Credit and your mortgage loan - next to having enough income to qualify for a loan, having a 620 or better credit score is the most critical element in determining if you can get a mortgage loan or not and how much the loan is going to cost you.

 

• FHA & VA loans - there is no extra cost to the buyer for having a credit score below 740.
• Conventional loans - Fannie Mae and Freddie Mac have an additional fee of .25 to 2.75 for credit scores between 620 and 740.

 

At Cherry Creek we have an outstanding credit restoration company that assists us in helping our clients either improve their credit scores to 620 and above so they can qualify for a loan or to increase their credit scores as much as possible on a conventional loan so their additional costs are minimized or eliminated altogether.  This is critical in today's troubled economic times because so many people have experienced credit difficulties due to job layoffs, shorter working hours, too much debt accumulation etc.

 

Our goal is to prepare every client to be as credit worthy as possible at the time they apply for a mortgage loan.

 

Contact us for assistance in getting your credit MORTGAGE READY.

 

FICO SCORE - WHAT IS IT?

• Fico stands for Fair Isaac Company, the company that created the original scoring system.
• The Fico score (credit score) is the best tool lenders have to evaluate and measure the risk they are taking when lending money or extending credit to a borrower.
• What the credit scoring model seeks to quantify is how likely the borrower is to repay a loan and make the payments on time - can they payoff debt without being more than 90 days late at anytime in the future.
• It is a snapshot of a person's credit at any given moment.  A person's credit score is like a report card of how a person manages their finances as an adult.
• The exact formula for creating an individual's Fico score is a closely guarded secret because, if people knew the formula, they could manipulate it.
  • This means that nobody can tell exactly what the point impact of any particular action a person takes will have on their credit score.
  • Since scores take into account everything in a person's credit report, closing an account may have a positive effect on one person's score, a negative effect on anothers, and do nothing to still another person's.
• The credit score changes the moment there is a change on a person's credit report.  If there is a collection reported today, the score will decrease immediately.

Why is it important?

1.  It can influence almost everything you do including:

• Obtaining a cell phone account
• Getting credit cards, or lines of credit
• Getting mortgage and automobile loans
• Getting insurance
• Getting utilities turned on and how big a deposit you will have to pay
• Looking for a new job

2.  It is the factor that determines what interest rate you are going to get when you borrow money from a lender.  A low credit score results in a higher interest rate, monthly fees, and amount of interest being paid over the total life of the loan.  This means your credit score directly affects your monthly cash flow, your ability to fund your retirement, your ability to finance your children's college education, etc.

* For example, if a person with a 630 credit score wants to buy a $300,000 home with 10% down, using a conventional loan, they will have to pay an additional 3 points or $7,000 more than a borrower with a 740 credit score.

The Three Credit Bureaus

1.    The FICO score is offered by the three major credit bureaus:

A.    Equifax
B.    Trans Union
C.    Experian

• In the mortgage business we run a "tri-merge" credit report that merges all three types of reports into one.  The lender throws out the top and bottom score and uses the middle score.
• If a husband and wife are qualifying, the lender takes the lowest mid-score of the two.

2.    A borrower will probably have 3 different scores from the three different bureaus because:

A.    The bureaus don't all share the same data.  Some creditors report to every bureau and some report to only one or two.

B.    The software is different for each of the bureaus to calculate the scores.

3.    A persons credit score changes daily.  Yesterday's credit score has nothing to do with today's.  Significant changes up or down can occur in the space of one week.  Usually, unfortunately, people have done something to hurt their score.

The Highs and Lows of Credit Scores

A.    850 is the highest credit score and 350 is the lowest.

• 720 - 850 is a great credit score (only 1 in 1,300 people in the United States have a credit score above 800).  Borrowers in this range will get the best interest rates available.

• 680 - 720 is a good credit score, and borrowers in this range will still get a very attractive interest rate and access to most available loan programs.

• 620 - 680 is an o.k. credit score.  Borrowers in this range may find themselves paying slightly higher rates for some types of loans.

• Below 620 is sub-prime  territory.  A borrower with a credit score below 620 is going to get an inferior interest rate because they are a riskier investment for a lender.

