Credit

Below is information on credit using the mortgage model.  Per federal laws, I am not able to recommend what to do to improve your scores, therefore, please consider this simply as information with suggestions of what has worked for other clients.  Again, we are not credit counselors, however, our goal as well as your’s is to get you too a buying position.

What are FICO® Credit Scores?  It is a three-digit number that summarizes the positive and negative information on your Experian credit report.  Creditors report payment history to Equifax/Experian/TransUnion who apply the mortgage model to the data and create a FICO score.  These scores are used to assess your credit risk.  Below is the model used in the mortgage industry. 

fico credit score range

 

 

THE FOUR C'S OF CREDIT

  1. Credit History
  2. Capacity to Repay
  3. Cash Assets to Close
  4. Collateral

Understanding Credit Scoring:  A credit score is a mathematical model that evaluates many types of information in a credit file. It indicates the likelihood that a person will make payments on time.  The higher the score, the less the risk.

Confirm that your credit report is accurate.  A survey found 80% of credit reports have errors on them; many sever enough to cause a mortgage decline.  For questions, call the creditor or credit institution relating to your question.  Their phone numbers will be included in the credit report provided.

 

what makes up your credit score

 

FOUR MAJOR TYPES OF DEBT

  • Secured Debt: This category requires collateral; if the debt is not repaid, the collateral is forfeited. Examples: Home loans, Auto loans, Secured credit cards.
  • Unsecured Debt: No collateral is required for these loans. Examples: Standard credit cards, Student loans, Medical bills.
  • Revolving Debt: Does not have fixed monthly payments. Instead they require minimum payments based on the amount owed, and interest is charged on the unpaid balance. Examples: Store credit cards, Home-equity line of credit.
  • Installment Debt: Has fixed monthly payments which includes principle and interest payments. You pay a set amount each month until paid off, i.e. home, auto, student, and furniture loans.


HELP WEB SITES  

 

ADVERSE CREDIT

General Guidelines on Late Payments / Collections / Liens / Judgments:

