Thursday, August 1, 2013

Are You Alive? Yet Another Reason to Check Credit Annually

In every class I teach, I am always telling people about the importance of checking their credit every year. Recently I had a mortgage client who had never checked his credit, but was confident everything was in good shape because he didn't ever really need credit so he had no debts. I pulled the credit, he was correct about no debts, but he was being reported as deceased. Yes, deceased, no credit score, no credit history, which if you are deceased you really don't need anyway, but this is a problem when you are alive and well.
 
He was surprised to find out about this, and has gone to work to rectify it with the three credit bureaus.  The problem is why he needs (or wants) credit now, he wants to buy a house. Can he buy a house right now? Not at this point, not until his credit report is corrected, and then we will have to see about establishing credit.
 
This is yet another example of why we as consumers need to check our credit with some frequency, a minimum of once a year. Credit is an ongoing thing, and when you need it you want to make sure it is there. Opportunity and survival, the two reasons we need credit, and the best time to by batteries is before the hurricane hits, the best time work on credit is when you don't need. As the saying goes, banks are always willing to lend you money when you don't need it, but unwilling when you really need it. Preparation prevents this problem, get your umbrella on a sunny day, don't wait for it to rain.
 
Imagine waking up one day and deciding to run a marathon. I don't mean waking up and deciding to train for a marathon, I mean waking up, going to a race, signing up and running in a marathon with no training or preparation. How is that going to go? Badly, because in all likelihood you wouldn't even be able to sign up for a marathon the day of the race, at least not a popular race, let alone go out untrained and complete the running course. Sounds ridiculous doesn't it? Yet every week I talk to someone who is doing the same thing, it just isn't running a marathon, it is buying a house, which is kind of like a marathon, there is preparation, and addressing credit now is the first step in that training process.
 

Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com

Thursday, June 27, 2013

The Needs List for a Borrower

Here is the letter I send to clients to get their file started, it tells them what we will need, covers the things to avoid doing, and is designed to eliminate issues to ensure a smooth closing:


Thank you for the opportunity to be of assistance with your financing. If at anytime I can answer any questions please let me know.

Here is a list of what we will need from you, let me know if you have any questions on anything.

Copies are sufficient, originals are not needed for your file.

Please note that it is better to send me these items as they become available rather than waiting to have everything.

- Past two pay stubs assuming bi-weekly payment, otherwise for weekly payroll four pay stubs

- Most recent quarterly retirement statement (all pages, even if page 4 of 4 is blank, we need it to complete the document)

- Past two bank statements (all pages, even if page 4 of 4 is blank, we need it to complete the document) IF YOU ARE ON AN ACCOUNT WITH ANOTHER INDIVIDUAL WHO WILL NOT BE ON THE LOAN THEY WILL NEED TO WRITE A LETTER STATING YOU HAVE FULL ACCESS TO THE MONEY IN THE ACCOUNT

- 2011 and 2012 years taxes with all schedules (if you show business deductions or loss on your taxes please let me know immediately)

- 2011 and 2012 W2's and/or 1099's

- Your work address and a phone number to the business

- Digital copy of driver's license, either a scanned copy or take a digital picture and forward, it is important that we have a clear copy

- Copy of social security card (if you do not have it I can use your W2 instead)

- Name and telephone number for verification of employment, or if your company uses the Work Number we will need a company code that you can request from your HR department

- Name and telephone number for your insurance carrier you use for homeowner's insurance, the #1 reason for delayed closings is last minute insurance quotes, get a quote during your inspection period and have your insurance agent email me at Patrick.Ritchie@FreedomMortgage.com for the mortgagee clause and loan number.

The following is only needed if it applies to your situation, I list this so we don't miss anything, if it doesn't apply please ignore:

- If you currently rent we need the name and telephone number for your landlord to verify rent was paid on-time

- For self-employed borrowers we need the name and telephone number for your accountant. Please note that your accountant will need to verify your business twice, once at the beginning of the transaction and once within 10 days of closing, it is a good idea to make sure your accountant will not be on a boat in Tahiti within 10 days of your closing.

- If you have ever been divorced we will need a copy of your divorce decree

- If you are ordered to pay or receive child support we will need a copy of the support order

- If you have filed for bankruptcy we will need your bankruptcy discharge and all schedules, if you do not have it I can access it through the federal court house with your bankruptcy filing number

- If you have a mortgage that has been modified please provide your modification agreement

- If you had a foreclosure we will need your 1099-C or 1099-A showing the property address and how your name appeared on the mortgage

- If you had a short sale we will need a copy of the HUD-1 Settlement statement to show the date of closing on the short sale

- If you have had a bankruptcy, foreclosure, or short sale we will need a signed explanation letter covering the extenuating circumstances surrounding the event (job loss, medical, divorce, family issues, etc.), why it happened and why it isn't likely to happen again.

- If you have sold a property in the past 12 months I will need a copy of the HUD-1 Settlement statement

- If you have rental properties we will need current signed copies of all leases, mortgage statements, and HOA payment statement/coupon

- If you have any other real estate that is not rented out we will need mortgage statements, and HOA payment statement/coupon (if you own it free and clear or do not escrow your taxes and insurance please provide a tax bill and copy of your homeowner's insurance policy)

- If you are a Veteran using VA we will need a copy of your DD-214

- Number of dependents and their ages living in your household

- Let me know if you have applied for any new credit in the past 90 days where the new account may not yet be reporting on your credit report

The 'do not do' list will make our transaction go smoother:

  • Non-payroll deposits must be seasoned in your bank account for 2 months, otherwise it will have to be documented to show where it came from (check stub, etc.). Do not make any non-payroll deposits into the bank account(s) you are using for this transaction, unless it can be documented with a copy of a check, statement, gift letter, settlement statement, bill of sale, etc., please do not deposit cash. Cash is bad because it cannot be documented other than with a bill of sale, if you need to deposit cash please call me ASAP so we can figure out the best approach, this will eliminate problems later.
  • Do not apply for any credit other than the mortgage application when you want to purchase a home.
  • Do not co-sign with anyone on a new credit transaction.
  • Do not apply for any 6 months same as cash financing for furniture or appliances until after closing.
  • Do not quit your job or switch employers during the home buying process, if this is a possibility let me know ASAP (EMPLOYMENT WILL BE VERIFIED AT THE BEGINNING OF THE TRANSACTION AND AGAIN WITHIN 10 DAYS OF CLOSING).
  • If you are buying a condo let me know ASAP because there are specific  requirements for condos and not all will qualifying for financing, this does not apply to townhomes or patio homes, only condos.
  • If you are planning on getting married or divorced during the transaction let me know ASAP
  • If you intend on asking for repairs in your contract have your agent contact me on the verbiage to avoid issues with the use of "credit or allowance" in the contract.