• The 500's - here the interest rates get really ugly and often lenders just reject the borrower's application if anything else in the file is amiss.  (1 out of 8 people in the United States have a score between 500 and 600) - roughly 30 million people).  Borrowers in this range need assistance in getting their credit score improved so either they can qualify now or sometime in the future.  If they do get a loan now with a super high interest rate, they may be able to refinance in 12 -24 months into a normal interest rate loan if they make their mortgage payments on-time and clean up the rest of their credit, and they are represented by a loan officer who cares about their financial well being.

• Which borrower would you rather have? A borrower doing 100% financing with a 700 credit score, or a borrower putting 20% down with a 520 credit score?

B.    The most misunderstood impact on credit scores is the lack of credit.  In order for a credit score to be in a favorable range, an individual must have open active lines of credit.  All current scoring models rely on an individual's past payments to creditors.

 

• dIf you have an insufficient number of these trade lines, your score will be in the 500's or below.
• If you do not have any open, active revolving trade lines, you will need a minimum of two to get started.
• If a borrower has no credit score, the fastest way for them to generate one is to either get a checking or savings account at a bank, go to a bank and get a secured credit card, or get a family member with good credit to put them on an old credit card as a signor.

 

Derogatory Items

A.    Delinquencies (30 - 180 days) collections, judgments and charge off accounts stay on for 7 years whether they are satisfied or not from the date of the critical missed payments.

• The more recent the delinquency and the greater the severity of the delinquency are the two key things to focus on about delinquencies.
• The highest scores result from consumers who have longstanding active accounts with no delinquencies in the past two years, and especially the last 12 months.

B.    Bankruptcies

• Chapters 7, 11 and 12 remain for 10 years from the filing date.
• Chapter 13  remains 7 years from the filing date.
• Accounts included in bankruptcy will remain 7 years from the date they were reported as included in the bankruptcy.

C.    Public records  - city, county, state and federal tax liens remain 15 years from the filing date.  Paid tax liens remain 7 years from the paid date of the lien.

D.    Closed Accounts

• Positive paid and closed accounts remain for 10 years to help the score.
• Closed accounts with delinquencies remains for 7 years from the date they were reported closed - whether closed by the creditor or by the consumer.

E.    Child support judgments remain 7 years from the date the judgment is filed.

F.    Inquiries - most inquiries remain for 2 years.  All inquiries must remain for a minimum of one year from the date the inquiry was made.

The Five Factors that make up a Fico Score


1.    PAYMENT HISTORY equals 35% of the total FICO score.

• Items like collections and charge-offs that are 3-4 years old have little impact on the credit score

UNLESS: You pay them off.  The minute you pay them off they become "updated" and the "date of last activity" becomes current.  The more recent the delinquencies, the more the credit score drops.

• You want to keep bad debt dead and good debt active.   When it comes to credit reports, an older credit history is better.

Missing low payments is better than missing high payments.  So, if you missed a $40 per month payment, it won't have as negative an effect as if you missed your car payment of $650.

2.    AMOUNT OWED equals 30% of the total credit score.

Amount owed measures the balances on revolving accounts - usually credit cards.  This is a tricky area, but, if understood, can significantly influence the credit score.

The ratio only pertains to revolving debt, usually credit cards.  To calculate the ratio, simply divide the current balances on people's revolving lines by the credit card limits.

There are point breaks at 50%, 30%  and then around zero.

1. Zero balances of course are the ideal to maximize your credit score.
2. 30% balances to credit limits are almost as good and more realistic for most people.
3. 30%-50% balance may lower a credit score slightly (10-20 points)
4. 50%-70% causes your credit score to drop substantially - up to 30-50 points.
5. 70%-100% causes an even steeper decline in your score probably from 70 to 100 points into the high 500's  or low 600's.
6. Over the limit accounts can be devastating.

Most debt guru's recommend that you pay off  highest interest rate cards first as a financial wealth building strategy.  That's a good idea, but, if you are thinking of purchasing or refinancing a home, better money saving strategies are to pay down any credit cards that are over 30% of the limit or to spread the balance  over a few cards rather than having it all on one card.  Your credit score will improve, and you may end up saving thousands of dollars by getting a lower interest rate than you would otherwise have gotten.

The credit scoring system does not discriminate between personal and business credit cards.  So, if a person has business credit card debt, and it's maxed out, their score will be lower_.

