Ritchie School of Real Estate Finance - Arizona Mortgage Education: credit report

Showing posts with label credit report. 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

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

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

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