The appraisal need to be paid with a credit card once you have a contract to purchase a home, you will be called to get your credit card number to pay for the appraisal.

You can drop these items off at my office, or scan and email them to me. If you would like for me to copy these for you at my office let me know. I do need to get these documents as quickly as possible in order to move your file forward, please let me know if you have any questions or need assistance with these documents.

Thank you for the opportunity to be of assistance with your mortgage. Feel free to call or email me with any questions.
 


Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com
 

Wednesday, June 12, 2013

How is the Short Sale Reporting on the Credit Report?

How a short sale reports on a credit report is important, it can make the difference between an approved mortgage or a denied mortgage. On a conventional loan, someone who had a short sale 2 years ago or more, and had an extenuating circumstance (job loss/reduction, medical, divorce, etc.) is eligible for a new conventional mortgage. However, the way the short sale reports can make a difference with the approval.
 
Ideally a short sale will report as "settled for less than amount due" or some deviation of that, and show a $0 balance and $0 past due. In some cases the short sale was never updated and shows on the credit report as being a foreclosure that is still past due. This makes a difference.
 
I had a client who had a short sale just over two years ago, it reported on the credit report as a settled account, and  the client has a good explanation for the reason the short sale occurred. I ran the file through automated underwriting and received an approval. A different client, same facts, except the short sale reported as a foreclosure with no reference to the account being settled, this loan was not approved by automated underwriting.
 
Same scenario for both borrowers, but the way the credit report is reporting can make a huge difference, make sure the credit report is reviewed for accuracy because when someone is ready to buy they may not be in the best position due to how their credit report is reporting.
 
If someone isn't sure about how to address their short sale have them contact me to get them in position to get a mortgage.

Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.




Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com

 

Monday, March 11, 2013

FHA Mortgage Insurance Increase and More Bad News for Buyers

On April 1st, 2013 the annual mortgage insurance (paid monthly as part of the PITI) will be increasing from a factor of 1.25 to 1.35 on the minimum down 30-year term FHA mortgage.

Currently on a $200,000 loan amount the monthly mortgage insurance would be $208.33, for case numbers assigned after April 1st the new 1.35 factor on a $200,000 would be $225 per month. Not an Earth shattering amount by any stretch, but considering four years ago the factor was only .55, on a $200,000 loan amount the old mortgage insurance was only $91.66 per month. It has only gone up over the past four years and here it goes up again.

Perhaps the bigger issue is what goes into effect on June 3, 2013, at that point any new FHA loans putting the minimum down will have monthly mortgage insurance for the life of the loan. The only way to get rid of it will be to refinance out of FHA. This unfortunately is a blow to using FHA, but for many people they don't have much of a choice because they only meet the guidelines for FHA, and not a conventional mortgage.

The reason behind these changes? Survival. Without it the FHA program, which has been around since 1934, would likely fold up and go away, that would be an enormous blow to real estate, and I hope we never see the demise of the FHA program.

Just to clarify a couple things that have come up recently, I have read two articles in the past couple weeks in magazines that have made it sound like someone can only get a mortgage if they have 20% down. That is not the case, on FHA a borrower only needs 3.5% down. Also, I have read that people who had foreclosure, bankruptcy, or short sale will have to wait forever to buy again, blah, blah, not true, the universal rule for FHA is worst case scenario after 3 years or less someone is eligible for FHA financing again. So be aware of some of the misinformation out there, when in doubt consult your FHA 4155 guidelines, or contact me and I will get you the answer.

Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.




Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com

© Copyright 2013 Patrick Ritchie All Rights Reserved


Use Your Head Before You Shred

I came across an article for an upcoming shred-a-thon, and it sort of gave me chills:

PHOENIX - ABC15 is hosting a shred-a-thon on Monday, March 18 to help you protect your personal information.

If you have piles of important personal documents lying around after filing taxes, bring them to participating UPS Stores around the Valley for safe shredding.

You can bring up to 50 pounds of documents to shred for FREE during normal store hours.

Seriously? You want me to bring 50 pounds of my most important personal documents for utter destruction? Is the fear of identity theft causing us to shred documents that we need to keep?

To a certain extent I am noticing more shred addicted clients than in years past. I gave a client a list of what we would need from them for their mortgage and they informed me they shred everything, so providing documents might be a problem.

I am all for reducing the likelihood of identity theft, I teach a class about it, and included a chapter on it in my book The Credit Road Map. However, I also highly encourage people to keep important documents, some can be replaced, some cannot. I have found the best way to save documents is to scan them as a .pdf file and save them on an external hard drive, and then place that hard drive in a safe deposit box at a depository institution. That is your best filing cabinet, the one that is there when you need it, and cannot be stolen by burglars in the event of a break-in. If you are extra anal like me, put that external hard drive into a freezer bag to protect it against water. A good friend of mine had the experience of his bank burning down to the ground, and the vault was flooded by the fire department. Those with boxes less than knee high had water logger boxes, just a heads up.

Some people swear by those services that backup your computer and say your entire hard drive can be put back on if something were to happen. Guess what? I had that service, paid an annual fee for it, and when my hard drive died it was supposed to be as simple as logging in, pressing a button, and everything would go onto my new laptop. It didn't quite work that way, in fact it didn't work that way at all, my hard drive was not updating to the cloud as it was supposed to do, and ultimately nothing transferred back onto my new laptop. Abiding by the childhood adage of always be prepared I had my trusty external hard drive, in fact I had a couple of them just in case one of them malfunctioned.

Here is a list of documents either needed for the mortgage process or that should just be kept:

- Bank statements: many people have gone paperless, and can access their statements online anytime they may need them. However, if you later leave that bank you will lose access to the statements, plan accordingly. For a mortgage you only need to provide the past two months.

- Pay stubs: some people are able to access online pay stubs from their employer, some cannot, for a mortgage you will need 30 days worth of pay stubs.

- Retirement account statements: just like bank statements, most people can access this online, for a mortgage you only need the most recent quarterly statement.

- W2's and 1099's: these are harder to access online and are important to save, the past two years are required for a mortgage.

- Tax Form 1040 plus all schedules: important to save, past two years needed for a mortgage, make sure you have copies of these saved somewhere you control. If you used the free version of a tax software it likely will not give you access to your tax work at a later point, I have had a few disappointed clients in the past who relied on that, if you paid for the service, the forms should be available as long as you know your login and password.

