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

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.

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

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

Free Credit Report Offers Examined

There was a point in time it seemed like you could not turn on your television without seeing and hearing the free credit report jingle. Those merry men dressed as pirates lyrically painting a picture of why we should all check our credit reports. Besides, it was free, right? It depends on your personal definition of “free,” which for the advertisers meant free as long as you don’t mind placing your foot in a proverbial snare so they can shake money out of you later. The Federal Trade Commission noticed the advertising, evening going as far as mocking them with its own jingle at http://www.ftc.gov/multimedia/video/credit/reports/apartment.shtm.

Then the FTC brought down the hammer, full disclosure of where consumers could obtain their federally mandated credit report. Too many consumers did not understand that they could go to www.annualcreditreport.com for a free credit report with no-strings attached (no credit score though, the law does not require it currently). The level of advertising for commercially generated free reports was enormous; the most well known free credit report site reportedly spent $100 million annually on advertising. How much free stuff can you give away with an advertising budget of $100 million? As it turns out, only so much, people ended up with credit card charges they did not want because to get the free credit report they had to sign-up for a 90 day or so free trial of identity theft protection or credit monitoring. If they did not cancel by the 90th day they would be charged, the complaints flowed like an angry volcano.

Per the FTC enacted disclosure any website offering free credit reports must now place at the top of the page:

THIS NOTICE IS REQUIRED BY LAW. Read more at FTC.GOV.

You have the right to a free credit report from AnnualCreditReport.com

or 877-322-8228, the ONLY authorized source under federal law.

The Web site disclosure must include a clickable button stating “Take me to the authorized source” and clickable links to AnnualCreditReport.com and FTC.GOV.

Disclosures are required for radio and television advertising as well, which went into effect on September 1, 2010. This is why we do not see or hear as many of the advertisements. However, there are a thousand ways to skirt regulation, so the new thing is to offer a free credit score instead of a free report. Fortunately consumers are catching on to the unsavory nature of these schemes. Even the free credit score is a ruse in the sense that it generally is not even the score lenders use for underwriting, just a fictitious self-created formula to get money out of unsuspecting consumers.

If your New Year’s resolution was to improve yourself financially this year, go to www.annualcreditreport.com right now and print off a copy of your credit report for your records.

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

Reasons to Save Copies of Your Credit Report

Video:YouTube Video Reasons to Save Your Credit Report

If you have not been reviewing and saving copies of your credit report each year do it today. The reason it is imperative to save copies of your credit report by printing them out is because the credit report is not a static document. It is completely variable, a liquid document, it is only as good as the information currently reported, so things can change. The information contained in a credit report is the information reported by the creditor, there is no formal verification process by the three credit bureaus (Experian, TransUnion, and Equifax). Which means it is up to the consumer to keep tabs for incorrect information and any changes that result in discrepancies.

Since the credit report is only as good as the information being reported at this moment, saving your old credit reports will give you solid documentation as to the dates of occurrence for anything negative. The reason these dates are so critical is because it is tied to your recovery period. The more time that passes the less impact negative items have. Think of it this way:

Most negative items come off the credit report entirely after seven years (one exception is Chapter 7 bankruptcy, which is 10 years) because of the Fair Credit Reporting Act. Seven years breaks down to seven 12-month periods, think of the first 12-month period as the worst for the credit, but once it passes we start to see more improvement. Generally after 2 to 3 years the credit scores are at or above average after a major financial hardship. Each 12-month period that passes is in the rearview mirror, we are improving until the negative event is completely gone, finished, no trace or reference of the short sale on the credit report. This applies to any type of derogatory account falling under the seven year rule.

The problem is manipulation of the credit report. The FTC went after NCO Group for reporting collection accounts using later-than-actual delinquency dates. In changing the date of delinquency it could cause a debt to be reported beyond the seven year limit allowed. For example, if the original debt was reported delinquent in 12/08 and changed to 12/10 it would extend the reporting of the debt for another two years beyond what is legally allowed. To settle the charges NCO Group had to pay $1,500,000. According to NCO Group it had obtained bad information about the age of the debts from a creditor. NCO Group is no small operation, it is one of the largest debt collectors out there, presumably with good systems, but mistakes do happen. What if it wasn’t a mistake, what if it was just an attempt to plague debtors longer in an attempt to negotiate a settlement of the defaulted amount? When situations such as this arise, it shows us why it is important to save paperwork and keep copies of your past credit reports. You may have to prove dates are being reported incorrectly at some point. It is impossible to know what the future holds and what issues may come about. I will post more about the bad debt market soon.

Any documentation you receive regarding debts should be saved as an important document. You never know when you will need to prove something down the road. Since the power of reporting is in the hands of the creditor, it is a smart move to be able to back up any future disputes you may have to make.

In summary:

1. Save your credit reports because they are not static, they are a liquid document that can be manipulated, and can be prone to mistakes.

2. Save all documentation received regarding debts, especially debts going into default, the more documentation you have of dates the better just in case you need it in the future for disputing.

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

Sunday, September 16, 2012

Welcome!!

Welcome to my Arizona mortgage blog, where I will combine my knowledge of credit and mortgages, as well as my legal education into a useful resource for my clients, other consumers, and REALTORS® to keep up with the mortgage world. I have been teaching and writing about real estate finance for the past 12 years, so it is well past time for me to sit down and start sharing info on a blog. It took me a year to write my first book, The Credit Road Map, and there were so many things I came across in my research that I didn't have room for in the book, so I am excited to be able to share that information here. I usually teach a continuing education class each week, so there is always an interesting discussion coming out of the classroom that I will talk about here. Every Friday I will post about what the current mortgage interest rates are at, in between Fridays I will only post about rates if they are doing something significant worth letting you know about. I will also post about CE classes I have coming up that you might want to attend. If there is a topic you would like for me to cover please feel free to contact me.

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