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Monthly Archive for September, 2008

CNN Survey: Compulsive Buying Ruining Marriages and Lives

Published
by
Gina Pogol
on September 30, 2008
in Uncategorized
. 2 Comments

A recent survey of 1,000 American households found that splurging is alive and well in the US despite uncertain economic times. According to CNN.com, Americans continue to splurge because it just feels good and they have been conditioned to go out and get that new Coach bag or iPhone even if they can’t afford it. This habit can cause more than just the destruction of credit ratings and the increase in mortgage foreclosures–it takes down marriages too.

Couples talked about spending nightmares in which significant others ran through their partner’s savings and blew the mortgage money on compulsive purchases. For example, in 2001, Joe Peacock had a $160,000 a year job in software design, and he was not in the habit of denying himself anything he wanted. Then, he lost his job–but not his spending habit. Until he realized that he had racked up $70,000 in credit card debt and was in serious trouble.

 Joe gave up his addiction–and like all addictions it took real willpower. He learned to avoid spending by keeping himself very busy. ”I learned how to entertain myself with everyday pursuits, like running, riding a bike, hiking, and drawing in my sketchbook,” he says. “These things cost nothing.” Happily, he and his wife paid off their creditors and stayed together.

Others were not so lucky. Marisa Vallbona’s shopaholic husband was unable to stop, even for his family’s sake. “I loved him dearly, but in the end, I realized that if I didn’t divorce him, my kids and I would end up on the street.” Kit Yarrow, a consumer psychologist at Golden Gate University in San Francisco has some tips for salvaging credit ratings, bank accounts, and relationships:

* Face it together and commit to overcoming the problem as a couple.

* Determine what psychological issues are triggering the spending problem. Counseling can help with this.

* Create a spending plan in writing and have everyone involved sign it.

* Stick reminders everywhere. She recommends something like a love note: ‘With a love like ours, who needs new shoes?’ rather than an admonishment: ‘No shoes!’

For most families, relationships and the home are top priorities. Don’t lose both by overspending in today’s economy.

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Ready, Willing, Able? Can You Qualify for a Mortgage?

Published
by
Gina Pogol
on September 26, 2008
in New Home Loan
. 4 Comments

You were turned down for a home loan. Or haven’t applied because you don’t think you’d be approved. Well, no need to go into a bank’s office, fill out a hundred forms, and get embarrassed when the dude in the blue suit says “No.” You can see where you stand by doing a little investigative work online.

Beginning at the top, know that even A-grade credit is no longer enough to get you a mortgage. You need sufficient, stable income, and you need to document how much it is and how often you get it.

Step 1: Prequalify Your Income Before even looking at your credit, try checking out a mortgage prequalification calculator to see if you can afford the payments on a home in your neighborhood. If your income is sufficient, go to step 2. If it isn’t, improve your debt to income ratio by putting a plan in place to pay off debt and get where you need to be income-wise. Other solutions people have tried include buying a home with someone else–the two incomes make home ownership possible.

Step 2: Determine Your Credit Grade Your down payment requirement can range from almost nothing to 30% or more, depending on your credit rating. So your credit grade is crucial in determining what else you will need to buy your home. If you have Grade-A credit you probably know it. A score in the 700s, several longstanding accounts with no late payments, and relatively low balances on your accounts are signs of a high-grade borrower.

Once you get out of Grade-A range, your credit may be assigned a subprime grade of A- to D. Those with grades C or higher are most likely to be able to qualify for a mortgage within the next year, so let’s address these here.

A- starts at FICOs in the 660 range, a debt-to-income ratio of 38% max, no mortgage lates, and no more than 1 or 2 other slightly late payments. No recent bankruptcy. You can borrow up to 95% of the purchase price with A- credit. You may also be able to get an FHA loan with A- credit.

B to B- means a score of about 620, several late payments over the last 12 months, and maybe a couple of mortgage lates (but no 60 day late mortgage payments). You can have a debt-to-income ratio of up to 50% and finance 75-85% of the purchase price. You may be eligible for FHA financing if you have plausable reasons for the late payments and have done something about the situation that caused them. You may have had a bankruptcy within 24-48 months.

C+ to C- means a score of about 580, a debt ratio of 55%, and you may finance 75% of the value of the home. You become a grade C by being 30 days late on several bills and perhaps 60 days late on some payments. You may have had a bankruptcy within 12 months. You cannot qualify for FHA financing with C rated credit.

