Credit Scores/Bad Credit category archives

Credit Score Components

If you have found this post because you have either been turned down for a mortgage application or you are concerned you may, you’re in luck. You should find more information than you may have thought you need.

Since credit scores started being used to determine financial worthiness there has been a lot of talk about “unfair” the process can be. If you know a few simple facts about how to make sure you achieve and maintain an acceptable credit score, I believe you will come to agree the credit scoring models are quite fair.

There are far too many articles on the internet already about the history of credit scores, the ranges of credit scores and the companies who provide credit scores and the scoring models. It would be a waste of your time to repeat that here. Instead we are going to talk straight about how you probably came to have low credit scores and what you need to do about it.

Step One – It’s time to get to work. If you have a low score one of four things have probably happened:

1. You defaulted on a loan and it went to collection
2. You have been late on payments, probably more than one
3. You have abused your credit privileges and all of your accounts are “maxed out”
4. You have had a repossession or foreclosure

If you have lower scores and you qualify for a loan you may not qualify for the rates or terms you see advertised. Those 0.0% auto financing ads? They require almost perfect credit. Those no interest, principal only furniture company loans likewise. Those low interest rates you see advertised on your favorite mortgage website … ditto. To get the best credit treatment you need to show evidence you are dependable to repay and that’s what a high credit score can demonstrate to the lender.

Step Two – Fix it.

Credit repair companies don’t usually care for me. It’s usually because I tell everyone there are too many credit repair scams and your chance of finding a reputable company are pretty low. This is not to say there are not legitimate companies out there. I am simply saying you stand a fair chance of overpaying for something that you could have done yourself for free. You also stand a great chance of getting some really bad advice which could further worsen your credit. In the very worst of cases you could face criminal charges for credit fraud.

There is no need to be afraid of the process. You came here to get peace and that’s what I want you to have. Let me tell you there are ways to take control of your credit, restore your score and move yourself back into the qualified applicant category. It starts with paying all of your payments on time but it does not end there.

If you have applied for a home loan and you have been denied go back to the lender and ask them if they have access to a credit analyzer. If they do ask them to use it on your credit report. It generally costs about $15 to have the credit analyzer program used on your credit. You should pay them for the $15 plus your credit report. For an individual that should be no less than about $25 total. It may be a little more but should not be over about $60 and you should pay them for that service but only the exact amount of the charges.

When they have used the credit analyzer system on your credit it should make some recommendations about how to manage your balances, whether or not you need to establish new credit accounts, whether or not you should pay off any existing credit. DO NOT BLINDLY ASSUME you know what you need to do and completely pay off accounts and close them. This, in fact, could be highly detrimental to you.

If they do not have access to a credit analysis platform you should either find someone who does and follow their recommendation. I know Suze Orman likes to say “you are not your credit score” but in reality, at least to the lender, you are exactly your credit score so take care of it. Tend to it and nurture it and it will help you get the things in life you truly need and cannot or do not wish to pay cash for. Your credit score is a snapshot of your financial well-being – unless you can pay cash for what you need. Paint a good picture and be treated like you want.

The numbers have been considered and tossed around for some time and now most lenders and banks are making the official move to raise FHA minimum credit scores to 640 from a current credit score of 620. While there will almost certainly be those who claim they can and will offer insured loans below 640, the reality is they likely will not close or be extremely difficult to close – especially if the advertiser is a correspondent lender or mortgage broker.

With bankers and lenders, everything is about risk. It used to be about risk and market demands but with what has happened over the course of the last several months, the market no longer gets what it wants and — just as the author predicted four years ago — the lenders once again make the rules and the people must work within them.

Each lender has a different timeline for roll out and with the exception of less than a handful of banks, everyone is going to the 640 credit score. Even those who will still be offering solutions for borrowers with less than a 640 middle score will be charging extra points to borrowers. This means if someone with a 650 score receives a loan at a 4.5% interest rate,  the borrower with a 638 score may get a 5.5% rate. While increased pricing does not mitigate risk, it does technically create a profit drip to cover losses in that pool.

According to an undisclosed source in the secondary marketing department of a major national lender, “loans below 640 have a 10% greater delinquency rate than loans with scores about 640.” This means if the delinquency rate above 640 is 5%, the delinquency rate below 640 is 15% and that’s a big hit for any lender to take.

Make sure you are working with a lender who knows how to work with borrowers who have credit challenges because it is still getting tighter in some areas of lending.  A select few lenders do have true in-house re-scoring systems to work with borrowers who have faced past issues but who are starting over or overcoming challenging times.

