Ritchie School of Real Estate Finance - Arizona Mortgage Education: 2012

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

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

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.

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

Saturday, December 8, 2012

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

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

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.

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

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?

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

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?

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

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.

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

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

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

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.

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

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.

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

Choosing Which Debts to Pay in a Crisis

If you find yourself in a financial pinch and must decide which bills to pay and which to delay, there are a couple different scenarios to consider.

Communicate with your creditors to let them know the circumstances. See if they can work with you on arranging a temporary repayment or perhaps place your account into forbearance until you can get back on your feet. Student loans will generally allow someone to place their account into forbearance for 12 months at a time, up to 36 months until they are no longer struggling financially.

In fact, I like the idea of putting low interest rate student loans into forbearance to focus paying down higher interest rate credit cards. Contact your loan servicer to inquire about forbearance, if you have a Direct Loan through the U.S. Department of Education the entire forbearance process can be performed online in most cases.

Automotive loans will often allow a borrower to miss a payment periodically without consequence if the borrower asks in advance of the due date. Always make the request before the due date, other types of loans allow for this, but it varies from lender to lender, just remember it never hurts to ask.

If the delay is 30 days or less make sure you pay the bills that report on your credit report or the ones that charge late payments if one day late. You want to avoid being reported late on your credit report, which would occur if you are 30 days or more delinquent. This would include credit cards, mortgage, automotive loans, student loans, anything that reports on your credit report. You do not want incur late fees on top of what you already owe for the monthly payment, so even if you are not going to be 30 days late, even being one day late could cost you a chunk of change, although I would gladly pay a late fee rather than be reported late.

Being late on utilities, cell phone, cable, internet, etc. is less of a concern since they are not reported to the credit bureaus, and you are not likely to experience a service turn-off if you are only a month behind. Make sure you are familiar with any late fees that may be imposed.

However, if the situation is longer term and you need to make tough decisions for 60 days or more, focus on the necessities such as food and utilities. Do not go hungry or live in the dark. Being able to support ourselves and family takes precedence over paying debts.

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

Security Breach: What Should You Do?

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Every week it seems like I read something about a security breach, whether it is a bank, government entity, university, or hospital, the possibilities of a breach are endless. Criminals are grabbing sensitive information such as social security numbers to commit fraud. The topic comes up frequently in my classes about credit, people want to know how they can protect themselves if they are part of a security breach.

The standard recommendation is to add a fraud alert to your credit report. This is a notation on the credit report notifying anyone looking at the credit report that there is a chance of identity theft, therefore the identity of the person requesting credit should be scrutinized. I am not a firm believer in relying on a fraud alert as a sound protection from identity theft. The reality is it does not stop anything, but rather it is simply a cautionary notice.

The better approach is to consider a security freeze as a protection because it denies access to your credit report. When a freeze is added to your credit report, all third parties, such as lenders or other companies, whose use is not exempt under law (FBI, IRS, CIA, etc.) will not be able to access your credit report without your consent (you give them a pin you receive from the credit bureaus for access). A security freeze is more beneficial than a fraud alert because it actually stops access to your credit report without your permission. It is available to ID theft victims with a police report and non-victims who have no police report for a specific incident, but wish to protect themselves.

You need to go to each credit bureau individually to institute a freeze:

TransUnion: http://www.transunion.com/corporate/personal/fraudIdentityTheft/fraudPrevention/securityFreeze.page#3

Experian
http://www.experian.com/consumer/security_freeze.html

Equifax: http://www.equifax.com/cs7/Satellite?c=EFX_Page_C&childpagename=EFX%2FEFX_Page_C%2FGetcreditCP&cid=1182374732430&p=1182374732489&packedargs=locale%3Den_cp&pagename=EFX%2FWrapper#NextSteps

If the links change just go into each credit bureau website and search the term “security freeze.”

The reason I like the security freeze is because if someone has your social security number and tries to apply for credit, a creditor will not be able to access your credit report and therefore credit will likely be denied. You should still check your credit report annually to make sure there are no issues, and the security freeze will not prevent someone from using your credit card if your account number is stolen, so remain on guard and realize the freeze will only prevent new accounts from being opened in your name. Existing accounts are still susceptible.

The security freeze may delay or interfere with the timely approval of any subsequent request or application you make that involves access to your credit report. This includes new loans, credit, mortgages, insurance, rental housing, employment, investments, licenses, cellular phone service, utility service, digital signature service, and extension of credit at point of sale.

Additionally, while your report is frozen, companies that provide consumer data to the credit bureaus will not be allowed to update name, address, social security number and date of birth information on your credit report. If there are any changes made to your name or address while your file is frozen, you must notify the credit bureaus directly so that they can update your personal information.

If you wish to apply for a new credit account or other credit relationship, and the prospective lender or company needs to access your credit report, you will need to get a pin code to give access to your report or remove the security freeze.