So, if you are an A-, B+, B, or B- borrower, your first stop should be FHA. See if you can avoid the bad credit mortgage market altogether with a government-backed mortgage.

If you can’t go FHA or your grade is lower than B-, and you don’t have a huge down payment (you probably don’t because if you had that kind of money you’d be paying your bills, right?!), you need a plan to pay your bills and pay them on time. Notice that these credit grades are drawn mostly from your most recent credit experience, the last 12 to 24 months. And on a $300,000 home, the difference in down payment requirement for a C- borrower and an A- borrower is about $60,000! Not to mention the difference in interest rate you will be charged as a C-grade borrower. The good news is that within a year you could be an A- borrower. So if you are serious about buying a home, get serious about paying your bills on time. Trashed credit today does not doom you for life–unless you let it.

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Renters Need Love Too…How to Get a Credit Score by Renting

Published
by
Gina Pogol
on September 18, 2008
in New Home Loan
. 2 Comments

Life is harder for those with no credit–and more expensive too. Talk about being kicked when you’re already down–you’re already young and broke–now you can’t buy a house, rent a car, or even reserve a hotel room. You’ve got to have credit to get credit, and it’s harder to earn a nice credit rating when you have less money but everything costs more.

Fair, Isaac, the company that compiles our FICO scores, has created an expansion score, which is derived from non-traditional credit, including utility payments, layaway charges, and bank deposit records. However, this doesn’t completely solve the problem because in many places it’s illegal to report utility records and it can be difficult getting nontraditional creditors to bother reporting credit data (there isn’t anything in it for them and it does entail an expense).

Today the system has been improved further, allowing you to get your rental history included in your credit rating. By paying a small fee and registering with Payment Reporting Builds Credit, you can get credit for your payment history including daycare, cell phone, rent, and insurance payments. Fair Isaac promised that it will include data from RentBureau and PBRC when compiling your score.

Registering with PBRC, opening a secured credit card, and piggybacking as an authorized user on a relative’s account are all strategies that can accelerate the acquisition of a usable credit history for a young borrower. Of course, all this reporting doesn’t do you any good if what’s being reported isn’t favorable. So if you go through the trouble of getting your payment history recorded for posterity, make sure it’s worth recording.

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A Rock and a Hard Place–When You Can’t Make All Your Payments

Published
by
Gina Pogol
on September 17, 2008
in Uncategorized
. 4 Comments

Which should you make and which should you miss? A couple of decades ago one creditor was known for being so sloppy with it’s records that no one took delinquencies from them seriously. “Oh, don’t worry about that one; it’s just Sears” was heard in many trade groups and credit bureaus before the retail giant got its act together. But are there accounts you can pay late these days? Yes, and no.

First, if you are going to be late on anything DON’T let it be your mortgage. Next on the list is your car payment. Then look at the rest of your accounts–it’s better to miss a payment on one big account and pay all the little ones on time–the number of delinquencies is more important than the size of the debt.

And finally, missing a utility payment will get you a late charge and maybe your service turned off (if you let it go too long) but it won’t show up on your credit rating. If you are trying to repair your credit it might be worth taking a hit with late fees and preserving your history. Other bills that probably won’t get reported are medical bills, insurance payments, daycare fees, newspaper subscriptions, and layaway payments. Make sure these get paid before they end up in collection (ugly) and you’ll be fine as far as your credit report goes.

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Can Debt Consolidation Hurt Your Credit Rating?

Published
by
Gina Pogol
on September 15, 2008
in Debt Consolidation
. 3 Comments

It comes in the mail. It has lots of exclamation points on it, so it must be GOOD!!!! It comes with a CHECK. Pay off all your bills! Consolidate your credit cards to one monthly payment!

Replacing all those credit cards and consumer loans with a single loan MUST be good for your credit, right? And a lower payment means you’ll be saving a bundle too! Right?

Maybe not. Remember, the big print giveth and the small print taketh away. Trading in several monthly payments for one isn’t a legitimate reason to replace those debts with a new one. Consider the following:

1. Paying off and closing out accounts may hurt the “utilization” part of your credit score. For example, if you have 5 accounts with a total limit of $5,000, and you owe $3,000, you are utilizing 60% of your available credit–not great, but not too bad either. By closing those accounts out and replacing them with a $3,000 consumer loan you now have 100% credit utilization. So, you say, maybe I’ll just leave the old accounts open? If you have the discipline to refrain from tapping them while that $3,000 account remains open, that’s an option….as long as the bureaus don’t then ding you for having too many open accounts.