3.    LENGTH OF CREDIT HISTORY equals 15% of the total credit score.

Tips:

• The longer your credit history the better.  Don't cancel a credit card that's several years old or you may lower your score.  A person with new credit will have a score lower than someone with old credit.

• You should make a purchase on each of your credit cards at least once every 2-3 months.  If a card goes longer than that without any activity, it may show up as unrated, and you don't get the points you might have otherwise received.

There can be a dilemma when a borrower takes out a new credit card to create a higher limit when we just said that a newer card will shorten your length of credit history.

However we have to look at the percentages - "length of credit history" is only worth 15% whereas "amount owed" is worth 30%.  It is probably advantageous to get the new card to spread out your existing debt.  You will be penalized on the new card you just obtained but you will benefit from having those balances reduced and that section of the score is worth twice as much.

4.    NEW CREDIT equals 10% of the total credit score. The most significant part of new credit is inquiries.

• An inquiry is when someone pulls your credit for the purpose of giving credit.  There are two types of inquiries - one impactful and the other not.

Hard inquiries - these can cost you from 2 to 50 points.  They include:

• Inquiries from a potential creditor or lender, the IRS, or someone who has a judgment against you.
• If you have a good credit report, a hard inquiry may only cost you 2 - 5 points.
• If you are a credit wreck, you are under a magnifying glass and can lose 25 to 50 points.
• Because looking for a mortgage or auto loan may cause multiple lenders to request your credit report even though you are only looking for one loan, multiple auto or mortgage inquiries in any 14 day period count as just one inquiry.  Additionally, the score ignores all mortgage and auto inquiries made in the 30 days prior to scoring.  So, if you find a loan within 30 days, the inquiries won't affect your score.
• Inquiries affect your score up to one full year.  They don't drop off until a year after you have your credit inquired on.

Your score is only reduced for the first 10 inquiries from 2-50 points depending on the other variables involved.  Once you get to 10 inquiries you might as well go out and get 50 inquiries because it isn't going to affect you any differently than if you had just 10.

Soft Inquiries - cost zero points and include:

• You pulling your own credit report,
• When a person pulls their own credit report the credit scores may be different from those pulled by a lender.
• One of your existing accounts pulls your credit for a periodic review,
• Inquiries related to insurance and
• Inquiries made by potential employers.

5.    TYPES OF CREDIT used equals 10% of the total score.

Types of credit used includes:

• Credit cards and lines of credit,
• Retail accounts,
• Installment loans and
• Mortgage, automobile and consumer finance accounts.

Credit bureaus like to see a variety of types of credit and a good mix is always best.

• An ideal mix of credit would be:
• A mortgage loan,
• An automobile loan,
• Major credit cards or lines of credit,
• All paid on-time over a period of 1 - 2 years.

Three  to five  revolving credit card accounts (credit cards or lines of credit) is the optimal  number that the score really rewards.  Anything less than that means you haven't established enough credit, and anything more means you may be a heavy credit user subject to being penalized.

Now, as I said earlier, 1 out of every 8 prospective homebuyers have a low score between 500 and 600, which means they are faced with the fact that they might not qualify for a loan they can afford.  It is important to your financial future to work with a lender who knows how to manipulate the score, who knows how to explain to the client what is happening, and who can set up a plan for the client based upon the possibility of them receiving a type of loan they weren't expecting to have to accept.

We seem to be transitioning away from a 100% seller's market where every home had multiple offers within days of coming on the market and listings were like money in the bank to all of you to a more normal market where buyers have a high dollar value to a Realtor®.  In this situation it is critical to develop as many prospects into viable and eager buyers as possible.

How we improve people's credit scores!

We have four different tools to assist credit challenged borrowers that have proven to generate more commissions for my Realtor® partners.

1.    The first is our Credit Repair Kit.  I give this kit to every client that has extremely low credit scores when I first meet with them.  It gives them strategies and instructions on how they can solve their issues themselves.  This is great for people who don't have the money to pay for somebody like a credit remediation company to assist them.

2.    The second tool is our PATH2BUY.  We use this to stay in touch with people who are working on their credit problems.  Our goal is to assist you in getting your credit upgraded, no matter how long it takes.

