Credit scores are the best predictor of how a homeowner will pay on a mortgage, so it’s no surprise that credit scores will play a bigger role in mortgage financing in 2008.

Actually “that date” is more clearly defined. It’s March 1, 2008.

For loans closing on or after March 1, 2008, Fannie Mae and Freddie Mac will subject the bulk of their mortgage products hefty fees when the loan-to-value exceeds 70%.

Credit scores will determine the amount of the rate adjustment.

• Credit scores between 660-679: 0.750% of loan size in fees
• Credit scores between 640-659: 1.250% of loan size in fees
• Credit scores between 620-639: 1.750% of loan size in fees
• Credit scores below 620: 2.000% of loan size in fees

For example, a person with a $250,000 mortgage rate would face a “credit-based fee” of $3,125 just because they carry a 650 credit score. It would jump to $4,375 for a 635 credit score.

Alternatively, this fee can be “financed” into the mortgage instead of paid as cash. The general rule is that for every 1.000% in fees, you can exchange it for a 0.250% increase to rate. This is just a guideline, of course — every mortgage lender has its own pricing scheme.

Because the credit score adjustment is not into effect for loans closing prior to March 1, 2008, there is plenty of time to be proactive if you think you’ll trigger the new rule.

If you are planning to purchase a home on or after March 1, 2008, it would be prudent to have your credit scores checked as soon as possible. If your scores are below 680, or teetering on the edge, take ownership of your credit and start working to improve your score.

A terrific source of non-biased credit scoring information is myFICO.com.

As a homeowner, your financial obligations extend beyond your monthly mortgage payment. Periodically, you are also required to pay real estate taxes and homeowner’s insurance premiums.

Each month, you pay your mortgage payment to a company called a “mortgage servicer” (because they “service” your mortgage each month).

In addition to the risk of not getting paid by homeowners, servicers also face two other risks related to homeowners:

1. That a homeowner’s real estate tax bill will become delinquent and will be sold to a third-party
2. That a homeowner’s residence will face catastrophic damages during a lapse in insurance coverage

But these risks can be mitigated.

Rather than assume that homeowners will pay on time, mortgage servicers can pay these bills on the homeowner’s behalf when they come due while passing that cost on as a mortgage statement line-item.

This service is commonly called “escrow”.

The escrow payment varies from homeowner to homeowner, of course. It’s the sum of the amounts due annually for real estate taxes and insurance, divided by 12 months in the year.

That yields a monthly amount which is then added to the homeowner’s mortgage statement each month, and added to a bucket of funds held on reserve by the servicer.

For example, a $3,000 tax bill with a $600 insurance policy = $3,600 in costs annually = $300 monthly paid into escrow monthly.

A $1,500 mortgage payment, therefore, would require a $1,800 check to be written to the mortgage servicer each month.

When a mortgage servicer “escrows” on behalf of a homeowner, it knows that taxes and insurance will get paid on time, thereby protecting its own interests. This is one reason why some mortgage lenders offer lower rates and/or fees for borrowers that choose to escrow.

If you’re unsure about whether escrowing is right for you, be sure to ask questions. As with all financial decisions, there are reasons to choose either route.

If you enjoy roller coaster rides, last week’s mortgage markets were a delight. Up and down mortgage rates went, trying to find a balance between inflation and recession (or maybe neither).

A major cue for traders came from a high-ranking Fed official who raised expectations for future cuts to the Fed Funds Rate.

Currently, the Fed Funds Rate sits at 4.500%.

For homeowners, it is unclear how changes in the Fed Funds Rate will impact mortgage rates moving forward. Contrary to popular belief, changes in the Fed Funds Rate are not tied to changes in mortgage rates.

This chart shows, for example, how the FFR increased more than 3.00% between 2004 and 2006 while mortgage rates only edged higher.

Proving this “detachment”, the recent drops in the Fed Funds Rate have been accompanied by only a slight reduction in mortgage rates, and only after an initial, post-Fed annoucement run-up.

The Fed next meets December 11 and is widely expected to lower the Fed Funds Rate by 0.250%.

October’s New Homes Sales report showed a modest month-over-month improvement from September.

Before we interpret that to mean that the housing market is rebounding, though, let’s consider the fallibility of the New Home Sales report.

On the Census Bureau’s Web site, there is a disclaimer about the validity of the data. Paraphrased, it reads:

A new housing unit is considered sold when a contract is signed and/or earnest money is exchanged. There is no follow up to verify if the sale was closed, or canceled.

Therefore, if cancellations are high, the New Homes Sales data can be overestimated.

Couple that with the 35-45% cancellation rates as reported by builders and you start to get the picture.

However! The disclaimer also includes the following text (again, paraphrased):

A housing unit will never be counted twice so if a previously canceled unit is later sold again, the Census Bureau does not count this sale a second time.

Therefore, when demand is strong, New Home Sales can be underestimated.

In other words, the New Homes Sales report overestimates sales figures in a weak market, and underestimates them in a strong market.

The long-term impact of October’s New Homes Sales report is unclear. The only thing that is clear is that the monthly New Homes Sales report doesn’t tell us a whole lot.