Ritchie School of Real Estate Finance - Arizona Mortgage Education: applying for a mortgage

Showing posts with label applying for a mortgage. Show all posts

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

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