  • Late Payments
    • If possible, get them removed. Some creditors will as a courtesy remove them.
  • Revolving Balances
    • Revolving balances ideally should be under 30%. There are three tiers in which you would see score improvement. 49%, 30% and 10%. Keeping the balance at 10% or less optimizes the score improvement. I would always recommend paying credit cards off monthly to avoid interest charges.
  • Collections
    • Under $2,000 usually do not have to pay.
    • $2,000 or more:
      • Pay in full before closing. (or)
      • 5% of the outstanding balance of each collection is included in monthly DTI.
      • Medical collections and charge-offs are excluded.
  • Judgments
    • Must be paid prior to or at closing.
    • An exception to the payoff of a court-ordered judgment can be made if you have an agreement with the creditor to make regular and timely payments.
    • Provide a copy of the agreement and proof of three months' payments made prior to credit approval. You cannot prepay the scheduled payment to qualify.
  • Taxes Lien from Current Tax Year (exceptions exist)
    • FHA - Must be paid unless; you can provide a valid repayment agreement and evidence to show at least 3 months of timely payments have been made.
    • Conventional - Must be paid unless; you can provide a valid repayment agreement and evidence to show at least 1 timely payment has been made.
  • Charge Offs
    • All housing and installment loans paid on time for last 12 months and no more than two 30-day late mortgage or installment payments in the previous 24 months.
    • Borrower provide a letter of explanation, which is supported by documentation, for each charge-off account. The explanation and supporting documentation must be consistent with other credit information. We must determine if the charge-off accounts were a result of the borrowers disregard for financial obligations, the borrower’s inability to manage debt, or extenuating circumstances.
  • Disputed Accounts
    • Conventional:
      • If the trade line does not belong to buyer or is inaccurate, must validate to ignore.
      • If trade line is buyers, a new credit report with the dispute removed must be obtained.
    • FHA:
      • If the cumulative outstanding balance of disputed accounts are less than $1,001, then you can leave as is.
      • If above $1,001, and the trade line is buyers, a new credit report with disputes removed must be obtained.
      • Disputed accounts not included in $1,001 limit: Has $0 balance; last late is 24-months or older; or payment is current and “Paid as agreed”.
    • USDA:
      • If the trade line does not belong to buyer or is inaccurate, must validate to ignore.
      • If trade line is buyers, a new credit report with the dispute removed must be obtained.
      • Remove disputes unless: Has $0 balance; marked as “Paid in Full” or “Resolved”; or balance owed is less than $500 or more than 24 months old.
    • VA:
      • No formal policy on disputed accounts.
      • If the trade line does not belong to buyer, or is inaccurate, must validate to ignore.
      • If trade line is yours, a new credit report with the dispute removed must be obtained.
  • Inquiries on Credit Report
    • Borrower to explain all inquiries within the last 120 days listed on credit report.
    • If new debt stated but not currently on credit report, a credit supplement showing new debt is required.
  • Debts Paid by Others  (FNMA Only)
    • Non-mortgage debt (installment loans, student loans, and other monthly debts that are non-mortgage) you can exclude the payment from the debt-to-income ratios if you receive 12 months documentation that the debt is paid by another party and has been paid as agreed. This policy applies regardless of whether the other party is obligated on the debt.
    • The policy does not apply if the other party is an interested party to the subject transaction (such as the seller or Realtor) or if the debt has been delinquent in the past 12 months.
    • Underwriting must evaluate the validity of the circumstances under which the payments are being made by another party. For example, payments on multiple student loans made by the borrower’s parent represent a common situation. However, additional investigation and documentation might be necessary when a borrower’s multiple installment and revolving debts are being paid by the borrower’s spouse who is not on the subject mortgage.
    • When a borrower is obligated on a mortgage debt – but is not the party actually repaying the debt – you may exclude the monthly mortgage payment from the borrower’s recurring monthly obligations if the party making the payments is obligated on the mortgage debt and if the borrower is not on title to the mortgaged property.  Need most recent 12 months’ canceled checks or bank statements from the other party making the payment that document a 12-month history with no delinquent payments. The party making the payments cannot be an interested party to the transaction.
  • How Long do Negative Entries Remains on Your Credit Report?
  • Credit Accounts, from 7 to 10-years
  • Judgments, 7-years from date filed, exceptions
  • Bankruptcy-Chapter 7 & 11 remain 10-years from date filed.
  • Bankruptcy-Chapter 13 non-dismissed or non-discharged, 10-years from file date.
  • Tax liens: Unpaid will not be removed. Paid remains 7-years from date release.


ESTABLISHING CREDIT

  • The easiest method is using credit cards.
    • Get your own card(s). Check online or with your local bank for what they offer. Make sure the card will be reported to the credit agencies, if not, this will not help in establishing credit.
    • Types of credit cards:
      • A Standard Card, or unsecured card provides a line of credit on the expectation that you will repay.
      • A Secured Card requires a bank deposit as collateral on the account, and your credit line cannot exceed the amount of your collateral. Interest rates are variable.
      • An Authorized Card is one that is already established, and someone adds you as an authorized user. This used to be a great way to share credit and sometimes it works, however, I suggest not depending on this type of credit to establish personal credit.
      • A Prepaid Card does not report to the credit reporting agencies so they will not help you in establishing credit.
      • Student Cards are available to college students. If you have one of these, find out if they are reporting on the credit agencies, if not, they will not help you. Remember, do not create debt, but rather establish a payment history. Suggest two cards. Put $10 on t hem, pay bill when it comes, put another $10 on them, repeating...
  • Other types of debt such as Installment debt, i.e.: furniture, auto, jewelry. They are good for credit, however, they have a start and end date, so at some point the loan will be paid off and you will lose the active credit. It will remain as part of your history.
  • Stay current on ALL payments.
  • See "Credit Information".