Absolutely!

I have in the past written about how to increase your credit score by purchasing a credit action report and making some minor changes that can have a big positive effect on your credit score. If you have a low score, this is something you should look into.

But what if you have NO credit score? What to do then?

Even a better question – how can I prepare my kids? Should I encourage them to open credit cards in order to “build their credit history”?

You don’t need to give that advice.

It is possible to borrow money for the purchase of a home without a credit score by building your own credit history. Four simple steps:

1. Find three or four bills that you pay at least quarterly. Examples include Car Insurance, Cell phone bill, Life Insurance, Cable, Internet, Apartment rent, Energy Bill, Phone bill, Medical Insurance Payment, etc. Any bill that you pay every month or at least quarterly will qualify.
2. Pay these bills using a check or by setting up an automatic bill payment through your bank or Credit Union.
3. Make the payments on time for 12 months and be sure not to bounce any checks or allow your account to go negative during that time. All pages will be reviewed and must show good cash management.
4. Collect 12 months of your bank statements (all numbered pages).

These 12 months of account statements are your credit report.

Once you have a mortgage on your credit report and have made payments on-time for a few months, you’ll not only have a credit score, but it will soon be a very good one.

Borrowing money to prove that you should be able to borrow money is no way to start out in life. So if you’re committed to living the rest of your life without consumer debt, then don’t start.

Keep good records and you’ll be just fine.

Image: (tableatny per this)

Ever hear of the Law of Unintended Consequences?  It states that when Congress passes a law to fix one problem, it will create five more.  Government, being by and large populated with people that have not had jobs in the industries they regulate, is the poster child for “oh, I didn’t think of that.”  With that preamble, here is a recap of the latest financial reform bill, the Dodd/Frank Wall Street Reform and Consumer Protection Act.

Credit Scores: Good: You are entitled, and have been for years, to a free credit report from each of the three credit bureaus every year.  You get these at www.annualcreditreport.com.  Now, though, if you’re denied for a loan, the denying company has to tell you what your credit scores were.

Bad: Seriously, we still can’t get our scores before we get denied for a loan?  What was the point of this change?

Mortgage qualifying: Good: Um.  Well, from my perspective, there isn’t anything to put here.

Bad: All sorts of things.  If you’re self-employed, you better start paying a lot more tax, or you’ll never get a home loan again.  Stated income loans are now illegal.  Banks are now required, except in narrow circumstances, to retain 5% of the mortgage loans they make, which means there will be less capital to lend and banks will make fewer mortgage loans.  It also means that FHA loans will continue to ratchet up their market share, since FHA loans are exempt from these requirements.  Eventually, the government will own practically all the mortgage loans in the US.  Lending in Utah, where I’m based, as well as every other state, will get increasingly difficult for both brokers and borrowers, with fewer loan options and less competition among lenders.

Mortgage broker regulation: Good: Well, theoretically, if you make it so that loan officers can’t get paid based on the kind of loan they sell or the interest rate on the loan, that should lead to better deals for consumers.

Bad: Except that in the real world, the lenders are the ones that get paid, and they still do.  Now, though, instead of the money going to the loan officers, the banks get to keep it.  If you think this leads to reduced interest rates, you belong in Congress.  Coming January 1, watch for flat-fee pricing from lenders, where the closing costs will be a flat percentage of the loan.  A higher percentage than is currently normal, I shouldn’t have to tell you.  Lending will consolidate further until only the biggest banks are left.  That should make things muuuuch better.

Credit Card regulation: Good: Retailers now cannot require you to buy more than $10 of goods if you want to use your credit card.  The Fed gets the power to regulate what percentages banks, but NOT card issuers (Visa, Mastercard) can charge on purchases.

Bad: Retailers already had agreements with Visa and Mastercard requiring them to accept the card for any amount.  Now they don’t have to do that.  Transaction percentages were already usually below 2%; now they will be wherever the Fed sets them, most likely higher.  But because of the threat of the Fed and the loss of control over those fees, banks will respond by chopping out freebies (like free checking) and raising overdraft fees (seen that already, haven’t you?), and bringing back the annual fees for credit cards.

Creation of the Consumer Financial Protection Bureau: Good: There will be thousands of new federal government jobs, alleviating some unemployment.

