get out of the mortgage after the five-year anniversary.
One key in signing any mortgage is whether it can be assumed by someone else or is portable should you want to keep it when you buy another property. Usually there are some fees of maybe a few hundred dollars with transfers.

“They key thing is whoever is taking over the mortgage, you want the bank to approve them,” says Ms. Roberts, noting you do not want to be liable if the person taking over your payments defaults. “You have to make sure you are removed from responsibility.”
She says there is little doubt that if rates go up, a low mortgage will have some sort of perceived value. “Say you had $300,000 mortgage and two [percentage points difference] every year, that’s $6,000. If you have five years left, that’s $30,000,” says Mr. Roberts, noting you not be able to sell the house for $30,000 more because it would not be appraised that high.
Farhaneh Haque, director of mortgage advice and real estate-secured lending at Toronto-Dominion Bank, says most fixed rate mortgages are assumable or portable while variable rate mortgages and home equity lines of credit are not.
“Previously mortgage assumptions were attractive because you could sell your property and your mortgage with it,” says Ms. Haque. “But the person has to assume the mortgage exactly as the terms are [written]. It’s one of the reasons mortgage ports are more popular. You have to remember if you are selling, you are likely buying another property. If you have an attractive rate and you are buying another property, you want to bring your mortgage with you.”
Either way, if rates go up dramatically and you are sitting 200 basis points below the prevailing market rate, you do have something of value even if it is debt.
“If you have a 10-year or five year [mortgage], within two or three years this will be an asset because they are historic lows. Rates will be higher, we now that, the only question is by how much,” says Benjamin Tal, deputy chief economist of CIBC World Markets.
For consumers locking into long-term mortgages, the higher rates go the more that loan may start to look like an asset.

Credit score: Why good financial behaviour can actually drag it down

So, what's your credit score? It's a bit like asking a woman how much she weighs, and the answer is fraught with just as much fear of judgment. But just like the number on the scale doesn't tell the whole story about your health, a pristine credit score is quite often not the symbol of financial virtuosity many believe it to be. In fact, some of the actions that drive up your score may actually drag down your finances.


1) The big 9-0-0

In Canada, credit scores are compiled by Equifax and TransUnion, both of which use a modified version of the credit scoring method called the FICO score. According to the Financial Consumer Agency of Canada, this score can range from 300 to 900, but exactly how your score is calculated is proprietary information (totally unfair, right?). What we do know is that a credit score is determined by your history of taking on debts and paying them off. (You can check out the precise combination of factors that go into your score here.)
So what about that canny gal who squirrels away her paycheques and pays for everything in cash? While she may be a paragon of financial responsibility by every sound measure, the bank thinks she's a deadbeat...which leads us to our next point.

2) No debt, no credit

Having a high credit score means you have to use debt, and that in itself, can be a problem — at least for some people. An open line of credit or unspent credit card balance can act as temptation or a tempest in a financial storm. Having and using credit is the best way for lenders to find out whether you're the type of person who takes care of business or walks out on her responsibilities. That makes sense. What doesn't quite add up is why those who come through with cash are stamped with a scarlet letter.


3) Testing your limits

Using a credit card will help you to build that ever-important credit history. But let's say you opt for a relatively modest credit card limit of say, $5,000. You don't want to get in over your head, right? To most people, this sounds like a reasonable use of credit. The credit scoring companies, however, may not see it that way — unless you're keeping the balance on that card under $1,200. You see, lenders like to see borrowers who spend about 25 percent of the credit that's available to them. This means if you want to use your card for a big purchase now and then, you'll need more credit, which, apparently, you aren't supposed to use.


4) Walking the credit line

Not only do credit scores favour borrowers who have more available credit, they reward borrowers who've done a lot of borrowing. The more types of debt you've had, the better — as long as you've paid it off on time, of course. This means that when it comes to your credit score, you're better off using a loan than paying in cash. The real catch-22 is that this loan will help boost your credit score and get lower interest rates on future loans. So essentially, you're paying interest to lower the interest rate on your next loan!