- Divorce decree: make sure you have a copy of this, you can always get a copy from the court if needed, sometimes online, but sometimes only in person. Save a copy because this important court order is something you will need for your mortgage, and you may need in the future if a disagreement arises.

- Bankruptcy paperwork: over the years I have discovered that many times consumers are never given their bankruptcy paperwork by their attorneys, but they don't know it, fortunately it is easy enough to obtain from the federal court if you need it. Another thing I have discovered is that it is easier for me to get it for the client than for the client to figure out how to get it themselves. I use the PACER system and can have the complete set of paperwork in a few minutes, and yes, I save it as a .pdf form for the client and give it to them. The discharge and all schedules are needed for the mortgage, other than that I am not sure when someone would need their bankruptcy paperwork, but if it has been in the past seven years it will be needed on a home purchase.

- Award letter for pension: since it tells the consumer how much they are receiving for their pension this is important to keep.

- Award letter for social security: same as above.

- Lease on rental: important to keep for at least the length of the statue of limitations in your jurisdiction for contracts, just in case. NOLO has a nice directory of the statutes of limitations for all 50 states, but do not rely on it for an important legal matter, for example it lists 2 years for injury in Arizona, which is true, but I unfortunately know dog bite law all too well in Arizona and the statute of limitations is 1 year, it is a unique exception to the 2 year rule, and the story as to why is way too long to get into, so use at your own peril:  http://www.nolo.com/legal-encyclopedia/statute-of-limitations-state-laws-chart-29941.html

- Old credit reports: unless you save a copy you can't replace this important document, you only need this to protect yourself when a creditor tries to change the date on a bad debt to try to keep it on there longer than seven years. Keep a copy of your credit reports every year, it is your best protection from financial bullying, don't be a victim.

- Documentation of paid debts: this is a tricky one, because now we could cross into hoarder territory, of which I have been a card carrying member, but have since shredded my membership. Now I am just a digital hoarder with many files in my external hard drives. Seriously though, if I asked you if you had a receipt from three years ago for the DVR you returned to the cable company would you laugh at me or could you produce it? I do ask people this question frequently, because if the answer is no they may have to cough up $400 to pay a collection to the cable company, because the cable company has sent a collection to the credit bureaus saying money is owed, and the culprit often times is a piece of equipment from the cable company that either was not returned, or was returned but not credited to their account. Save those receipts and final statements.

- Documentation of unpaid debts: save this to document the age of accounts, plan B to this is saving your credit report, it is preferable to save both.

- Tax paperwork such as receipts: if the IRS comes calling you will want to have this for at least the past seven years.

The bottom-line is this, you can shred all you want, just scan the irreplaceable documents first.

Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.




Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com

© Copyright 2013 Patrick Ritchie All Rights Reserved

Friday, December 28, 2012

Danger Zone: Co-Signing Part II


Why does someone ask you to co-sign? They don't qualify, and you do, beware.

Danger #3: credit utilization

What is credit utilization and how can it destroy your credit? Credit utilization is the ratio of your available credit limit on a credit card and the current balance, you want this ratio to be as low as possible to benefit your credit score.

Father co-signs with son on credit card. Son uses entire credit line and pays the minimum payment on-time each month. Is dad effected? Yes. 35% of your FIO credit score is based on paying on-time, 30% is based on debts, which is impacted by credit utilization. Maxing out a credit card can damage the credit as much as being late, credit utilization, or balances, must be monitored and you should know your ratios based on the reported limits on your credit report. 

Every month I see several credit scores that would easily be 100 points higher if the credit card balances weren't so high. Pay them down and the score comes back up the next time the creditor reports the lower balance, it snaps back, so that is the bright side.

Danger #4: getting sued

Father co-signs on car and son loses job, doesn't make car payment. Father gets defiant, refuses to pay car payment when lender calls because "it isn't my car." After 90 days car is repossessed, sold at auction for $3,000, loan balance was $15,000, so now $12,000 is still owed. Dad refuses to pay because "it isn't his car." Past due amount is sent to collection. Dad wants to buy a house, but can't, credit score is destroyed by late payments, repossession, past due collection, etc. Dad receives summons to appear in court, doesn't show up because "it isn't his car." Creditor gets default judgment, starts garnishment process. Dad informed by employer that they have received a garnishment for his wages. The next day money disappears from his bank account, garnished by judgment creditor.

Bottom-line: if the person you trusted to pay the debt does not, you need to pay it or life is going to get rough. 

Danger #5: bankruptcy

Mom co-signs for son on mortgage, son loses job, mom tries to keep it together, juggles money to pay her mortgage, son's mortgage, and everything else. Mom realizes her efforts are fruitless and decides to file bankruptcy.

Parent co-signs for adult child on credit card, child files for bankruptcy and includes credit card, parent now has a credit card included in bankruptcy potentially reporting on their credit report and most likely owes the debt despite the fact that the co-signer filed for bankruptcy.

Never go into a co-signing situation unless you are fully prepared and able to pay the debt on your own if the other party bails out.

Danger #6: federal government naughty list

Parents co-sign on federally backed Stafford Loan for child going to college. Child attends for a few semesters, spends most of the money during spring break and for cool stuff. Takes a break from college to regroup, student loans eventually become due after 6 months of separation from school. Child not making enough money to pay student loans, puts loans into forbearance for up to three years, meaning no payment due. After three years of avoidance, the loans now need to be paid. Department of Education informs child and parents that the Higher Education Act gives them the ability to bypass the court system and garnish wages directly, and to take any tax refund owed. Oh, and by the way, student loans are not dischargeable in bankruptcy.

Something to know: Stafford Loans (federally backed student loan) are not credit based.

Students can get Stafford Loans based on need with no co-signer since the loan program is not credit driven, a credit report is not even accessed. There is no reason to co-sign on a Stafford Loan, in 2012 for a 4-year undergraduate degree a student can borrow up to $57,500, for graduate school up to $138,000 (includes amount used for undergraduate degree). PLUS Loans for graduate school and private loans are credit driven and some students may not be able to get them on their own without a co-signer. 

Let me tell you a secret, add your student onto a credit card that will report as an authorized user on their credit report, ask the creditor if they will report it, if not call one of your other cards until you find a winner. The preferred card has a seven year or more history, low balance, and is paid on-time. Example, 22 year-old added to mom's credit card with a 15 year history, 1% credit utilization ratio, and always paid on-time, the result, an 817 FICO score for 22 year-old, mom and dad no longer need to co-sign on PLUS Loan for graduate school or private loan.