3.    The third tool we use is rapid re-scoring, which can be a fast and effective way to correct errors and omissions on a client's credit report within as little as 72 hours.  The key to rapid re-scoring is that the borrower has to have proof, usually in writing, from the creditor to send to the re-scoring company.  The re-scoring company then turns the proof over to the credit bureaus, and, if the bureaus agree a mistake was made, they will make the correction and update the client's credit report, allowing for a new credit score to be calculated.  Rapid re-scoring does not erase negative credit history from the credit report.  Rapid re-scoring costs $35 to $100 for each error to be corrected for all three bureaus. 

4.    The fourth tool we use is credit restoration or credit remediation.  This is a longer process than rapid re-scoring and usually takes 90 to 180 days.  What happens in this process is that the consumer pays a credit remediation company with an intimate knowledge of the credit scoring model to work with the credit bureaus on items the consumer feels are incorrect on their credit report.  Once the credit bureaus are notified of a disputed item, they have 30 days from the date they are notified of a dispute to verify the item(s) in question with the original creditor.  If the original creditor does not verify the account within that time, the disputed account must be corrected or deleted from the credit file.  At this point the score will adjust immediately.  Credit restoration can cost anywhere from $350 - $1,200.

Repairing your credit

Your credit score, or FICO score, is a rating created by Fair Isaac to boil down all of the information in your credit

report to three digits, ranging from 300 to 850, that tells lenders how likely you are to pay back your loan.

It's always a good idea to obtain a copy of your credit report before applying for a home loan.  This allows you to

correct any errors on your credit profile in advance, establish credit if necessary or start repairing your credit if you've had problems in the past.  Lenders look very carefully at your credit as an indicator of your "character" or your willingness to repay your loan.  Having poor credit, little or no established credit or unresolved disputes with creditors can affect your purchasing power and your ability to get a loan.  To avoid unpleasant surprises down the road, you can request a copy of your credit report for a small fee by writing to any one of the following credit bureaus:

1.         Experian (formerly known as TRW): (888) 397-3742

P.O. Box 2002, Allen, Texas 75013-2104

Website: www.experian.com

2.         Trans Union Corporation: (800) 888-4213

P.O. Box 1000, Chester, PA 19022

Website: www.transunion.com

 

3.         Equifax: (800) 685-1111

P.O. Box 740241, Atlanta, Georgia 30374

Website: www.equifax.com/consumer.html

 

As a part of our standard pre-qualifying procedure, Cherry Creek will order a credit report for you.  All we need is your:

1) Full Name 2) Current Address 3) Previous Addresses for the last 5 years 4) Phone Number

5) Date of Birth 6) Social Security Number 7) Spouse's Name

We'll run the report and review it with you, saving you time and money.  Your credit report will generally include the following:

a) Inquiries: If you have recently applied for any type of credit (car loan, credit card, etc.) chances are that this will show on your report as an "inquiry" into your credit.  This means that you have authorized a bank, department store, etc. to check your credit.

b) Public Records: Any judgments, liens, bankruptcies or foreclosures you've had will show up in the Public Records section of your credit.

c) Open Accounts: All accounts you have that are currently open will be shown.  Included in the report are:  the name of the creditor, account number, the original amount loaned and the date it was opened, the current balance, a rating on how you've paid, the terms of the loan and how the account was secured are included in the report.

d) Closed Accounts: Past accounts that have been closed will also be indicated on the credit report.

e) Derogatory Accounts: Any accounts 30, 60, 90 or 120 days late will appear

in this section as will any repossessions, charge-offs, collections, etc.

 

What to Look for on Your Credit Report

When you receive your credit report, check for the following items:

•           PERSONAL INFORMATION

Be sure that all of your personal information is correct and current.

•           CREDIT INQUIRIES

Check to make sure any inquiries showing up on your credit report were actually authorized by you.  Inquiries can stay on your report for up to two years.

•           INCORRECT ENTRIES

If there are mistakes on your credit report (i.e. accounts that aren't yours or on time payments that are showing as late), you can have them corrected through a simple procedure that we'll outline for you later in this handbook.  Errors on credit reports are quite common.

•           OUTDATED NEGATIVE CREDIT

If there are unfavorable credit items showing on your credit reports, check to see if they are outdated.  According to the Fair Credit Reporting Act, derogatory information must be removed from your credit report after a certain period of time has passed depending on the nature of the problem.