 

TRIGGER LEADS

We protect your personal information, but did you know when your credit is pulled; the credit bureaus will capture your information, bundle with other consumers and sell for profit?  These are referred to "trigger leads".  For about $25 to $100, your name, address, phone number, mortgage history, and even your FICO score range, are sold to unscrupulous mortgage companies who blindly solicit your business. This results in unwanted phone calls, emails, and junk mail which are in no way associated with your real estate agent or us.  Unfortunately, no legislation presently exists to prevent the credit bureaus from profiting at your expense. You can Google online for recommendations, but below are a few recommendations to help stop trigger lead harassment:

  • Put your name and phone number on the National Do Not Call Registry, www.donotcall.gov. You can register your cell phone number as well. Do this at least a month before you apply for a loan because it takes 31 days to become effective. Make a note to re-register every five years because the order expires at the end of five years.
  • To prevent mortgage lenders from sending you direct mail, you will need to register with the Direct Mail Association. Whether you register online or through mail, it will cost you $1.00, which can be charged to your credit card. Register early because the DMA distributes its lists quarterly, so it could take a while to become effective. This registration is good for five years.
  • Sign up for OptOutPrescreen, www.optoutprescreen.com. This will stop the four credit bureaus from selling your name as a trigger lead. They are: Equifax, Experian, Innovis and TransUnion. The Fair Credit Reporting Act allows the sale of your name, but opting out puts a stop to trigger leads for five years.

 

DID YOU KNOW?

  • Medical bills, #1 cause of bankruptcy filings
  • Heart disease is the No. 1 cause of death in the U.S. Every 40 seconds someone in America will have a heart attack, and every 40 seconds someone will have a stroke.
  • Just over 1 in 4 of today’s 20-year-olds will become disabled before they retire.
  • The average disability claim lasts 31.6 to 34.6 months.
  • 1,688,780 new cancer cases were expected to be diagnosed in the U.S. in 2017.
  • 30.6 million people in the U.S. each year have accidental injuries that require emergency department visits. There are 41.6 deaths due to unintentional injuries per 100,000 people.
  • There are 4 times as many days lost from work due to off-the-job injuries as for on-the-job.
  • Sweat Till You're Wet! Work up a sweat for at least 1 hour per week to enjoy a range of benefits: reduced risk of heart attack, better mood & lower blood pressure.
  • Exercise Your Brain! Dance! Studies show that regular, moderate exercise helps fight the effects of aging on the brain. No grueling workouts required!
  • Hit the Sack! It might not seem like a diet factor, but 7 hours of sleep per night not only helps you live longer, but also lowers your stress, sharpens your memory, and reduces cravings for pants-splitting foods.
  • Grab Some Nuts! They are among the best sources of healthful fats and protein. Half of a handful eaten about 30-minutes before a meal will temper your appetite and help you avoid the drive-thru.


MANAGING YOUR DEBT

  • Contact your creditors and request any assistance on addressing debt, such as a lower interest rate, varied terms.
  • Paying down debt. There are two primary approaches to paying down debt; the snowball approach and the avalanche approach. The avalanche approach will save you more money in the long run, but the snowball approach will allow you to see faster results.
  • Snowball Approach
    • Pick your bill with the lowest balance; pay as much as you can on it each month.
    • Pay only the minimum balance on your other bills.
    • When the smallest bill is paid off, combine the amount you were paying on that bill with the amount you were paying on your next-smallest bill and concentrate your efforts on paying off that bill, while continuing to pay the minimum on all other bills. Keep all bills current.
    • Continue this strategy until all bills are paid.
  • Avalanche Approach
    • Pick your bill with the highest interest rate; pay as much as you can afford to pay on it each month.
    • Pay only the minimum balance on your other bills.
    • When the highest interest rate bill is paid off, combine the amount you were paying on that bill with the amount you were paying on your next-highest interest rate bill and concentrate your efforts on paying off that bill, while continuing to pay the minimum on all other bills. Keep all bills current.
    • Continue this strategy until all bills are paid.
  • Debt Management Companies
    • I do not recommend these companies because you can do everything they can do, and I would rather you pay the money you would pay for them to address your debt.
    • They charge a monthly fee for things you can do yourself.
    • They may have a negative effect on your credit rating.