On the Sallie Mae website under FAQ the question "can I get a student loan with no credit"? is answered, "yes, the ones for students do not require a co-signer or credit check." Can a student get a student loan from the government even a day after bankruptcy? Yes, the answer is yes, there is no credit check for a Stafford Loan, but tell your kids about the ramifications of being chased down by Uncle Sam for federal debt if it is not paid back. 

Student loans are a topic of their own, so I leave you with this, before you co-sign for anyone, think long and hard about whether you are willing to part with the money, because you may end up paying it yourself. 

Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage for purchase or refinance in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.




Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com

© Copyright 2012 Patrick Ritchie All Rights Reserved





Danger Zone: Co-Signing Part I


Want to live on the edge? Want to wake up one day to find your financial world in disarray? Here is the recipe: co-sign on a loan.

Danger #1: payment is not made on-time

Father tempts fate, co-signs with son on car, safeguards himself by requiring son to set up automated payments, these payments do not go through properly despite the money being in the bank, car loan reports 30 days late. Credit score declines significantly. Tempted fate one, co-signing father zero, father now spends his days on the phone trying to right the wrong with the automotive lender and the bank the money was supposed to be automatically withdrawn from. Tempted fate two, co-signing father zero, as father wastes his time and encounters massive frustration trying to right the wrong.

If I co-signed for someone, which would probably be limited to my children, I would have them write the check to the creditor, give it to me, and I would send it in. I would also login online or call the automated phone system to make sure the check was good, just to make sure the payment has officially been made. Slightly anal behavior? Yes. Smart? Absolutely.

Danger #2: too much monthly debt lowers what I can qualify for when I need to borrow money

Why not just have my co-signed obligor give me the cash so I can pay it myself. Wouldn't that be easier? It would be easier, but there is a specific reason I would not do that. Debt-to-income, all monthly debt payments owed on my credit report count against my debt-to-income ratio, which translates into this: the more monthly payments I show on my credit report the less I qualify to borrow right now. 

This impacts how much of a mortgage a home buyer would qualify for. The reason I want my co-signer to write a check to the creditor is because I want to be able to prove they have paid the monthly payment on their own, from their own checking account (meaning their funds, not mine), and I need the past 12 months cancelled checks to prove this, resulting in the debt being excluded from my debt-to-income ratios when I apply for a mortgage. Let's look at an actual dollar difference by playing make-believe:

Income $60,000/12 = $5,000 gross monthly income

Total debt-to-income ratio $5,000 x 45% = $2,250 (all debts including mortgage should fall inside this amount, the actual ratio ranges from 36% - 50%, I am using 45%)

Debts include car payment of $450, credit card minimum payments $150, co-signed student loan $200, and co-signed car loan $350.

Total debts with co-signed debt = $1,150

Total debts without co-signed debt (because the debts are paid by whoever the other co-signer is for the past 12 months, out of an account in THEIR name that has no trace of MY name, and can be proven with cancelled checks or automated payments shown on 12 months bank statements) = $600

$2,250 - $1,150 = $1,100 for a mortgage payment with the co-signed debt

$2,250 - $600 = $1,650 for a mortgage payment without the co-signed debt

Purchase difference? Assuming monthly taxes of $150, homeowners insurance of $50, and mortgage insurance of $150, and a rate of 3.25% fixed for 30-years: 

Taxes and insurance = $350

With co-signed debt $1,100 - $350 = $750 Principal & Interest = $172,332.06 mortgage amount

Without co-signed debt $1,650 - $350 = $1,300 Principal & Interest = $298,708.90 mortgage amount

A difference of $126,376.84, just due to co-signing, voluntarily being saddled with more debt, wow, what a difference, and how disappointing for the person who cannot get what they want because of co-signing.

Do you see the dangers of co-signing just based on debt?

Do it right, if you co-sign make sure the payment is made by the other party from their account by a means that can be documented for the past 12 months, and finally, is paid on-time every month.

Read more about co-signing in Part II.

Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage for purchase or refinance in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership. 




Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com

© Copyright 2012 Patrick Ritchie All Rights Reserved





Saturday, December 8, 2012

Accounts in Dispute on Credit Report = BAD


Accounts in Dispute on Credit Report = BAD

Imagine going through airport security, would you rather walk through the metal detector and be on your way or go into a small room for a slow in-depth search of you and your luggage?

For most mortgage applications the file passes through automated underwriting and moves on through underwriting to closing with relative ease, like the majority of passengers filing through security at the airport. However, just like the occasional passenger who left a bottle of liquid in their carry-on by mistake, or forgot to remove their collection of metal elements from their pockets, there are certain things that can trigger a deeper look at a mortgage file. One of the most common I encounter is when there are 'accounts in dispute' listed on the credit report, this classification on a credit report triggers a manual underwrite. 

A manual underwrite is when the automated underwriting is tossed and the file has to go through the full body cavity search, often times it turns up nothing, but in regards to those pesky accounts in dispute, they will likely have to be paid barring overwhelming documentation that they are a mistake, whereas if they were not in dispute they may not have had to be paid.

What are accounts in dispute? 'Accounts in dispute' is a classification of accounts that have been disputed by the borrower, but have not been resolved. Consumers should always dispute accounts on their credit reports that are incorrect, but the problem is with disputing accounts that are correct.

When someone disputes an account that is correct it will likely remain on the credit report as an 'account in dispute' rather than falling off. When an account is in dispute it is not supposed to score in the FICO score during the first 30 days while the dispute is going on, so it is a trick the credit repair industry uses in an attempt to circumvent the system: dispute everything whether it is correct or incorrect.

The problem with this is that not everything comes off the credit report, and those accurate accounts that do happen to come off will be put back on eventually. Credit repair as an industry is a waste of money for consumers, people need credit education so they know how to correct their credit reports when the need arises. My book The Credit Road Map covers the process of correcting the credit report, if you don't have it on your shelf come by my office for a complimentary copy. I always leave copies for real estate agents on my filing cabinet, if I am out just tell the front desk I left a copy for you in my office on my black filing cabinet. Take a copy for yourself and some for clients. 

People spend thousands of dollars on credit repair that gets them nowhere, and leaves accounts in dispute on their credit report. So what should they be doing? If the account is inaccurate, dispute it until it is off the credit report. If the account is accurate, do not dispute it, either pay it or don't pay it. If the client plans on buying a house in the next 12 months I would like to assess their credit report before they do anything so I can advise them on what to do. If their credit score is high enough, my advice will likely be to leave the report as it is, if there are collections, they have already done the damage by being reported, so paying them is not necessarily going to help much. If there are other past due debts out there that have not been reported on the credit report yet I want them to pay those immediately before they report and damage the credit score. Those become priority debts because they can knock the score below 620 and now the client may not qualify for a mortgage.