Late Payments - 7 years

Judgments - 7 years

Liens - 7 years

Charge Offs - 7 years

Repossessions - 7 years

Bankruptcies - 10 years

Outdated negative credit can also be removed from your credit report.

•           CURRENT NEGATIVE CREDIT

If you have current credit problems, the time to resolve them is before you buy.  It may take some time to do but it is well worth making the effort to clear up credit issues.  Re-establishing good credit after a bankruptcy or other credit problems is also very important.

Safe Points to Improving Your Credit Score

Simply obtaining one credit inquiry removal can instantly add 5-10+ points on the credit score.  Inquiries are easy to get rid of.  Here's how.  When you are going over the credit report, only credit inquiries that are signed for by you, the individual are valid.  Therefore, it's important to ensure that all inquiries have a valid signature.  If an inquiry was run through without a signature, it is very possible that you can get it removed the first time you try.  All you need to do is send an Unauthorized Inquiry Letter.  Below is a sample for such a letter.  Be sure to sign it and attach a copy of your ID and social security number.  Also, send a copy to each Bureau reporting the inquiry.

 

 

Sample Unauthorized Inquiry Letter

 

Client's Name

Address

City, State Zip

 

Date

 

 

Credit Bureau Name

Address

City, State Zip

 

Re: Unauthorized Inquiry

 

Dear (Equifax/Experian/TransUnion)

 

I am writing to request that you remove the following unauthorized inquiry from my credit report:

 

(List the name of the lender who pulled the report and the date of the inquiry).

 

Per my rights under FCRA Section 611, 623 and FACTA, if you do not delete the above inquiry from my credit report, I am requesting that you supply me with evidence that you received from the creditor in support of their claim that I authorized this inquiry.

 

Otherwise I look forward to receiving an updated copy of my report and would like to thank you in advance for your assistance.

 

Sincerely,

 

(Signature Required)

 

Client's Full Name

SS#

Date of Birth

 

Safe Points to Improving Your Credit Score

Another area that can really stack up the points is by making sure that Home Equity Lines of Credit are not being reported as revolving accounts.  We all know that revolving accounts fall under the limit versus balance ratio rule and let's face it, HELOC's are in most instances always maxed out.  One maxed out credit card account can cost you 75+ points.  If you have a HELOC reporting as a revolving account below is a sample letter to send to the Bureau(s) reporting the account inaccurately.

 

 

Sample

 

Client's Name

Address

City, State Zip

 

Date

 

 

Credit Bureau Name

Address

City, State Zip

 

Re: Home Equity Line of Credit Account Rating

 

Dear (Equifax/Experian/TransUnion)

 

When reviewing a copy of my current credit report, I found that you are reporting the following account as a Revolving Account which is affecting my credit score VERY negatively.

 

* Account Name, Account #

 

Per the attached statement (Include your HELOC statement), please note that this is a secured Home Equity Line of Credit account.  Please change the rating to reflect this immediately so that I do not appear to be maxed out on a credit card account, which per Fair Isaac, can bring my credit scores down by up to 75 points.

 

I look forward to receiving an updated copy of my report and would like to thank you in advance for your assistance.

 

Sincerely,

 

(Signature Required)

 

Client's Full Name

SS#

Date of Birth

 

Repairing Your Credit

 

If any of the information contained in your credit report is incomplete or inaccurate, it is possible to have it removed. The process for doing this is simple and well worth taking the time and effort to do it.  The pay off is a clean credit report and possibly, a new home!

A section in the Fair Credit Reporting Act states that if an item on the credit report is inaccurate and the consumer (you) disputes the information being shown, the consumer reporting agency is required to, within a reasonable time period, re-investigate and record the current status of that information.  If, after the re-investigation, the information is found to be incorrect or if the item cannot be verified, it must be deleted from the credit report.

For example, if you write a letter to a consumer reporting agency about a store account that showed several late payments on your credit report and disputed the information, the consumer reporting agency is required to re-check it by requesting  the store to verify the information.  If the store does not respond or is unable to locate the record within 30 days, the information in dispute must be removed from your credit report.

To dispute inaccurate information on your credit report, follow this easy process outlined by Tom Burgos, author of "Survival Guide To Credit Repair":

1)  Write a dispute letter (see our example on the next page).

2)  Explain what you want removed from your credit report.

3)  Provide copies of any documents or information on your behalf that may help your case such as divorce or bankruptcy papers.