Bad: Financial rules for mortgages, banks, credit cards, car and student loans, and everything else will now be made by unelected bureaucrats in Washington, rather than by Congress, your state representatives, or, Heaven forbid, the companies that actually have to make a living in finance.  We get a whole new government bureau for the purpose of promulgating these rules.  Because as we were all aware, we don’t have enough of them already, and the ones we do have are doing such a splendid job.

I could go on to discuss such things as the creation of the new Office of Minority and Women Inclusion, which I’m sure you would agree is an integral part of any Wall Street reform, but you get the idea.  Overall, the good is that if you are totally ignorant of even the most basic financial concepts, you may continue to be so and it will be less likely that you’ll accidentally do something stupid.  The bad is that if you are smart and do your homework, your life just got more complicated and less rewarding.  Again.  Continuing the trend toward crushing the entire population into a narrow band of mediocrity in the name of “protecting” us, Congress has served up another heaping plate of mystery meat in this bill.

Most home buyers today are not aware of a report that is available to them through their lender that will allow them to see a significant increase in their credit score based on precise action taken on their part.

Credit action reports are available at minimal cost through all three of the main credit repositories; TransUnion, Equifax and Experion.

In the past, it was a loan officer’s “best guess” as to which credit action would produce a credit score increase and then if it did, the amount of the increase was uncertain. The following proposed actions are among the more normal ones:


1.    Pay down the balance on a credit card or revolving account to an amount lower than 25% of the limit.

2.    Pay off a small medical collection for $88 and have the paid off account reported as paid.

3.    Remove a disputed late payment from the past 12 months of history on a current automobile loan.

Any of the above three credit actions will almost definitely produce some sort of positive credit score benefit.  But will the benefit to taking this action be enough?  Let me give you an example.

Many lenders who offer FHA loans are requiring a 640 minimum credit score as the borrower’s middle score (of the three repositories mentioned above).  In fact, FHA now requires a minimum score of 620 and by now, all FHA lenders are requiring this as well.

A hopeful borrower who has had some credit difficulty in the past and finds his middle score at 545 right now would normally be given a few “hints” from a lender and told to call back when he has taken care of them.  He calls around for a second opinion and finds that some of the advice he gets is conflicting.  One lender suggests opening a new credit card (which is never a great idea for various reasons) while others suggest paying off a car loan.  The disoriented borrower stumbles forward and tries again in a few months only to find that his scores have not risen all that much.  This depressing scenario plays over and over leaving the person in essentially the same place for months.

Today we can do much better.  With the credit action report tool, we can tell this borrower exactly which credit actions to take, in which particular order and estimate the actual numeric credit score benefit that will likely be seen with each one.

This gives the borrower confidence that taking these actions will produce a helpful result and thus increases the chance for follow through.

Other applications include getting better rates on conventional loans for both refinancing and purchasing; as well as increasing your standing with insurance companies that use credit scores as part of their matrix for evaluating risk and premium levels.

Put it on your list to talk to your local lender and request a “credit action report”.  Make the improvements now before you need them – it could save you both time and money.

Image(goa_entranced per cc)

On Tuesday 6/1/2010 Fannie Mae put into affect “Fannie Mae’s Loan Quality Initiative”. These new guidelines that all lenders must meet on Fannie Mae loans will affect the timely closings of many mortgage transactions. The new initiative requires lenders to perform additional verifications of the borrower’s intent to occupy, social security numbers and requires lenders to pull a 2^nd credit report just prior to closing. That last item is the trip wire that will delay closings or even result in loan denial after your mortgage was cleared for closing! The initial pre-closing credit pull will be to check for new activity, this report will not have credit score. If new activity has occured, the lender will pull a full credit report with credit scores. At that time, the new debts and new score will have to be taken into consideration. This can change your approval and your interest rate!

Let’s say that you apply for a mortgage to purchase a home, and between the time of application and closing that you went out and bought $5,000 in furniture for your new home, when the lender pulls the 2^nd credit report just prior to closing, the new debt will show and has to be taken into account. This will affect your debt to income ratios and could push them beyond the limits, or your credit score could drop significantly. This could result in your loan being denied. In the past, this would have never even been detected. Here is what you need to do to avoid sabotaging your mortgage:

Credit Cards / New debt:

Once you have applied for a mortgage, do not apply for new debt or credit cards, even if you do not plan to use them until after settlement. This will show up on your credit report and the lender will have  to prove that you have not incurred new debt or they will have to factor the new debt into your qualifying ratios. When you buy a home, you will buy items for that home. Wait until AFTER settlement!