Here is the tale of two clients, both have a few thousand dollars in collections, the collections are accurate, the debts are owed, there is nothing incorrect about the collections. One client has done nothing with the collections, no disputing, has not paid the debts, but his score is high enough and is income is enough to qualify for a mortgage. The underwriter determined that because the collections were medical she was not going to require them to be paid.

The other client had about the same amount of debt, mostly medical collections, but had paid a credit repair person over $500 to 'repair his credit.' All the bad debts he owed were disputed, in the end they were not removed from his report, they were all classified as 'in dispute.' Due to the in dispute status the file is red flagged and has to be manually underwritten instead of automated, the mortgage was still approved, he had a high enough FICO score and had enough income, etc. The difference was that he had to pay the collections at closing in order to 'resolve' the dispute, if these were not in dispute in the first place he probably would not have had to pay them if he chose not to. If he did not have enough money to pay the collections this would have been a problem for the client.

In summary, we want to avoid manual underwriting when possible, and the best way is to make sure clients are not frivolously disputing accurate information on their credit report.

Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.




Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com




© Copyright 2012 Patrick Ritchie All Rights Reserved






Lender Paid Closing Costs: Vital in a Seller Market


Lender Paid Closing Costs: Vital in a Seller Market

I have a handful of clients who have been writing offers to no avail for the past year. Recently one of those clients requested an updated Pre-qualification Form, they were going to make their 23rd offer in the past 12 months. I don't  mind sending out updated Pre-qualification Forms, it's part of my job as a Loan Officer, but I decided to have a heart-to-heart with the client about their offers. They were always asking for the seller to pay the closing costs, in this market they might have a better chance of winning the Power Ball drawing.

I suggested rather than going with the rock bottom lowest rate of 3.125% on a 30-year fixed FHA, instead go with 3.25%, only a difference of $14 a month on a $200,000 loan amount. The appeal is that at 3.25% for the pricing that day, there is a premium (yield-spread-premium, YSP, or also called rebate) of 2%* of the loan amount that can be applied toward closing costs, so on a $200,000 loan amount the buyer can get back $4,000 to apply toward closing costs, that should be enough to cover the closing costs in most situations, lender fees ($995 flat fee for Freedom Mortgage, much lower than most of the industry), title/escrow fees, homeowners insurance, appraisal, property tax escrows, flood certification, recording, and in some cases even a home warranty, home inspection (if they will bill at close of escrow), termite inspection, termite treatment, etc. if there is enough premium, the higher the rate the more of a premium the buyer can have back toward closing costs. On that same day a borrower could have had a rate of 3.99% and received 5%* of the loan amount back toward closing, on a $200,000 loan amount that is $10,000, way more than is necessary. 

The reason I am writing about this is because as a lender I work with buyers, and if buyers don't have accepted contracts it does none of us any good. When a buyer is asking for closing costs from a seller in a seller's market it is time to forge a better game plan, and the game plan is for premium pricing to cover the closing costs. It works great, but keep in mind that to use it your client needs to be in tune with what the premium pricing is for that day so if the offer is accepted the rate and premium can be locked in before it changes.

Are all lenders created equal? No. Not all lenders give this premium to their clients, some of them stick it in their pockets instead, I know this because when I talk to former colleagues this is the stuff we talk about, boring yes, yet insightful. So you and your clients should be asking about premium pricing and whether it is going back to the buyer or not. Specifically ask, "at what rate could the closing costs be covered by the lender?" If the answer is, "we can't do that," my number is 480-203-4641, we CAN do that. We also do FHA and VA down to a 620 FICO score, some lenders are as high as 640 - 660 for their minimum FICO score, this is known as a bank overlay, which vary by lender.

 Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.




Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com




© Copyright 2012 Patrick Ritchie All Rights Reserved






Monday, November 26, 2012

Story From the Vault: Surprise Medical Collection

The majority of collections I see on credit reports stem from medical debts. The collection industry has published reports showing medical collections account for roughly 40% of all collections. The problem with debts related to medical services is that the billing is sometimes lackluster, making some of the collections inaccurate, and thereby decreasing credit scores in error. One of my clients applied for a mortgage to finance the purchase of a vacation home, she told me that her credit was good, her score was typically in the high 700 range around 780, but sometimes reached 800.
 
When I pulled her credit I discovered she had a 705 FICO score, which is not a bad score at all, but cream of the crop is 740 and up. If someone has a 740 FICO score they will always get the best interest rate as it pertains to credit. A 705 may or may not get the best available rate, it varies by the specifics of the scenario.
 
She had a 705 for one reason, there was a collection on her credit report for $381 from a medical provider. I gave her a copy of her credit report and told her about the collection, she was furious because she said it should not be on her report. Where do we go from here?
 
First off, the collection is not going to prevent her from getting approved for the mortgage, so we are safe there. However, will she get the best terms possible? The answer would be no if the best terms for her scenario require a 740, but even then, the terms for a 705 FICO score will still be good, just not necessarily the best. Imagine it this way, I have two pizzas, one came from the freezer aisle at the grocery store, the other was made fresh at a low-end pizzeria. I am going to say they are both good because they are pizza, but I will say the fresh made pizzeria pizza (740 FICO) is better than frozen pizza (705 FICO). It could be worse, it could be school cafeteria pizza, which I am going to compare to a 660 FICO, still pizza, just not great pizza. A FICO score under 620 is just a dry cracker with tomato paste on it, not even close to being pizza.
 
Now that I have you hungry for pizza, let's move on. She is mad and confused, why would this be on her credit report?
 
She had only experienced a single medical issue recently, an injury on the job that sent her to the hospital. Keep in mind that collections can come from years ago and appear out of the blue, I have another story for that at another time. She called her employer to inquire about whether the bill had been paid, and confirmed that it had. Next she contacted the medical facility that had placed her account in collection to see why they had sent a paid account to collection. They acknowledged that the account had been paid, and that it should not have been sent to collection, and they promised to remove the collection within 30 days from the three credit bureaus.
 
