Blown Mortgage

This post is from the Blown Mortgage Hall of Fame.  It originally appeared back in July 2007 on my series on credit.  Now more than ever your credit score is vital to securing financing.  I’m on vacation from Saturday until Tuesday the 15th so enjoy some of the classics while I’m gone. 

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In part 1 of this series on credit we talked about how important credit has become in surviving the current home depreciation environment and avoiding the ARM Reset Foreclosure Trap. In part 2 of the credit series we looked at the elements that comprise your credit score. Part 3 covered improving your score on your own and outlined the importance of credit management and protecting your credit report. Inpart 4 examined the pros and cons of using and outside credit repair service.  Our conclusion was that it probably made sense to try to fix credit errors yourself.  In the conclusion of the series we look at the best ways to manage your score and ensure you’ll keep your score heading up, up, up!  Here is a recap of the series so far and where we are at to date:

Credit Series Overview

1. Why credit is so important
2. Understanding elements of credit
3. Improving your score organically
4. Improving your score using 3rd party help
5. Managing your score

The Goal

Over the past four articles we’ve examined credit and how your actions can improve or damage it.  We’ve given you some tools to repair and improve it.  Today we will give you some tips for maintaining your score and improving it.  The main goal of this series is to help people with short-term adjustable rate mortgages improve their credit enough to enable them to refinance in to a better loan when the first rate adjustment date arrives.  This is the best chance you have to avoid the ARM Reset Foreclosure Trap if you are planning on staying in your home.

You can’t control the value of your home, you can’t control the interest rate your loan will reset to when the fixed period ends, you can’t (assumably) pay down your mortgage balance significantly; the one thing you can do is improve your credit.  You do this by managing your score.

Manage Your Score

Managing and improving your score is kind of like exercise.  The more you use it, condition it, and look after it the better and stronger it becomes.  If you go to the gym, eat well, keep track of your weight, caloric intake and improvements at the gym you become healthier and stronger.  Same goes for credit.

Track Your Score

It is important to keep track of your score, its changes and performance and whether it is increasing or decreasing.  The best way that I have found to monitor your score is through myFICO.com’s Score Watch program.  This program monitors your Equifax credit score daily and your FICO score weekly.  It does the work for you.  For about the cost of 2 cups of Starbucks a month you’ll be alerted to any changes to your credit report and score.  This is a valuable service that anyone who wishes to invest in protecting and improving their credit score should use.

I’ve stated through out this series that my wife and I both used the Score Watch program while improving our credit and it helped me add well over 100 points in the last year through proper management and payment history.  Please note again that I am an affiliate of myFICO.com and do get compensated for sales through my site.  However, I have been promoting myFICO.com for over 3 years now and have only recently in the last two months become and affiliate.  It is a great service.

The nice part about this service is that if anything derogatory appears on your credit  you can research and dispute it right away to have it removed.  You can also take a proactive approach to managing your scores.  If you see your scores decline you can look at your report and determine what may be negatively impacting your score.

Proactive Management

Just like anything else of great import in life; it is better to be proactive about your credit score than reactive.  The worst feeling in the world is applying for credit and not knowing if you’ll be approved or not.  Not knowing your score puts you at a disadvantage.  It gives people power to tell you what you do and don’t qualify for.  It puts you at the mercy of people who would try to take advantage of you by your ignorance in this arena.  Know your score.  It is as important as your social security number, and more important than your drivers license number.

Take these steps to actively manage your credit:

1. Sign up for Score Watch from myFICO.com
2. Watch for any changes in your score, positive or negative
3. Maintain a close eye on your credit card balances - keep your balances ideally under 33% of your credit limit and definitely under 50%
4. Always make your mortgage payment - missing a mortgage payment can be the single most devastating thing you can do to negatively impact your credit score
5. Sign up for automatic payments on all revolving accounts - this simple move is guaranteed to improve your score; especially if you have a tendency to be lazy with bill payments
6. Promptly follow up with all disputed items - work quickly to remove erroneous items from your credit report and payment history
7. Get everything in writing - it is extremely important that you keep a written record of any and all disputes you have regarding your report and payment records on your credit report.  Keeping written documentation will help you whenever another party or opinion is needed to settle a credit matter.