2. Consolidation could cost more. A lower monthly payment isn’t really “savings” unless you are getting a lower interest rate too. And stretching out the debt over too much time can cost you more in the long run even if you get a lower rate. Suppose that you have a $10,000 car loan at 7%, and you have been paying on it for a three years and you now owe $4,000. Your payment is $198.01 and you will have it paid off in 2 more years. Now, some pretty, exclamation-point-loaded mailer shows up, you bite and call the 800 number, and the sales agent tells you (in a very sexy voice!) that you can use that check to pay off the car loan and your payment will only be ONE THIRD as much!!!!! Well, Slick, if you use that check your payment will drop to $57 all right, but only because your $4000 has been stretched out into a ten year loan! And your interest rate just went to 12%!

3. The consolidation loan may have “teaser” provisions. In other words, just because your balance transfers start with a low fixed rate doesn’t mean they will stay that way. Especially if the consolidation loan is another credit card or unsecured account, the terms can probably change whenever the lender chooses to change them. Read the entire agreement and make sure you aren’t jumping out of the frying pan and right into the fire.

Consolidation loans, carefully chosen, can be life-savers. There is a reason for their popularity–the right one can indeed lower your interest, give you a manageable payment, and help you get your financial house in order. The best consolidation loans are those secured by equity in your home. Unlike most other loans, mortgages are highly regulated. Rates can’t be changed arbitrarily, and if you get a fixed rate loan your rate and payment will not change. This makes budgeting easier. Mortgages may also confer some tax advantages–check with an advisor to be sure. And because they are secured by property, debt consolidation mortgages are considered less risky by lenders and rates should be considerably lower than for the unsecured debt you will be replacing. For best results (from a credit rating standpoint), keep a few old accounts (the ones with the best payment histories) open but destroy the cards and don’t use them. You want your credit report to show low credit utilization. Make that monthly payment on time and get used to budgeting. Eventually you’ll get the loan paid off and can divert that monthly amount into savings.

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Not All Credit Repair Companies Are Evil

Published
by
Gina Pogol
on September 10, 2008
in Uncategorized
. 3 Comments

It’s pretty common knowledge that there are a lot of dirtbags in the credit repair business. It may surprise you then that there are legitimate firms out there that can in fact improve your credit score quickly. And since according to CNNMoney mortgage interest rates have dropped like crazy–but ONLY for those with credit scores of 740 or higher–improving yours could save you a ton of cash over the life of your mortgage.

So, how do the good guys fix your credit score? These firms, called credit resellers or rapid rescorers, often work with mortgage companies. They can update and remove inaccurate or outdated credit information quickly, often much more quickly than you or I can. Studies show nearly everyone has some inaccurate derogatory information on their reports. When a few points can make all the difference, why not remove it and improve your score? And if you are a victim of fraud or identity theft you have bigger headaches and bigger reasons to take care of them. Sometimes, resellers can even get creditors to change the reported information based on extenuating circumstances like medical problems. Because of the relationships these people have with creditors and bureaus, they can often fix things faster than the consumer can. For example, it may take you a month to get a reply from a credit bureau about an erroneous item–too late to close on your home loan. Resellers may get items taken care of  in 72 hours or less, for about $30 to $50 each.

Resellers have good success rates because unlike you and me they do this all day long and know the right people to resolve problems. In addition, they analyze credit histories and reject applicants they can’t help (unlike the dirtbags who will take your money all day long but may not accomplish anything). They don’t market directly to consumers but get clients on lenders’ recommendations. They provide required Consumer Credit File Rights and abide by the Credit Repair Organizations Act, which states that you cannot be charged for services until they have been performed.

How Can you Spot the Dirtbags? There are five signs when credit repair firms might not be on the up-and-up:

1. They try to charge you upfront. That’s illegal under the Credit Repair Organizations Act. If the company tries to dodge this by claiming to be something other than a credit repair shop, then what are you hiring it for?

2. They don’t advise you of your rights. You should be given a copy of the Consumer Credit File Rights before you sign any contract with them.

3. They advise you to dispute everything bad on your credit file, regardless of accuracy. These guys have no contact with bureaus and hope to improve your score by sending mass mailings disputing everything and hoping to get lucky if the bureau can’t verify all the items within 30 days. Of course, once verified the negative tradelines come back.