In the meantime she is trying to close on a vacation home in less than 30 days, and her FICO score is at least 75 points lower as a result of the error made by the hospital. My recommendation to avoid this issue is to apply for a mortgage early to make sure there are no issues on the credit report, and if there are, there is still time to address it and fix it. Early meaning that if you know you are going to be in the market for a home in the next 90 days apply now or earlier to guard against issues, always check your credit report at the minimum once a year, and always follow up with medical providers to get a final billing reflecting your account paid in full to be certain there is nothing leftover unpaid by insurance. NEVER ASSUME ANYTHING WHEN IT COMES TO MEDICAL BILLS, I see these things bite people every week, it is unfortunately common, be aware.
 
In the end there was no time to get the collection removed before she needed to close. There is the possibility of a rapid rescore when there is an error, which could correct the report internally within 48 - 72 hours, but the collection agency would not provide the letter required for a rapid rescore. Ultimately her interest rate was slightly higher (1/8), the result being an increase to her payment by $14.05 per month. $168.60 each year more because of the collection, $5,058.00 over the term of her 30 year mortgage. It adds up, but despite the monetary cost, the bigger issue is we have a person who has always done the right thing, paid her bills on time, never abused credit, but when her credit counted it wasn't at its best.
 
The moral of the story, you can have perfect credit at this moment, but will you watch your credit to make sure it is perfect when it counts? Will you apply for a mortgage in advance to make sure there is time to rectify any surprise issues, such as errors knocking down your FICO score? The biggest question is, will you use a loan officer who cares enough to help you address mistakes when there is enough time?
 
Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.





Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com

© Copyright 2012 Patrick Ritchie All Rights Reserved

Saturday, November 24, 2012

How Much do You Qualify For?

Lenders use calculations, or ratios, to determine the level of housing and overall debt, which can realistically be carried by a borrower.

Debt ratios are calculated from gross monthly income and monthly debt figures.  Borrowers can generally afford to spend no more than 29% of their gross monthly income for housing debt and 45% for overall debt (36% - 50% is the possible range). Every mortgage approval is different, so only rely on this as a guide, every approval is tailored to credit, down payment, reserve assets, etc.

To determine the amount YOU qualify for, we will use the Housing and Debt Ratio Worksheet below.  You will need to understand some terms used on the form first.

Gross Monthly Income
This is your total stable and verifiable income from all sources.  This is the amount before taxes and insurance premiums are deducted.

Net Income
This is what is left of your gross income after taxes, insurance premiums, and other deductions.  Essentially, this is your take-home pay or money that comes into your household from all sources (including AFDC, Social Security, etc.).

Monthly Installment Debt
This is an account that has a specific term (length of time to repay) and a set payment per month.

Revolving Debt
These are accounts where the balance and the monthly payment may change each month.  Credit cards are examples of revolving debt.

Housing Debt Ratio
This ratio determines the amount of gross monthly income that can be applied to principal, interest, taxes and insurance.  Many lenders use 29% as the maximum for the housing debt ratio.

Total Debt Ratio
This ratio determines the amount of gross monthly income that can be applied to all monthly debts, including housing.  This includes things like car payments, finance company bills, credit card payments, and any debt that has more than 10 payments left. 

The maximum percentage used by lenders is generally 41%; however, strong credit scores or strong assets can allow a borrower to exceed 41%.  Qualifying for up to 50% is not uncommon.

A person coming out of bankruptcy, foreclosure, or a short sale is likely going to top out around 36% Debt-To-Income as a worst-case scenario; whereas someone with great credit and asset reserves may go up to 50%.

These are the four parts of a mortgage payment:

PITI
P: Principal
I: Interest
T: Taxes
I: Insurance (includes Hazard and Mortgage Insurance)

The amount that is paid monthly for taxes and insurance is usually put an escrow account. Homeowners Association dues (HOA) are paid separately to the property management company and are not part of the monthly mortgage payment, although it is used in qualifying.

Housing and Debt Ratio Worksheet

Borrower’s Gross Monthly Income           $2,000
Co-Borrower’s Gross Monthly Income   +$1,000
Total Gross Monthly Income                 $3,000

Monthly Debt Payments:
Car Payment                                           $350
Credit Card Payment                              + $25  
Total Monthly Debt Payments                 $375 (A)

Housing Debt Ratio:
Gross Monthly Income                           $3,000
Housing Debt Ratio                                 x 29%
Estimated Monthly Housing                    $870 (B)*
Total Debt Ratio:
Gross Monthly Income                           $3,000
Total Debt Ratio                                      x 41%
Estimated Total Monthly Expenses          $1,230 (C)

Available Income Indicator:
Estimated Total Monthly Expenses                         $1,230 (C)
Total Monthly Installment & Revolving Debt             -$375 (A)
Available Housing Income                                  $855 (D)*

*The amount a borrower can spend on principal, interest, taxes, and insurance (PITI) is the smaller of lines B or D.

Housing and Debt Ratio Worksheet

Borrower’s Gross Monthly Income         _____________________

Co-Borrower’s Gross Monthly Income  +_____________________

Total Gross Monthly Income                 =_____________________

Total Monthly Debt Payments               =_____________________ (A)

Housing Debt Ratio:

Gross Monthly Income                            _____________________
Housing Debt Ratio                                  x 29%

Estimated Monthly Housing Expense     =___________________ (B)*

Total Debt Ratio:

Gross Monthly Income                           _____________________
Total Debt Ratio                                      x 41%

Estimated Total Monthly Expenses       =_____________________ (C)

Available Income Test:

Estimated Total Monthly Expenses     _____________________ (C)

Total Monthly Debt Payments           -_____________________ (A)

Available Housing Income                = _____________________ (D)*

*The amount you can afford to spend on principal, interest, taxes, and insurance (PITI) is the smaller of lines B or D.

Are You Ready?

Buying a home requires a lot of financial considerations:

  • Qualifications are based on gross income, not take home.
  • It is important to realize that just because a lender approves you for a specific loan amount, only YOU can determine if YOU can afford the monthly obligation.
  • Always get a fixed rate mortgage, an adjustable rate mortgage carries the danger of increased payment later and makes budgeting more difficult since the rate can go an increase up to 5% over the life of the loan from where it started.

The best way to see if a mortgage is affordable is to ask yourself…

  • How much am I paying in housing now?
  • How much am I paying in utilities now?
  • What will be the monthly difference when I buy to what I am paying today?
Always assume there will be minor repairs/costs, budget for $100 a month in housing expenses for
pest control, weed control, landscaping, the unknown, etc.
  • Can I set aside the increase into savings for 6 months prior to buying the property to see if I really can afford it?
Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.




Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com



© Copyright 2012 Patrick Ritchie All Rights Reserved

Tuesday, October 2, 2012

Credit Protection & Prevention: The Best Offense is a Good Defense

When it comes to credit, prevention and protection are the best methods to maintaining good credit. What that means is making sure the bad stuff never gets on there in the first place, prevention. One method of protection is to make sure your credit score is so high that if something does slip through the cracks it won’t be completely detrimental. I have always told my students and readers their goal should be too reach an 800 FICO® score not because it will necessarily give them the best rate (typically anything over 740 will accomplish this), but because it will protect in the event of something bad appearing on the credit report. Obviously paying our creditors on-time is the main way to both prevent and protect our credit from the #1 bad thing, late payments, from occurring. However, there are many other bad things which can happen, so we need to be on guard.
 
A common bad thing is a collection, probably the most common. Medical collections make up the bulk of collections, 42% in fact, according to ACA International Top Collections Markets Survey. Typically they are small amounts, in many cases less than $250. However, no matter the amount, a collection will cause harm to the credit score, therefore potentially costing us more money when we seek to borrow money. The nature of the collection for many people is that if they knew they owed it they would have just paid it. I am going to cite a personal example that happened to me a few years ago.
 
My son was born in mid-2004; at that time I was writing checks to anyone who said I owed them money. If there is a downside to having a child it is the medical costs involved. Insurance may cover some procedures, but there are still deductibles, not to mention out of network medical providers who do not have a contractual with your health insurance provider. So out of the blue a call is received in November 2008 from a lady at a medical collection agency claiming $260 is owed to a pre-natal medical provider. Of course this sounded fishy to me. The first step in answering the claim of a collector, request a validation of debt. Provide me with documentation in regard to the debt, show me I owe it. That being said, there is always the possibility they are looking for a different person. For example, there is another Patrick Ritchie in the Phoenix area. I used to do a once per semester class at Scottsdale Community College, I received a check for an unusually higher amount than normal. Upon contacting Human Resources I discovered my check was mixed up with the other Patrick Ritchie, who apparently works there full-time in some capacity. We all know mistakes happen at times.

Since mistaken identity is always a possibility, request a validation of debt. It is a legal right under U.S. Code TITLE 15 > CHAPTER 41 > SUBCHAPTER V > § 1692g Validation of debts. Knowing this I made the request. A few days later I was provided with information pertaining to the service for which they say I owe. It shows the debts are from December 2003 and January 2004 for two separate ultrasounds. I save everything, so I went to my filing cabinet to dig out what I had. To verify I had not missed anything I also called my health care insurance provider to see what its records showed in regards to this claim. The insurance company showed the two claims as being paid. I called the pre-natal medical provider to have a conversation with them directly about the debt. They claimed they did not show receipt of payment. I had the insurance company fax me proof of payment. I drove to the medical provider’s office to show them my documentation. What I discovered was that they were out of network for my insurance company, so the insurance company had sent the payment to me instead of the provider. The provider continuously billed the insurance company, never me, and eventually gave up in June 2005. I never received a bill from them for any amount. As it turns out I had their money, or actually a portion of the money since the entire billed amount was not paid by the insurance company. So I did owe them the money.

To remedy it I wrote a check directly to the collection agency. Their bait was that the debt had until December 31st, 2008 to be paid before it would be reported on the credit report. As strange as the collection call was, it was not a scam, but it certainly seemed unusual. Knowing how many checks I had written for any invoices received at the time, it seemed extremely odd that I would have ignored a bill from this particular medical provider. The reality is that I was never sent an invoice for services provided. In late summer of 2004 I did move to another house, although my mail was forwarded to the new address. In discussing the situation with the billing department of the medical provider they could not show that an invoice had ever been sent out to me. Coincidentally, the same medical provider was used for ultrasounds in early 2005 for a subsequent pregnancy which resulted in a miscarriage. According to their records, those ultrasounds were all paid for, yet somehow, even though I was there writing checks a year after the first pregnancy, they never brought up the fact that I still owed them money.
 
Do you see why collections are so frustrating? Sometimes things just fall through the cracks, plain and simple. I will say that both the collection agent and medical provider were helpful in assisting me to figure this all out. This situation was fortunate for me; they were able to reach me before it was submitted to the credit report. Had they been unsuccessful in reaching me, the collection would have just been placed on the credit report. Then I would have been contacting them the next time I went to apply for a loan and this came up. I have heard this a million times, “This is impossible, there cannot be a collection on my credit report, I pay everything I owe.” Of course we do, but if we never receive a bill and a debt comes up four years later it can become a problem.

What kind of problem could it have been? My credit scores typically range between 780 – 810; I would think a collection would have knocked me down about 50 points. So my worst case scenario might have been a credit score in the 730 range. Still a good credit score. This is why we should always shoot for an 800, it reduces the fall if something unforeseen should occur. What about my worst case scenario?

My worst case scenario would have been if the collection had been reported, my credit card companies might have picked up on the derogatory account. Our credit card companies check our credit reports periodically to assess risk, typically every quarter, but possibly monthly. The good news is that this has no impact on the credit score because it is considered a “soft” inquiry, which means I did not initiate it, nor am I applying for credit. If I am deemed a higher risk my credit card limit could be dropped and/or my interest rates could be increased. This is known as universal default, it has come under a lot of scrutiny over the years. Higher interest rates do not impact my credit score; however, lowering my limits could have a majorly adverse impact. We always want to keep our credit balances as low as possible, the benchmark is under 50% of the available limit (always check to see what limit is being reported on your credit report, do not assume that what is on your credit card statement will always be what is reported to the credit bureaus). If my credit card limits were cut as a result of a collection being reported this could have a much worse impact on my credit score, potentially knocking my score down in excess of 100 points. I will get more in-depth on this in a future posting.

The point of this is to show the importance of protection and prevention in regards to our credit.
 
Doing so will ensure you are always on top of your credit when you need it.
 
Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.




Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com



© Copyright 2012 Patrick Ritchie All Rights Reserved

How Will Future Lenders View me After Foreclosure, Bankruptcy, or Short Sale?

Overcoming the circumstances that caused the previous financial issues requires knowing what to expect when reapplying for a mortgage in the future. It is important to understand the process and to be informed about the details of the process in order to become a homeowner again.
 
How long do I have to wait before I can get a mortgage? Most people will use an FHA mortgage because it is the more forgiving than a conventional mortgage, although conventional may allow someone who had an extreme hardship to be eligible 2 years after a short sale, but for the most part FHA is likely to be the route to owning again:
For FHA:
  • Foreclosure – 3 years
  • Deed-in-lieu of Foreclosure – 3 years
  • Short Sale – 3 years, in most cases
  • Chapter 7 Bankruptcy – 2 years
  • Chapter 13 Bankruptcy – 1 year
  • Credit Counseling Plan – 1 year

Coming out of a major financial setback can feel like an uphill climb, but it is not insurmountable. In fact,  there will be a point in time and beyond when nothing from that time frame of financial difficulty will even appear on the credit report. For most items it will expire off the credit report within 7 years, the worst case scenario is 10 years when it comes to a Chapter 7 bankruptcy.
 