4)  Make sure you point out how damaging the information is to your reputation, credit worthiness and character.

5)  Send your dispute letter to the consumer reporting agency by registered mail so that you have the name of the person who received it as well as a record for your file.

6)  Always handwrite your letters - never type them.  Handwriting the letter makes it appear more personal and differentiates it from all the others they receive.

It will take anywhere from 2 to 4 weeks to receive an answer from the consumer reporting agencies.  If, after 30 days, you have not received a reply, the agency is required to immediately remove the information from your file.

If the store or finance company that reported the information originally does respond to your dispute letter and says that the information is accurate, you still have the right to add your side of the story to your credit file.  It is a good idea to follow through and do this since the consumer reporting agency is required to send this statement to anyone you apply for credit with along with your credit report. This gives you an opportunity to tell your side of the story.  See "Re-Establishing Your Credit" for further details.

Sample Dispute Letter

Use the format shown below to request the consumer reporting agency to investigate the item in dispute.  This letter may be used for any accounts showing up on your credit report that aren't yours, accounts belonging to an ex-spouse, a debt that should have been a part of a bankruptcy, an account that belongs to someone else with the same name or outdated negative data.  (In the case of a divorce or bankruptcy, include copies of the appropriate papers.)  A brief explanation of the problem may also be incorporated into the letter.

 

 

Your Name

Current Address

Previous Address

Your Social Security Number

 

 

 

Consumer Reporting Agency

Street Address

City, State,  Zip

 

Dear Sir  or Madam,

 

I have recently read the Fair Credit Reporting Act and understand my rights under it.   I am requesting that you please investigate the information shown below.  I have found it to be incorrect and very disturbing.  It is not only very damaging to my credit worthiness but also to my character.

 

Name of Creditor:        __________________________

 

Subscriber's Number:   __________________________

 

Account Number:        __________________________

 

Amount:                      __________________________

 

Please forward an updated copy of my credit report as soon as your investigation is complete.

 

Thank you very much for your time and consideration.

 

Sincerely,

 

(Your Signature)

 

What a Lender Looks For

 

"This three digit number makes all the difference when you're shopping for the lowest interest rate."

In fact, recently a borrower with a score of 720 to 850 would pay 5.78 % for a 30 year mortgage, while someone with a score of 620 to 674 would pay 7.59%, according to MyFICO.com, a division of Fair Isaac.

- Sarah Max, CNN/Money senior writer

Your credit history is what the lender reviews to determine your "character" or your willingness to repay the loan.  Underwriters (the people who actually make the final decision on your loan) look carefully at your past payment record as shown on your credit report.  Generally, the underwriter is looking for the intent to have excellent credit.  An excellent credit history does not have to be a perfect or spotless credit record.  A minor instance of poor credit or a late payment can usually be explained as long as there are plenty of other accounts that have good payment records.  This proves your intent to have excellent credit.

 

What underwriters don't like are patterns of late payments.  For example, if you had late payments consistently over the last 3 years or had lates after a bankruptcy, your package may not be looked at favorably.  In cases like this, it is important to repair the credit to insure that the report looks as clean as possible.

 

If any of the following items appear on your credit report, further explanation from you will be required:

 

1)         Credit Inquiries

We will need a letter of explanation from you and if you did obtain a loan, we'll need the paperwork in order to determine what the monthly payment(s) and balance(s) are.

2)         Late Payments

Any and all derogatory items that show up on your credit report will require a written explanation from you.

3)         Judgments, Liens and Collections

A written explanation is required and the judgment, lien or collection will have to be paid off prior to close of escrow if it is not marked "satisfied" on the credit report.

4)         Bankruptcy

Bankruptcies must be discharged for a minimum of two years* and we will need a letter of explanation and complete bankruptcy papers including the schedule of creditors and the discharge.  You must also have re-established, good credit since that time.

* NOTE: Some bankruptcies do not require two years discharge.  Check with your Cherry Creek loan officer on your particular situation.

How toWrite  An Explanation Letter

A letter explaining late payments or derogatory credit should include the following points:

•           The derogatory item was due to circumstances beyond your control.

•           It was an isolated incident and will not happen again.

•           It was not a result of credit abuse or over-extension of financial means.