5) Debt's no problem

Paying off your debt is key to getting a top credit score. But there's a catch: when it comes to revolving credit like that used for a credit card or line of credit, whether you pay it all off or just the minimum is inconsequential. So while you don't actually need to pay a penny of interest to secure a good credit score, you also won't be punished if it takes you the rest of your life to pay off the balance.

6) Just in case

There's some solid truth behind that old cliché about putting your credit cards in the freezer (on ice, get it?) to keep you from overspending. Closing credit cards can actually hurt your credit score. Most sources say the ding won't be that big or last that long, but experts still advise against cancelling a credit card right before you go to apply for a loan. A credit card can represent two key aspects of keeping a high score: your credit history and your available credit. Based on what's best for your credit score, you should just tuck those pesky cards in between the ice cream and the Lean Cuisine and try to avoid temptation (good luck with that).

Credit Score Zealots Pursue Fool's Errand for Top Score

Jeff Rose, a 33-year-old financial planner, is trying to improve his credit score even though it's 780, which is 69 points above the median score.
Rose, who lives in Carbondale, Illinois, said he opened up a second credit card last year to establish another line of credit and help boost his score. He said he doesn't know exactly what actions will help or hurt his score, so wants to get it above 800 to ensure he gets the best rate if he refinances his mortgage.
Three years after the credit crisis when lenders abruptly closed accounts and cut limits, consumers, including those who have excellent scores, have become more focused on getting the number above 800. Those efforts may be futile because once consumers have FICO credit scores of 760, a higher one doesn't mean they'll get better interest rates on mortgages and credit cards or more elite card offers, said Greg McBride, senior financial analyst at Bankrate.com, a unit of Bankrate Inc.
"There's very little incremental benefit to getting a score above that," said McBride, who's based in North Palm Beach, Florida. Once consumers are above 760, "it's a lot more difficult to move the score up in any noticeable way, and little reward."
Mayank Maheshwari, 26, a business analyst who lives in Jersey City, New Jersey, said his FICO score is 780 and he's still trying to get it higher. He has a student loan that he hasn't paid off in full, although he can afford to, because he thinks maintaining monthly payments on time will help increase his score.
FICO Scores
The most common scores are based on models established by Minneapolis-based FICO, formerly known as Fair Isaac Corp., which are used to gauge a consumer's financial health. The numbers, which range from 300 to 850, affect the ability to get mortgages and credit cards, as well as the rates borrowers pay for them. The score is used by 90 of the 100 largest U.S. financial institutions, according to FICO's website. There are other scores used by lenders, such as VantageScore, which has a 501 to 990 range for measuring credit risk.
About 18 percent of 200 million consumers in the U.S. with credit scores, or 36 million Americans, had credit scores of 800 or higher in 2011, according to estimates from FICO. More than 75 million had scores of at least 750 while the median credit score last year was about 711, FICO said.
'Bragging Rights'
The percentage of consumers with scores of 750 or more has fluctuated only slightly during the past five years, said Barry Paperno, consumer affairs manager for myFICO.com. That's because consumers with high credit scores tended to maintain their good behaviors during the credit crisis, such as paying down debt and cutting expenses, Paperno said.
The score that's considered the cutoff to qualify for the best rates, however, has changed. Before the recession, it was generally 720 instead of at least 750, said Ben Woolsey, director of marketing and consumer research at CreditCards.com, a website for cardholders based in Austin, Texas.
FICO credit scores rank borrowers according to the likelihood of default and there's almost no difference in the probability of default when a consumer has a 780 or an 820, said Ken Lin, chief executive officer and founder of San Francisco- based Credit Karma. That means lenders won't price a consumer differently and extend different rates, since the risk is virtually the same, Lin said.
"If you're at 780 plus, it's all bragging rights from there," Lin said.
Credit Decisions
