Monthly Archive for May, 2010

Yes, I'm not kidding. Even though this blog has repeatedly said that credit repair firms can't clean your credit, and that they can't remove true credit information no matter what they claim. So, was I lying then, or am I lying now?

As a matter of fact, neither. Credit repair firms cannot legitimately do anything that you can't do yourself. That was and will always be true. However, you can, in the right circumstances, get past-due credit accounts brought to current status and reported that way to credit bureaus, get late fees forgiven, and get back on track. It's called debt re-aging, and it's all the rage.

What is debt re-aging?

When a delinquent account is re-aged, it's no longer considered past due by the creditor or credit bureaus. The creditor simply reclassifies the account as "current" and it gets reported that way in the next reporting cycle. If you're three months behind on one of your credit card accounts, and you can convince the credit card provider to re-age your account, it would be as if those three months never happened. You still owe the money, but the late fees go away and you're no longer considered delinquent. Your credit score increases because a major booger has been deleted.

But how do you convince a creditor to re-age your account?

It's not easy, and you can't do it every month. It kind of works along the same principle as debt settlement -- I'll do something for you (pay you now) if you do something for me (waive the unpaid balance, in the case of debt settlement, or make my credit report prettier, in the case of re-aging). You want to offer the creditor a generous payment, along with proof that you are in a position to continue paying your account on time as agreed.

Of course, the government has guidelines about re-aging schemes. The Federal Financial Institutions Examination Council (FFIEC), says that for a revolving account to be eligible for re-aging, it must meet several conditions.

1. You must show a willingness and the ability to repay the loan.

2. Your account should be at least nine months old.

3. You must commit to making at least three consecutive monthly payments or an equivalent lump sum single payment.

4. Your account cannot be re-aged more than once within any twelve-month period.

5. You are not allowed any new credit until you get your balance down to below it's pre-delinquency level.

Contact your creditors in writing if you can pay your bills on time from now on and would like your accounts re-aged. Explain why you were late, and what has changed that will allow you to meet your payment due dates in the future. If the creditor agrees to re-age your account, get the agreement in writing before forking over a big payment. Many consumers have been told over the phone that a creditor will re-age their account, only to find that the re-aging never took place.

Many people with bad credit wonder how long it will take to get a FICO score that will allow them to get a mortgage, or refinance to a better mortgage. What if you pay all of your bills on time for the next 6 months? What if you close a couple of accounts? What if you paid an extra $100 a month on your credit card accounts for the next three months? What if you pull the president of FICO from a burning building (answer: nothing!)? Conversely, what if you're a bit short this month? How much will missing a payment hurt? Wouldn't it be awesome if there was a way to give various scenarios a 'trial run," and see how they'd affect your score? Well, there is.

It's called Score Power, and it's a product put out by Equifax credit bureau and FICO -- the folks who created the most widely-used credit scoring model. For those with bad credit and a goal of buying a house, it may well be worth the $48 to get your three scores and the Score Power credit simulator.

The section entitled "How Lenders See You" provides a lot of good information for someone planning on getting a mortgage. It shows where you are compared with other consumers, what delinquency rates are for someone in your score range, and what interest rate you could expect to pay on a car loan, mortgage, or home equity loan. In addition, this section tells you in plain English, exactly what is helping your score (for example, accounts paid on time, few new accounts, and not seeking new credit), and what is hurting your score (for example, short credit history and no recent activity). This would tell you that you could improve your score over time by using your credit a little each month, continuing to pay on time, and not increasing your balances.

Score Power can give you an idea of how long you have to keep your nose clean, credit-wise, to get your credit scores high enough to get a lender to approve your mortgage application. And if you have friends or family with mortgage credit problems? The tool can be given as a gift.

500? 580? 660? Many people with credit problems would like to know exactly how much do they need to improve their bad credit before they can seriously think about getting a mortgage. Aside from bad credit mortgage lenders, the most forgiving lender on the market is probably FHA. But confusion about FHA's minimum credit score requirements is abundant. Articles about credit problems quote FHA minimum scores at 500, 580, 600, 620, 640, 660, and even 680. And the FHA Web site doesn't offer much help either.

So what is the real minimum credit score for an FHA mortgage? If you read HUD's recent press releases, you'd think it was 500 to get an FHA mortgage, and 580 to get one with only 3.5% down. But just try to get an actual home loan from an actual mortgage lender with those scores. Unless you make a much bigger than required down payment, you aren't likely to get an FHA loan with bad credit scores like those.

Even though FHA says it's okay for you to have a 580 credit score, FHA-approved lenders don't often agree. You'll see when you check around that FHA lenders may require minimum scores ranging from 600 to 680. Even though FHA's own guidelines are more flexible. This is called a lender overlay.

Why would a lender impose tougher requirements than FHA does? Doesn't FHA insurance protect the lender against losses? And don't these guys want to write as many loans as they possibly can and make money hand over fist? Yes, FHA-approved lenders want to make as much money as they can funding as many loans as they can. And yes, they are protected by mortgage insurance from loss if you blow off your loan. But they could also lose their FHA approval if too many border-line borrowers blow off too many mortgages. Even if those loans were underwritten in EXACT conformance with FHA guidelines. With 39% of all mortgages these days being FHA loans, no lender wants to chance losing its approval and with it, over a third of its business. That's why lenders add requirements to minimize the chance of mortgages going sideways and maximize the odds of holding on to their approval. That's part of what's caused the average FICO score of FHA borrowers to skyrocket from 621 in 2008 to 692 by the end of 2009.

What can you do? Because lender requirements for FHA loans are all over the place, your best bet is to contact a lot of lenders. See what they consider bad credit and what scores are acceptable to them. Filling out the form on this site can let you get competitive quotes from several lenders, and then you can ask them all what their minimum scores are.