As a method of protection the security freeze is a way to lock up your credit report and the cost is generally free if you have a police report or a $5 - $10 onetime fee if you do not. It is not only the best protection, but it is also a very inexpensive protection.

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

Friday, September 28, 2012

What NOT to do During the Mortgage Process

The mortgage process is very specific, so it goes without saying there are do's and don'ts when it comes to successfully closing on a mortgage.

The credit report expires 90 days after it is originally pulled, so if it expires, a new one has to be pulled. If the credit score is now lower, that is the score that will be used, which could change the interest rate for the worst. If the score is below the minimum required credit score the loan has to be denied unless it can be brought up before closing. Here are the main reasons credit scores might drop in that 90 day period:

- Credit card debt increases

- Late payment on something

- Medical collection shows up unexpectedly

Your employment will be verified at the beginning of your mortgage application and again at the very end before you close. Do not quit your job, even for a better job if you have a contract to close on a house, talk to me first so we can get it figured out. Do not do anything to get fired, like eating lunches from the office refrigerator that are not yours, or getting in a fight at work, one of these two things have actually happened on one of my mortgage files. Sadly the borrower did not get the loan because he no longer had a job, this was the week of closing, and the seller was furious we did not close escrow. Leaving your job is a serious matter when you are applying for mortgage, and when you are trying to buy a house your source of income is imperative. I am always available to answer questions about employment if there is a concern.

Do not apply for other credit, such as a car, credit card, or any new debt. A popular one I have encountered is buying furniture for 90 days or more same as cash. This can have a majorly adverse impact on the credit score, the reason is due to a high credit utilization ratio. For example, if you purchased furniture for $5,000 and received 90 days same as cash, this is likely set up as a revolving line of credit with a limit of $5,000. With $5,000 available and $5,000 as the balance the credit utilization ratio is 100%, which will severely impact the credit score. In this scenario it could drop a score as much as 100 points depending on how much other revolving credit a person has.

Do not make any unusual large deposits into your bank account, an unusual deposit is any deposit that is not a payroll deposit. All deposits need to be sourced with a paper trail, such as a bill of sale if you sold something, all money must be documented to make sure it was not borrowed, it has to be your money, and you have to verify that.

While I am at it I have a very important recommendation, always pay rent with a check, paying rent with cash is a bad idea because it provides no record of when rent was paid, or how much was paid. Being able to show 12 months of cancelled checks is important, not always required, but if it is necessary you need to have the documentation. If you pay cash and can show ATM withdrawals on your bank statements every month that can work as well.

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

Thursday, September 20, 2012

Credit Checks for Employment

Video: About Credit and Employment

A few weeks ago I was teaching a finance class at the Ohio State University when a scenario came up that I knew I would need to write about on this forum. A student had applied for an internship for the summer, the hiring manager said he was the top candidate and there were just formalities such as a background check before a final decision would be made. The student signed an authorization form allowing the employer to do a consumer report on him. Within a few days the hiring manager called and told the student that the position was filled by a different candidate. As he was telling the story in class I knew where it was going, I have heard a similar story every academic quarter since 2006 when I first started as a guest lecturer at OSU. The student checked his credit report and found a medical collection for $168. Did he owe the money? Yes. Was it his responsibility to pay it? Yes. Should he have checked his credit report before applying for a job? Absolutely!

A 2009 survey by the Society of Human Resource Management showed 60% of employers conduct credit checks of potential employees. This is an increase from 2006 in which only 42% of employers were doing credit checks.

Not all job candidates go through a credit check, of those organizations surveyed only 13% do credit checks on all employees. 47% surveyed conduct credit checks on specific positions. Positions in a financial or fiduciary responsibility go through a credit check 91% of the time, while senior executive positions are checked 46% of the time, and positions with access to highly confidential employee information are checked 34% of the time. Medical debt is generally not considered during the hiring process according to the poll, but medical collections are open to scrutiny. A foreclosure is only part of the hiring decision in 11% of those surveyed. 87% of those surveyed allow job candidates the opportunity to explain the results of the credit report, depending on the circumstances. 57% initiate a credit report after making a contingent offer, 30% perform the credit check after the interview.

Employers may be considering many things, such as the likelihood to be more tempted to steal based on delinquent accounts or a high debt-to-income ratio based on the debt present on the credit report. Other considerations:

• On the job errors
• Longer lunch breaks to take care of personal problems
• Requesting paycheck advances
• Attempting to borrow money from co-workers
• Frequent personal phone calls or incoming collection calls
• Absenteeism, attitude, enthusiasm, etc.

