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



© Copyright 2012 Patrick Ritchie All Rights Reserved

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.
 
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

Security Breach: What Should You Do?


blocked,cards,credit cards,cropped images,cropped pictures,debts,dollar signs,dollars,loans,locked,locks,monies,overdrafts,PNG,savings,securities,transparent backgroundEvery 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:
 
 
 
 
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.

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