The average rate for a 30-year fixed mortgage was 3.89 percent in the week ended Jan. 12, according to Freddie Mac. The average interest rate charged on credit-card balances was 12.8 percent in November, according to Federal Reserve figures released Jan. 9.
A FICO score of 760 or higher on a $300,000 30-year fixed mortgage may qualify a borrower for a 3.62 rate or $1,368 monthly payment, compared with a 3.85 percent rate and monthly payment of $1,406 for those with scores from 700 to 759, according to myFICO.com. Having a credit score of at least 720 means a consumer may get a 3.89 rate on a 36-month auto loan of $25,000 and pay $737 a month, compared with 5.31 percent and a payment of $753 for those with scores from 690 to 719.
The decision to offer a mortgage and the size and rate on that loan is based on many factors about a borrower's financial history, Tom Kelly, a spokesman for JPMorgan Chase & Co., the largest U.S. bank by assets, said in an e-mail. JPMorgan's risk management approach is proprietary, and criteria that go into the decisions on credit cards may be based on income and credit history with other Chase products, said Paul Hartwick, a spokesman for the New York-based bank, also in an e-mail.
Elite Offers
While the type of mortgage product and region may impact rates, generally FICO scores above 720 receive the lowest rates, Terry Francisco, a spokesman for Bank of America Corp. in Charlotte, North Carolina, said in an e-mail. A FICO score is one of several considerations the bank uses in determining credit-card rates, Betty Riess, a spokeswoman for Bank of America, which is the second-biggest U.S. lender, said in an e- mail.
Elite card offers are more likely to be based on income and assets than solely on high credit scores, Bankrate's McBride said. When making credit decisions, American Express looks at a cardmember's credit profile, which includes total debt level, reported income, credit bureau score, credit report and payment history, Melanie Backs, a spokeswoman for the New York- based firm, the biggest credit-card issuer by purchases, said in an e-mail.
Hiccups Happen
Revolving debt, which includes credit cards, climbed in November by $5.6 billion, the biggest advance since March 2008, according to Federal Reserve data.
"There are a lot of companies out there competing for credit," said Linda Sherry, director of national priorities for Consumer Action in Washington. "Once you're there, your dance card is going to be full," she said, referring to a score of about 770.
The benefit for consumers who have good scores and are still trying to raise them is that they'll have more of a cushion in case they do something that negatively affects their scores, said Woolsey of CreditCards.com. Borrowers should also keep in mind that each lender may vary on what they use as a cutoff for qualifying for the best rates, although anything above 750 generally should be sufficient, he said.
"Some hiccups could happen and I get whacked and I'm a 720, so you shouldn't be too comfortable because you never know what might happen," said Rose, the CEO and founder of Alliance Wealth Management.
Timely Payments
Consumers with scores from 750 to 800 who want higher numbers should continue what they're doing, just for a longer period of time, said FICO's Paperno. That means continuing to pay bills on time, keeping a low amount of debt relative to available credit and not opening accounts unless needed, he said.
Making a payment 30 or more days after the due date could cut a score by as much as 110 points while applying for a new card may result in a five point drop, said Liz Weston, author of "Your Credit Score."
Borrowers should avoid using more than 30 percent of their available credit, even if they pay their balances in full, because the balance owed may be reported to the credit bureaus before the payment is due, according to McBride.
Credit Monitoring
Some things consumers do to try to raise their scores, such as paying for a credit score monitoring service, aren't worth it, said Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group in Washington. Monitoring doesn't prevent errors or identity theft and consumers may not understand the cost of the service, Mierzwinski said.
Instead, borrowers may want to just stagger looking at each one of the free credit reports they're entitled to annually from the three major credit bureaus every four months, he said.
"Credit is there to save you money," said Lin of Credit Karma, referring to how a high credit score can help consumers qualify for lower interest rates. "You shouldn't be using money to build credit."
To contact the reporter on this story: Alexis Leondis in New York aleondis@bloomberg.net
To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net.