How employers gauge the credit issues in terms of a hiring decision:

• Outstanding judgments 64%
• Collection accounts 49%
• High debt-to-income 18%
• Foreclosure 11%
• Medical debt 1%

My advice is to review your credit report, make sure it is correct, and always have an explanation for anything derogatory focusing on:

• Why the derogatory event occurred
• Why the derogatory event was out of your control (job loss, medical issue, etc.)
• Why the derogatory event is out of character based on the big picture of your credit and is unlikely to happen again

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

Bankruptcy Versus Debt Settlement

Video: My Thoughts on Debt Settlement

Here is an email question I received the other day:

Patrick, I attended your class last year and have purchased your book. I have a client who has about $70,000 in credit card debt. They are planning to file bankruptcy but don't want to lose their home or their retirement accounts. I suggested they use a non-profit credit association company to work out a payment plan and pay their debt. I don't want to lead them down the wrong path as I am not a financial advisor. You implied in your book and class that bankruptcy might be the best route for their credit.

What is your suggestion?

There are many things they should consider, here is my short list off the top of my head:

• They likely can keep their retirement accounts in a bankruptcy; the statutes in most states give retirement accounts an exemption from creditors. The list of exemptions will be in your state codes/statutes, the legislative websites have great search features for locating the information. Or check with a bankruptcy attorney, Stephen Trezza is a knowledgeable bankruptcy attorney with useful information on his website: http://www.filebankruptcyinarizona.com/Chapter-7-Bankruptcy/What-Can-I-Keep-After-Filing-Chapter-7.shtml

• As long as they continue to make the payments they can most likely keep the house. This decision needs to be weighed carefully, do they really want to keep the house, can they afford it?

• People who go through bankruptcy will generally have better credit within 2 - 3 years, whereas people in credit counseling repayment programs can be in bad credit shape for 3 – 5 years.

• Through bankruptcy (Chapter 7) they may be able to discharge the entire $70,000 balance, depending on if they qualify based on their income

• A bankruptcy is a permanent public record, but falls off the credit report within 10 years, they could buy a house again within two years of a Chapter 7 bankruptcy

• Credit counseling is not part of the permanent public record and will fall off the credit report in 7 years generally (this is the way to go if they have political aspirations). There are circumstances where it makes sense to go through CCC instead of bankruptcy, generally for smaller amounts; $70,000 is not a small amount.

• A major consideration is tax consequence when it comes to debt settlement, if they owe $70,000 in credit card debt and settle for half, they are possibly going to be taxed for $35,000, depending on their tax bracket this could be a shock. An important thing for consumers to realize is that even if they do not qualify for a Chapter 7 discharge, going the Chapter 13 route may turn out better than settling through a non-profit. For example, let’s say the non-profit gets the creditors to settle for half, but the court may order that the creditors will receive ten cents on the dollar. Bankruptcy can be superior even from a settlement standpoint.

• With debt settlement through CCC the consumer does not lose any assets (other than the money they are paying), with a Chapter 7 bankruptcy the debtor would lose any non-exempt assets (personal property, stocks, savings, etc.). In a bankruptcy the non-exempt assets are auctioned off, I go to these auctions frequently. Many times the debtors will go to the auction and bid on their own stuff, which is allowed. Last year I purchased $2,300 worth of framed art for $80, the assets were from an art gallery that went under. The possibility of losing personal property is a major factor in making the decision to go the bankruptcy route, especially if the debtor has cherished keepsakes that would have to go to auction to pay creditors. It is a good idea to sit down with an experienced bankruptcy attorney for an exemption planning session to plan out the bankruptcy thoroughly.

If given the choice between a payment plan and discharging the debt it is almost always a better idea to discharge the debt. At the point of discharge the credit begins to heal, whereas with a repayment plan the damage continues until the account is settled and closed out. It is also important to realize that there are specific laws and procedures for bankruptcy, plus there is oversight. In the world of credit counseling there is no schooling, there is no licensing, there is no bar exam to ensure proficiency, it is a wide open wild west of sorts. I do believe there is a place for credit counseling, as long as the organization sticks to budgeting and interpreting the credit report. An excellent measure of whether a credit counseling agency is trustworthy is if they are HUD approved. I have worked with HUD approved counseling agencies for a number of years and have found NeighborWorks organizations to be the best all around.

As soon as credit counseling crosses into a repayment plan this is where I start to feel shivers up my spine. There is a thing called the sharing rule, which allows a debt settlement/credit counseling company to receive a commission/cut of the amount they can get the consumer to pay to the creditor. I feel this is an outrageous breach of fiduciary duty at the highest level. My second major issue is that many consumers drop out of the repayment program and file for bankruptcy ultimately any way.

This is just some food for thought, being in a position of choosing between bankruptcy and debt settlement is not an easy position to be in. Given the circumstances I think they should consult with a bankruptcy attorney to inquire about their eligibility. I feel strongly about this because I see many credit reports where if someone had just filed bankruptcy they would be fine today, but instead they dabbled with settlement and it prolonged the damage.

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

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website