 

Re-Establishing Your Credit

Even if you are currently unable to get a home loan because of your credit, you will eventually be able to buy if you are motivated and willing to do what it takes to re-establish a good credit record.  Following the steps outlined below will allow you to do that.

1) Contact your creditors.

Some creditors will remove derogatory information from your credit file if you make a full or par-tial payment toward the debt.  They may also "re-age" the account by making the current month the first repayment month and will show no late payments.  Call the creditor directly and ask to speak to someone in the customer service or collections department.  Offer to pay an amount monthly that is comfortable for you and ask if they will consider re-aging the account.  Since the bank or store would rather get paid than not, they may do it for you.  If they say no, you can still offer to repay the debt. After you have made 2 to 3 payments on time, write a dispute letter to the credit reporting agency.

 

2) Add positive information to your file.

Send information to the credit reporting agencies that shows stability and the ability to make pay-ments on time.  For any accounts that do not show on your credit report that you pay on time, you can send account statements and copies of cancelled checks to show your payment history and the credit agencies may add them to your file.  If you have long-term employment, have lived in the same place for a length of time, etc., be sure to add documentation to your file that shows this stability.

 

3)         Add statements to your credit report.

If you feel that your side of a dispute requires further clarification, you have the right to file a statement explaining your side of the story.  This statement should be a summary of 100 words or less. The credit reporting agency will then send this information along with your credit report to any bank, store, etc. who requests a credit report on you.  This allows any potential credit grantors to see additional information on which they can base their decision.

 

4) Get credit in your own name.

If you are married and your spouse has had financial problems, be sure that you establish good credit in your name alone.

5) Re-establish good credit.

If you've had credit problems in the past (especially a bankruptcy), it is important that you re-establish good credit.  There are several ways to do this including:

• Get a secured credit card.

Many banks will, in exchange for a sum of money deposited with them, give you a credit card.  They will usually allow you to borrow only the amount on deposit on the credit card.  For example, if you put $100 on deposit, you can charge up to $100 on the card.  The sole reason for doing this is to establish or re-establish a good credit rating.  Use the card and make your payments on time.  Your credit can quickly improve.

You may also try applying for oil company cards or department store cards since they are frequently easier to obtain.

• Obtain a secured loan.

If you have a passbook savings account or can open one, ask the bank to give you a loan against that money. They keep your passbook until the loan is paid in full.  Make sure the bank reports on the loan to the credit bureau.

 

• Work with a local store.

Some businesses will give you credit on a purchase regardless of your credit standing.  You may pay a higher rate of interest, need a co-signer or a large downpayment but this is still a good way to improve your credit.

 

6) Satisfy judgments, liens and collections.

Make it a priority to pay off any judgments, liens or collections against you.  Whenever you pay something off, never do it through the mail.  Go in person and request a receipt so that you will have proof that you have actually paid it.

Depending on the extent of your credit problems, by following the procedures outlined in this handbook, you can clear the slate.  Be persistent and positive and you'll soon find yourself on the road to homeownership!

How much impact does a short sale have on FICO Scores? How about a foreclosure? Frequently heard questions by CCMC Loan Consultants from clients.  New FICO research sheds light on the subject.

 

The FICO study simulated various types of mortgage delinquencies on three representative credit bureau profiles of consumers scoring 680, 720 and 780 respectively.  All consumers had an active currently-paid-as-agreed mortgage on file.

 

The results are below.  The first chart showing the impact on the score for each stage of delinquency, and the second shows how long it takes the score to fully "recover" thereafter.

 

Starting FICO Score	680	720	780
FICO Score after these events
30 days late on mortgage	600-620	630-650	670-690
90 days late on mortgage	600-620	620-630	650-670
Short sale/deed-in-lieu/settlement (No deficiency balance)	610-630	605-625	655-675
Short sale (with deficiency balance)	575-595	570-590	620-640
Foreclosure	575-595	570-590	620-640
Bankruptcy	530-550	525-545	540-560

 

Source: FICO Banking Analytics Blog

 

Starting FICO Score	680	720	780
Time for FICO Score to recover after:
30 days late on mortgage	9 months	2.5 years	3 years
90 days late on mortgage	9 months	3 years	3 years
Short sale/deed-in-lieu/settlement (No deficiency balance)	3 years	7 years	7 years
Short sale (with deficiency balance)	3 years	7 years	7 years
Foreclosure	3 years	7 years	7 years
Bankruptcy	5 years	7 to 10 years	7 to 10 years