Review your credit report:

Be proactive in the process, thoroughly review your credit report with your loan officer and report any inaccurate or MISSING information. What is missing on your report today, could show up later and derail your closing.

Save everything:

Save all of your bank statements, paystubs and credit card statements from time of application until closing. Your lender may need them.

Do not pack your financial papers!:

Keep all tax returns, W-2’s, paystubs, 1099’s, K-1’s , bank statements etc… in an accessible place. You never know what you may have to provide at the last minute with the new guidelines. Be prepared!

Gift Funds and Large deposits:

Your lender will need a paper trail on gift funds and large deposits that are not consistent with your normal deposit pattern. If you are receiving a gift, your lender will need to verify that you have received it and that the donor has the ability to give those funds. Large deposits will have to be sourced, be prepared to show and explain where that money came from. If it was from a bonus, have the check ready. If you sold an organ, have the paperwork and a photo of the scar. You get the point.

Changing Jobs:

This one seems obvious, but if you are planning to change jobs during the loan process, please inform your loan officer. If you are forced to change jobs, inform your loan officer immediately. You will sign a final application at settlement. When you sign it, you will be verifying the information that it contains. Do not commit mortgage fraud.

Do not move cash around:

Lenders must verify all funds for closing and the source of those funds. When you move those assets around, it creates a paper trail nightmare. The best practice is to leave everything where it is. Once you your lender has verified all accounts and gives you the ”ok” , then you can play musical chairs with your money.

Finally,

When in doubt, ask your loan officer. Do not take any chances with the approval of your loan. If additional verification is required, it will at the very least, delay your settlement.

There are multiple resources that experts use to determine the health of the housing market.  They use price indexes, new home sales, existing home sales and available inventory. 

However, there is one important piece of information that is not typically evaluated but is an essential piece of the puzzle.  How much can people afford?

HOW MANY BUYERS ARE BUYING AT THEIR LIMIT?

This poll shows the results from multiple loan officers across the country.  Each loan officer was asked how many of their buyers are at their buying limit.  A whopping 81% of the loan officers said that 50-100% of their buyers could not afford more.  92% of the loan officers state that at least 1/4 of all their buyers are buying at their limit or higher. 

Read the rest of this entry »

Instead of going through the strenuous process of raising your credit score we should cut to the chase and talk about how to destroy a perfectly good credit score. After all it is easy to make scores tank but it takes work, practice and good habits to build and maintain a good credit history.

In the event you are unsure of what a good credit score is suffice it to say anything above a 740 would be considered a good score by any bank or lender for most loan purposes. Scores in the range of 680 to 740 would be considered at least fair by most banks and lenders. So for the sake of our story you get to start out with a 755 credit score … just like Henry Aaron you get a 755.

Getting to a 755 takes good habits. It requires good borrowing habits, good payment habits and good spending habits. Once you achieve a 755 you will get plenty of opportunities to destroy your credit. In fact some lenders and credit card companies will be very blatant in their willingness to help you abuse your credit score. They are so glad you spent the 5 to 10 years to build your scores, maintain your payments and exhibit good spending control they will now allow you to squander your efforts pretty much just by signing a piece of paper and mailing it back or even just by phoning them and giving them a code from your offer.

To best destroy your credit without even going through the effort of applying for new credit you should simply be late on your credit cards, car payment or mortgage payment. In fact being only 31 days late with your mortgage payment should knock you down a couple of dozen points or more. If your credit is deep, meaning you have a great payment and spending history on several accounts, you will not be able to do too much damage with just one late mortgage payment. In that event you should go on to the next step.

Since you failed to do much damage to your score by being late with a mortgage payment I recommend strongly you do your best to be at least 30 days late with 2 payments. But don’t be late 2 months in a row. Skip a month and then be late with 1 other payment at least 30 days. That should do it for a few months.

Now wasn’t that easy? Chances are you dropped your scores at least 100 points in just 4 months. You may, depending on the depth of your credit history, manage to lower your scores as much as 150 points or more! Congratulations!

Hopefully you are able to recognize a spoof when you see one. The examples are fictional but the results are very true. Never be late, never over spend (keep your credit cards at the limit), be careful about what type of new credit you apply for and when, and always be conscious of your credit scores. Regardless of what Suze Orman says when it comes to borrowing, you are your credit score.

When you begin shopping for a mortgage, whether it be a purchase or a refinance, you’ll probably order a credit report to see where you stand.

Consumers seem to be pretty enamored with their credit scores, but a credit report can be quite handy for other purposes as well.