Late payments, collections, charge-offs (debt written off and sent to collection), foreclosure, defaults, chapter 13 bankruptcy, etc. will all come off the credit report after 7 years.
 
Chapter 7 bankruptcy falls off the credit report after 10 years.
 
It is critical, after a serious derogatory credit event, to be PERFECT moving forward. If you go through a foreclosure, but then for the next 12 months following you have other derogatory items reported on your credit report, this can severely lessen your likelihood of being approved for a mortgage 3 years later. In the case of a bankruptcy, you get a second chance, but even one late payment or one collection after the bankruptcy could derail the possibility of getting approved for a new mortgage.

When there has been derogatory credit in the past, it will almost always have to be fully explained in a written letter.

Lenders must document their analysis as to whether the late payments were based on a:
  • disregard for financial obligations
  • an inability to manage debt
  • factors beyond the control of the borrower (extenuating circumstances).
Extenuating Circumstances: nonrecurring events that are beyond the applicant’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations. These cannot be solely defined by the event itself; all circumstances must be taken into consideration.
 
What the underwriter is looking for is:
  • WHY the derogatory event occurred
  • WHY it was out of my control
  • WHY it is unlikely to happen again
Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.





Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com


© Copyright 2012 Patrick Ritchie All Rights Reserved




Monday, October 1, 2012

How Long Will My Credit Be Impacted After Foreclosure?

CREDIT has become the adult grade card. It opens and closes doors of opportunity and survival. For someone in a mortgage crisis it is more important to focus on closure in order to move forward. Once a house is foreclosed upon or sold in a short sale the healing process begins.
 
The majority of the damage comes from the number of days of delinquency someone experiences. FICO put out a good study to refer to: http://bankinganalyticsblog.fico.com/2011/03/research-looks-at-how-mortgage-delinquencies-affect-scores.html
 
The chart in the link shows us a few things, first of all that a short sale with the debt forgiven is better than a short without the debt forgiven. A short sale without the debt forgiven is no better than a foreclosure in the chart. There is one thing where the chart falls short, it only shows 90 days of delinquency, in Arizona most homeowners would likely be at 180 days delinquency before the foreclosure would actually take place, so the credit score would be lower just based on the longer delinquency period being reported, and of course the longer the delinquency the more damage to the score. No matter what, once the final event takes place, foreclosure or short sale, the recovery period begins. The derogatory information will remain for seven years and as each year passes will have less and less adverse impact on the credit score. Generally the scores are back to the high 600 range to low 700 range in 2 - 3 years, however, every credit report is a like a stand of DNA, so recovery depends on the whole picture, not just one account.
 
The GOOD NEWS: nothing bad on the credit report will last forever. It may be necessary to look at bankruptcy as an option in order to weigh your options and guard against deficiency liability. While not favorable, it is an efficient means to cleaning up the problems of financial disarray in a very specific and legal manner without leaving the door open to future liability. When facing the prospect of losing your house always sit down with a bankruptcy attorney to find out your potential liability.

The other GOOD NEWS: a foreclosed homeowner today can be a home buyer again, generally at the 3 year point. In 3 years (FHA 4155 Guidelines as of 4.21.2010) no matter what my circumstances are right now YOU can buy again, that is 1,095 days, or only 26,280 hours (1/3 or more of which you will sleep through). Of course, at the 3 year mark, you will have to qualify and there cannot be any derogatory credit issues after the original foreclosure.
 
Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.




Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com



© Copyright 2012 Patrick Ritchie All Rights Reserved

Credit Scoring

The credit system in place today is fast.  A credit report and score can be obtained by a creditor within seconds. Generally used for lending, it is the basis for approving or denying loans.
 
The credit score came along in the early 1990’s when Fannie Mae approved the FICO credit score to be used in mortgage approvals and it saved hours per loan application in terms of approving or denying a loan request. the FICO credit score ranges from 300 - 850, higher is better, being at a 740 or higher will almost always get you the best terms on a loan.
 
The three big credit bureaus (Experian, Equifax, and TransUnion) provide credit reports which contain information on a consumer’s current and past accounts, including details such as amounts owed, payment history, length of time the account has been open, etc.
 
The Five Factors of the FICO Scoring Model:
 
1. Payment history - 35% of the score. Paying accounts on-time is the largest factor for credit scores. An account is considered on-time as long as the payment is received within 30 days of the due date. One day past the due date may be considered LATE in the eyes of the lender.
 
You could be subject to a late charge, but if it is received before it is 30 days past due it will not affect your credit scores. Could a lender report an account that was one day past due as being late to the credit bureaus? Absolutely. Will they? Not likely. It is an accepted practice by lenders to report only payments that are 30 days late.
 
2. Balances owed accounts - 30% of the score. The balances we carry have an impact on the credit scores, coming into play mostly with revolving accounts such as credit cards. The rule of thumb is that you should try to keep your balances on credit cards less than 50% of  the available credit limit. The closer you get to the limit on an account the more likely you are to  see a decline in credit scores. Try to keep your credit card balances as low as possible, lower is better.

3. Length of credit history accounts - 15% of the score. The longer the positive credit history the better. An installment loan has a set lifespan and will be closed when the last payment has been made. Conversely, credit cards (revolving accounts) can have an infinite lifespan.

Contrary to popular belief, closing accounts is not a  good thing when it comes to credit scores. If you cannot withstand the temptation to accumulate more  debt on open credit cards, put them out of immediate  reach (safe deposit box) to avoid spontaneous  purchases. Try to avoid closing out history you have  already earned.

4. New credit accounts - 10% of the score. Inquiries and new accounts fall into this category. Every time a lender gets your credit report or credit score it shows up as an inquiry on your credit report. An inquiry can have a small impact on your credit score, maybe a decline of a point. Gaining a new credit account can have a larger impact on your credit score in the short term. Do not apply for unneeded credit.

5. Mix of credit accounts - 10% of the score. An ideal mix of credit would be credit cards, car loans, mortgages, student loans, etc. Someone with only credit card accounts and nothing else may be at the most risk. Keep in mind - the “mix” is only 10% of the overall formula.

Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.




Patrick Ritchie
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com



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