4. They guaranty to improve your credit score. Resellers  / rescorers will make no such claims. Even when they successfully erase an item there is no guaranty that your score will increase–that depends on the bureau’s computer scoring and how it looks at your history.

5. They try to get you to creat a new identity by using an employer identification number (EIN) to apply for credit or obtaining a fraudulent social security number. This is illegal and could get you prosecuted.

Legitimate credit repair firms can’t get accurate information removed. Their chief advantage is the speed with which they work (when you need it done in days instead of weeks) and in their relationships with creditors that could get derogatory information “softened” in light of mitigating circumstances. And, while consumers can wade in and assume much of this burden themselves it’s more efficient in many cases to have an expert do it and not spend the time.

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When Bankruptcy Is Better

Published
by
Gina Pogol
on September 8, 2008
in Foreclosure
. 4 Comments

Bankruptcy is referred by so many as a “last resort.” Not necesarily. For those facing foreclosure, bankruptcy may be the best solution available. If you have a lot of debt and you lose your home through foreclosure, you unload your house payment but you still have all your other debts. You can’t pay them with a debt consolidation loan because you will have no home equity. In most states you can be required to pay your lender for the difference between what they are able to sell your foreclosed home for and what you owe on your mortgage (this is called a deficiency)–so you don’t really get out of your mortgage, after all! And then, you have trashed credit and you still have to find (and pay for) a place to live. Not much of a solution.

Bankruptcy, however, can be a way out whether you do a Chapter 7 or 13. Chapter 7 may work best if you:

1. Can pass a Chapter 7 “means test.” Here is a list of median income by state and family size. If yours is less than what’s on here, you pass. Otherwise, the calculations are more complicated but involve subtracting necessary expenses like utilities, housing, and taxes and determining if you have enough “disposable income” to pay some or all of your bills.

2. Have very few non-exempt assets. Because Chapter 7 is a “liquidation” bankruptcy, your assets are taken and used to discharge your debts. So if you have assets, you might want to do a Chapter 13, which involves restructuring your debts to manageable payments  and discharging them over time.

3. Have primarily unsecured debt like credit card obligations. Debts like child support, student loans, and most tax debt can’t be discharged by a bankruptcy so don’t file to get rid of them–it won’t work. Debt secured by things like cars and houses can’t really be discharged unless you want the creditors to take your things. However, a Chapter 7 filing can keep the lender from getting a deficiency judgment (collecting extra money from you if the property is worth less than what you owe on it). Chapter 7 may help you afford your house payment by relieving you of your unsecured payment obligations (like credit card bills). If you can’t afford your house payment even with the discharge of other debts, however, you will probably lose your home.

 Chapter 13 might be a good solution if:

1. You have assets that you don’t want to surrender in a bankruptcy proceding. You don’t get the clean break afforded by a Chapter 7 filing, but paying some or all of your obligations over time may cost you less in the long run. Chapter 13 creates a plan for repaying your creditors, allowing you to retain your home, and if you stick to it your obligations will be discharged in a few years. And you can save your possessions.

2. You fail a Chapter 7 means test. This means the government has determined that you can afford to repay at least some of your obligations. The bankruptcy trustee administers your plan, which may involve debt settlement, interest rate reduction, payment reduction, having arrearages added to the balance and the account brought current, or other options. Chapter 13 can get your expenses to a level that makes it possible to pay your mortgage and keep out of foreclosure.

3. Want to minimize the hit to your credit rating. Lenders view Chapter 13 much more favorably than Chapter 7. for example, FHA will allow those who fiole Chapter 13 to get a mortgage a year before they will approve someone who files a Chapter 7.

Bankruptcy is almost always better than foreclosure. Many lenders consider foreclosure the blackest mark you can have on your credit. And you could end up owing a deficiency. And you may have a very hard time finding a rental or a mortgage for years after your house is taken. Of course, to be certain of choosing the right solution for you, check with a reputable debt counseling service, attorney, or mortgage counselor (you can find them through HUD).

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Prime Foreclosures Now Higher than Subprime: What We Can Learn

Published
by
Gina Pogol
on September 5, 2008
in Foreclosure
. 4 Comments

Information released by the HOPE NOW coalition, a voluntary effort by major lenders to reduce mortgage foreclosures, shows that for the first time since its inception in July 07 prime mortgage foreclosures exceeded those for subprime loans.