Take for example your debt-to-income ratio, which banks and mortgage lenders use to determine what size mortgage payment you can manage.

If you get your hands on a credit report, you’ll be able to see the exact obligations a lender will take into consideration when determining how much you can afford.

And if you tally up all these monthly liabilities, which include auto loan payments, minimum credit card payments, student loans payments, and so forth, you’ll have a better sense of what will be left over for your housing payment.

You may be surprised to find out that you part with $1000 or more on a monthly basis to a variety of other lenders, so knowing your obligations is a good way to avoid overextending yourself.

Check out Zillow’s affordability calculator to get a better idea of the max loan amount you can take out.

Your credit report also contains employment information, and it’s important to know what the credit bureaus think you do before telling a lender you do something else.

Additionally, you may come across tax liens or judgments that must be cleared up before being approved for a mortgage, even if you have good credit otherwise.

It’s recommended that you get a copy of your credit report long before applying for a mortgage to ensure everything is in tip-top shape (how to read a credit report).

Any corrections or changes will take time, so you never want to wait until the last minute.

You can get a free copy of your credit report from each of the three major credit bureaus once annually at AnnualCreditReport.com.

They contain all the pertinent information discussed above, but do not provide a free credit score.

(photo: thetruthabout)

In today’s world, it is more difficult than ever for consumers to qualify for a mortgage. Bank underwriting standards tighten every day, and documentation requirements are extensive and thorough.

If you are in the market to buy a home, getting pre-approved for a mortgage is one of the first steps to buying a home. However, a pre-approval doesn’t guarantee that you will ultimately get the financing if you have any change in your circumstances between the pre-approval application date and your loan closing.

It is surprising what some people will do after they get their loan approval that can potentially derail their financing and ultimately cause a mortgage denial. I remind my clients early on about these potential home buying blunders to avoid, and I hope you also take note of these things. Don’t make these mistakes!

Blunder #1: Making credit purchases after loan application, prior to closing on the home.

This one seems to be a no-brainer, but it happens. Whatever you do, do not apply for any new credit between your loan application date and your closing. This is not the time to buy new furniture on a 0% financing plan! The new credit line could affect your credit score or debt-to-income ratio, or both, and could potentially lead to a mortgage denial. If you must make a purchase, talk to your mortgage advisor first.

Blunder #2: Paying off collections

This blunder is also related to your credit score. It doesn’t sound logical, but paying off a collection account that is older than 12 months will likely cause your credit score to go down. That’s because although the account is paid off, it is still a negative item, and any accounts with more recent activity, positive or negative, will affect your credit score more than an account that has activity further in the past.

The only exception to paying off a collection is if the creditor agrees, in writing, to completely delete the account from your report if you pay it off. Even still, it’s best not to pay off the account if you already have a mortgage pre-approval, it’s best to leave everything regarding your credit alone because lenders may re-pull your credit once you are under contract, especially if there is a lag of more than a couple months between the initial application and when you go under contract on a home.

Blunder #3: Larger than $500 non-payroll deposits into your bank account

This is the most common home buying blunder that I see. Any non-payroll deposits into your bank account within 60 days of closing must be “sourced.” In other words, you need to show where it came from and that it was your money. This is most commonly a problem with people have “mattress money” or cash that they intend to use toward their home purchase. Cash can’t be used unless you deposit it into your account greater than 60 days prior to closing. If you have any funds to deposit, do it before your pre-approval application and if after, inform your lender.

Blunder #4: Changing jobs

Sometimes of course, changing jobs is necessary. However, if you intend to change jobs, or worse yet, you lose your job after your pre-approval application, inform your lender immediately. If you want to make a job change, the best policy is to wait until after your closing. However, a change within the same field is usually acceptable with an increase in pay and an explanation as to why the change was made. If you get a job offer that is too good to pass up, by all means take it, but discuss with your lender first. If you lose your job, and are able to find work in the same line of work within 30 days, you should still be approved for your financing.

Blunder #5: Making an offer on the first home you see

My wife and I made this mistake on our first home. We looked at two homes and made an offer on the second home we saw. Although the house was great, we wondered for years if we made the right decision and should have looked at more, or could have gotten a better deal. The best policy is to view at least 10-12 homes, even if you fall in love with the first one you see. Get a good sense of the market, and then come back to the first and make sure. You may be surprised at what else is out there and find something you like even more.

Good luck with your home search. Hopefully this article will help you avoid these home buying blunders!