Consumers interested in purchasing or refinancing a home will pay an interest rate based on current market conditions and their ability to pay back the loan.

The borrower’s income and debt ratios are taken into consideration by the lender, as well as the predictability factor provided by credit scoring.

It’s important to have a mortgage professional in your corner who has a keen eye for solutions to improving credit scores in an effort to get the best interest rate possible.

Interest rates associated with various loan programs are broken down into schedules based on credit score ratings. While each lender has its own guidelines, it’s safe to assume that as the consumer’s credit score goes down, interest rates will go up.

A borrower with an outstanding credit rating will get what is called an A-paper loan. This type of borrower is rewarded with a lower interest rate because he or she has a proven track record of using credit sensibly and paying bills on time.

Loans designed for consumers with less-than-perfect credit, sometimes referred to as “sub-prime” loans, can range anywhere from A-minus, B-paper, C-paper or D-paper loans.

If you have already taken out a mortgage loan with a higher interest rate because your credit score was a little under par, you will really appreciate the value in doing a little work to improve your credit score. Refinancing from a D-paper loan to a B-paper classification can save literally thousands of dollars in financing fees over time, even though the B-paper loan is still considered sub-prime.

A qualified mortgage consultant will guide you through the nuances of the process of improving your credit score to refinance and save money. First and foremost, he or she will want to review the terms of the existing mortgage loan to determine if you have a pre-payment penalty clause written into your contract. In general terms, that means that if you sell the home or try to refinance before the pre-payment penalty expires and you have not already paid off 20 percent of the original loan amount, you will most likely have to pay a 3 percent fee back to the lender to compensate for the high risk and high costs incurred to provide that financing.

Next, you should obtain free copies of your credit reports from www.annualcreditreport.com and start working on improving the credit score six months before the expiration date on your existing pre-payment penalty.

There are five factors that make up the credit score, and your mortgage consultant can coach you through some basic strategies to improve your credit score. This means very conservative use of credit cards, paying off debt as much as possible and not applying for additional credit cards unless you will benefit from such action.

You will want to verify that negative items you have paid off are being removed from your credit report, and that good credit history is being reported to all three bureaus. You’ll also want to dispute any errors that appear on your credit reports and seek to have those removed entirely.

Once your credit score improves, it’s time to refinance at a better interest rate. Your mortgage professional should look for a program that carries no more than a two-year prepayment penalty so you can continue to refinance as your credit score increases. You can repeat this process until you reach A-paper status and secure the best interest rate available.

This is a strategy that also works well for first-time home buyers who do not have enough credit history under their belt to get an A-paper loan at the time of purchase. The important thing is to work with a mortgage consultant who can give you a roadmap to follow and a strategy for success in building personal wealth.

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Capital region sees biggest increase since ’90s, but home losses may ease

The shake-out is on.

Hundreds of Sacramento-area homeowners who missed their first mortgage payments early last year fueled the region’s most dramatic rise in home foreclosures since the 1990s during the fourth quarter of 2006, a property research firm said Wednesday.

But there were also indications that new instances of financial distress may be diminishing, especially in the region’s most populated counties.

La Jolla-based DataQuick Information Systems said 865 capital-area homeowners surrendered their houses to the bank in October, November and December — nearly double the region’s 450 third-quarter foreclosures.

While foreclosure activity climbed sharply, statistics also showed the rate of growth in notices of default — the first sign that homeowners are having trouble making their mortgage payments — has slowed.

The region’s 16 percent jump in default notices in the fourth quarter compared to a 25 percent jump the previous quarter — and a 37 percent rise statewide.

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Home mortgage loans throughout California went into default last quarter at the highest rate in more than eight years, the DataQuick Information Systems research firm reported yesterday.

Lenders sent notices of default, the first step in the foreclosure process, to 37,273 homeowners during the fourth quarter. It was a rise of nearly 37 percent from the previous quarter and an increase of 145 percent from the fourth quarter of 2005, said DataQuick analyst John Karevoll.

Foreclosure sales on California homes totaled 6,078 during the final quarter of 2006, up nearly 77 percent from the previous quarter and up 595 percent from the last quarter of 2005, he said. About 32 percent of homeowners who found themselves in default earlier last year actually lost their homes in the October-to-December period. A year ago, the figure was 8 percent.

The sharp rise in distressed properties “definitely reflects a softening trend in the housing market,” said Union Bank senior economist Keitaro Matsuda. “The percentage growth looks dramatic because housing demand a year ago was relatively strong. It does not necessarily reflect a housing market crisis.”

In San Diego County, there were 1,621 foreclosures during 2006, compared with 212 in 2005, a jump of about 665 percent. Notices of default here totaled 8,816 during the year, compared with 3,933 in 2005, an increase of 124 percent.

Because there are about 650,000 homes in the county, the current level of default isn’t alarming, but the market is delicately balanced, Karevoll said. Small shifts in interest rates or a slump in the economy could have big impacts, he added.

“San Diego County numbers still are relatively low, but in parts of Riverside County and San Bernardino County, we expect foreclosure activity to impact the market” to a small degree, he said.

DataQuick reported that the overall median home price in San Diego County during 2006 dropped 0.8 percent, to $490,000. The 2005 median was $494,000. The year-over-year decline was the first since a 1.8 percent drop from 1994 to 1995, when the median price was $166,000.

Greg Smith, San Diego County’s assessor, recorder and clerk, said he agreed with Matsuda that a rising foreclosure rate doesn’t necessarily mean there is a serious problem. The year 2005 “was a tremendous, unbelievable sellers’ market,” followed by a buyers’ market in 2006, he explained. That makes foreclosure figures for 2006 seem high by comparison.

Smith predicted a more balanced market in the year ahead, with 2008 becoming a sellers’ market, given a favorable lending climate.

California mortgages were least likely to go into default in Marin, San Francisco and Santa Clara counties during the fourth quarter, and most likely to go into default in Merced, Riverside and Tulare counties, Karevoll reported.

Zoltan Pozsar, an economist for Moody’s Economy.com, noted that defaults are on the rise nationwide.

“Credit quality is deteriorating nationally,” Pozsar said. “In Southern California and the Central Valley, the erosions in credit quality are mainly today due to ARM (adjustable-rate mortgage) resets, where subprime borrowers have taken on mortgages and the teaser rates are expiring. They are starting to bite.

“Other regions are experiencing greater credit erosion as well, most notably the Midwest,” he continued. “The auto industry is in trouble. In the Northeast, where declines in home prices have been the most pronounced, buyers are seeing their equity erode, so they have an incentive to default.”

Most of the California loans that went into default last quarter were originated between January 2005 and February 2006, DataQuick reported. Karevoll said he believed declining home prices, not adjusting loans, were the prime cause of foreclosures. For some recent buyers, a softening in prices has resulted in less flexibility to either refinance their mortgages or to sell their homes quickly to satisfy lenders. Others may have reached beyond their means to achieve homeownership, analysts say.

Matsuda said San Diego’s housing market had been a trendsetter for California and was likely to remain so.

“San Diego was at the epicenter of the housing boom,” Matsuda said. “San Diego may get on firmer footing before the rest of the state.”

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