According to housingwire.com, the reason for this trend is that servicers prefer to rely on repayment plans when dealing with prime borrowers who fall behind, rather than modifying the terms of the loans as they do with most subprime borrowers. HOPE NOW reports that 57,822 troubled prime borrowers got a repayment plan in July, which is 72.3 percent of all workouts effected that month. While only 48 percent of subprime borrowers were stuck with similar repayment plans–servicers were more likely to offer loan modifications instead.

Housingwire.com’s opinion is that this is because lenders still believe they have a shot at recouping prime borrowers’ arrearages, so they push repayment plans. In addition, repayment plans allow the lenders to classify seriously delinquent loans as “current,” which makes their numbers look better. But many feel the practice just sweeps the problem under the rug. Even prime borrowers end up in foreclosure when the repayment plan isn’t feasible.

Kevin Kanouff, the president of  Clayton Holdings Inc. theorized that servicers are using repayment plans as “one way to reduce default rolls.” Repayment plans represent “a temporary fix for the servicers if they do not fit the borrowers’ capabilities to repay. Eventually the real numbers will come out on bad plans.”  Cheryl Lang, the president of Integrated Mortgage Solutions, clains repayment plans “are used to minimize or mask the 90-day-plus category of delinquencies.”

So, what can we learn from this? First, if you have a problem with your mortgage you are likely to be offered a better solution if you are a sub-prime borrower. Don’t allow your lender to shove an unrealistic plan down your throat. Second, you are more likely to be successful at keeping your home out of foreclosure and saving your credit rating if you get a loan modification rather than a repayment plan. A loan modification involves changing the terms of your mortgage to something manageable. A repayment plan just means moving the past due amounts to a different loan, classifying the (still unpayable) mortgage as ”current,” and expecting you to pay both your mortgage and the repayment plan. How logical–let’s see, the borrower is behind on the loan because he can’t make the payment, so we’ll help him out by giving him 2 payments to make!

If your lender suggests a plan that you know won’t work, don’t let their stupidity become your stupidity. Housing / mortgage counselors abound, and qualified attorneys can also help with mortgage negotiations. If your goal is to keep your home, working with your lender to create a realistic plan is your best chance at a win-win.

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Declined for a Home Loan? What’s Next?

Published
by
Gina Pogol
on September 3, 2008
in New Home Loan
. 13 Comments

You’ve probably heard; it’s harder to get approval for a home loan than it used to be. And if you’re a first-timer, chances are you have the deck stacked against you–a short or spotty credit history, less time at your job, and a smaller bank account. But you have options if you didn’t get an approval right away.

Find out what you’re missing. Then get creative. For example, if your lender said you don’t make enough money, don’t think you’re going to have to go to medical school before you can afford a home. What the underwriter is really telling you is that your income isn’t high enough to support your new house payment and your debts. So one way to get approved for more house is to cut your debts. And many lenders stop counting a debt against you if it will be paid off in less than ten months. By paying the balances down until there are less than ten months’ payments left, you can free up a lot of income for housing expense.

Another way to offset inadequate income is to lower your mortgage payment by getting a loan with a lower rate. How do you accomplish that? By paying the lender for a lower rate, or rather, getting a motivated seller to pay it for you, you might be able to get your ratios down to an approvable level.

Finally, get some “compensating factors.” Many programs including FHA loans allow underwriters to stretch your ratios a bit if you can give them a compelling reason to do so. For example, if your current housing expense is more than your new mortgage payment would be, it’s obvious that you are capable of making it even if the ratios are a little high. Similarly, having at least three months’ expenses in the bank after you close your loan (called reserves) makes you a better investment because you could weather a financial hiccup with your savings. A seller can help you here too–by paying all your closing costs, leaving you with more money in the bank and a better-looking application. Another compensating factor is having a job with bright prospects for increased earnings, or a demonstrated history of saving money and being conservative with debt.

Finally, if credit is the issue, look at several lenders to see what grade you are and see what you have to do to move up a notch. Your most recent history is most heavily weighted, so it behooves you to start paying your bills on time right away. In a matter of months the bad stuff will begin to fade and you can move up. A good loan agent should be able to help you.

Your lender owes you more than just a letter declining your application and a smile. Find out what is needed for approval and what you need to do to get there. Then take action and get your home.

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