 

Note: Estimates assume all else held constant over time (e.g. no new accounts, no new delinquency, similar outstanding debt)

 

Source: FICO Banking Analytics Blog

All in all:

 

• The magnitude of FICO Score impact is highly dependent on the starting score.
• There's no significant difference in score impact between short sale/deed-in-lieu/settlement and foreclosure.
• While a score may begin to improve sooner, it could take up to 7 to 10 years to fully recover, assuming all other obligations are paid as agreed.
• In general, the higher the starting score, the longer it takes for the score to fully recover.
• Even if there's minimal difference in score impact between moderate and severe delinquencies, there may be significant difference in time required for the score to full recover.

Bankruptcies, short sales, foreclosures and mortgage loans

 

These three events all have a dramatic impact on your ability to obtain a mortgage loan.  Below is an overview of how these three difficulties impact time wise your ability to qualify for a home loan.  Every case is individual and sometimes involve extenuating circumstances.  If you have experienced a bankruptcy, short sale, or foreclosure, it is extremely important to talk to a Cherry Creek mortgage consultant to chart the credit path that is best for you to achieve your goal of home ownership.

 

FHA/VA DEROGATORY CREDIT CHART

 

FHA                                                    VA

Derogatory Event	Waiting Period and/or Guideline	Waiting Period and/or Guideline w/extenuating circumstances	Waiting Period and/or Guideline	Waiting Period and/or Guideline w/extenuating circumstances*
Bankruptcy Ch. 7 or 11	2 years	1 year	2 years	1 year
Bankruptcy Ch. 13	1 year with 12 months satisfactory payments to trustee.  Must have court permission (not trustee) to incur new debt.  If not fully discharged for 2 years loan must be manual UW.	Same	1 year with 12 months satisfactory payments to trustee and trustee permission to incur new debt.	Same
Foreclosure/Deed-in-lieu**	3 years	UW Discretion	2 years	1-year w/current satisfactory credit
Short Sale	Borrower current at time of short sale: No wait if all mtg. and installment debts pd. On time for 12 months preceding short sale. Borrower delinquent at time of short sale: 3 years from date of sale.  If previous mortgage was FHA, 3 years from date CAlVRS claim was paid.	Same	No guidance. Typically treated as foreclosure but is at UW discretion.	Same.

 

*Examples of circumstances out of the borrower's control are death of a primary wage earner, serious illness, unemployment, etc.  Generally divorce is not considered an extenuating circumstance nor is derogatory mortgage history due to job transfer or relocation.

 

** If mortgage is included in bankruptcy, waiting period clock still starts when property is transferred/sold back to lender, NOT when bankruptcy is discharged.

 

Fannie Mae versus Freddie Mac

Waiting Periods for Derogatory Credit

 

Fannie Mae                                         Freddie Mac

Derogatory Event	Waiting Period Requirements	Waiting Period with Extenuating Circumstances	Waiting Period Requirements Credit Score 680	Waiting Period with Extenuating Circumstances
Bankruptcy Chapter 7 or 11	4 years	2 years	4 years	2 years
Bankruptcy Chapter 13	1. 2 years from discharge date 2. 4 years from dismissal date	3. 2 years from discharge date 4. 2 years from dismissal date	5. 2 years from discharge date 6. 4 years from dismissal date	7. 2 years from discharge date 8. 2 years from dismissal date
Multiple Bankruptcy Filings	5 years if more than one filing within the past 7 years	3 years from the most recent discharge or dismissal date	5 years if more than one filing within the past 7 years	3 years
Foreclosure	7 years	3 years 3 years up to 7 years: 1. 90% maximum LTV ratios 2. Purchase principal residence 3. Limited cash-our refi, all occupancy types	7 years	3 years
Deed-in-lieu Pre-foreclosure Short-sale	1. 2 years - 80% maximum LTV ratios* 2. 4 years - 90% maximum LTV ratios* 3. 7 years - LTV* ratios per the Eligibility Matrix	2 years - 90% maximum LTV ratios	4 years	2 years

 

We are very experienced in assisting people who have suffered through these unfortunate circumstances.  Contact us to discuss your personal situation.