If your score is going down

If your score is dropping it is important to obtain a copy of your credit report and ascertain why the score is declining.  Remember your score can be impacted negatively by any of the following:

• Too many inquiries on your credit report
• Balances on revolving accounts of more than 50% of your credit limit
• Reporting of a late payment on your mortgage or other reporting accounts
• Too much debt, for example another car, second home or other large debt item
• Public judgment, tax lien, unpaid parking tickets, etc.

When you review your report take a look at what may be dragging your score down and work to rectify it quickly.  Here are some common ways to rectify a score drop:

• If your score is hit by excess debt it may be because an old mortgage or automobile account is still showing as active even if you’ve already refinanced that old mortgage, or turned in a leased vehicle or sold your old car.  While you no longer have that debt the bureau may count it against you if the account is not properly recorded as closed.
• If you’ve been shopping excessively for items that require a credit inquiry your score will take a temporary hit.  Take a break from running your credit for about 3 to 6 months to allow your score to recuperate.  Too many inquiries make you look desperate for credit - which hurts your score.  Time will clean this up.
• If your balances are getting large it may make sense to open another card and transfer some of the debt to the new card.  This may be effective if you only have one or two cards with high balances.  Having a third may allow you to return your debt levels to under 50% of the credit limits.  This takes discipline however; do not use the new card to rack up additional debt.

Essential Reminders

1. Do not miss a mortgage payment, please.  This is one of the worst things you can do.  There was a study recently that showed Americans are more likely to make their credit card payment than their mortgage payment.  If you are in a short-term adjustable ARM and are planning on refinancing in the next 12-18 months this is a terrible decision.
2. Know what is on your report.  I’ve seen loan applications declined because borrowers didn’t know that their gym membership was reporting on their credit and they neglected to pay their gym dues.  I’ve seen a late library book from a University library shave 30 points of a credit score.  Don’t let trivial items hurt your chances at getting a great loan.
3.  Fight erroneous information. No one is going to clean up your credit report for you with out you being vigilant about keeping it clean and pristine.  Dispute errors quickly and in writing to document your efforts.  Your credit is your responsibility.

Avoiding the ARM Reset Foreclosure Trap

If you refinanced to a high loan-to-value (85% or higher) loan over the last two years; and chose a short-term adjustable rate mortgage in the process - these articles are for you.  Regardless if your loan expires in 6, 12, or 18 months it is important to begin working on your credit now.  The reason is simple.  The combination of falling home prices, rising interest rates and tighter underwriting guidelines will make high loan-to-value loans available only to those with the best credit.  If you are not in that group you will have to deal with the consequences of an ARM Reset and payment adjustment which can be financially devastating.

Work now to avoid that trap.

First time homebuyers

This advice applies to you as well.  By managing your score before you begin the home buying process  you will ensure yourself access to the best rates and loan programs on the market.  The more programs you have to choose from the more manageable owning your first home becomes.

Conculsion

Credit is essential.  Access to credit is a major determinant to your success and quality of life; especially in regards to your home.  Please understand that recent events in the mortgage market make it essential-now more than ever-to improve your score to protect yourself from deleterious changes.  I hope that you are able to use some of these concepts and skills to raise your score.  Using these same skills I personally raised my score over 100 points in two years and 200 points in a little over 3 to put me in the best position possible for my financing needs.  You can do it too.

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This post is from the Blown Mortgage Hall of Fame.  It originally appeared back in July 2007 on my series on credit.  Now more than ever your credit score is vital to securing financing.  I’m on vacation from Saturday until Tuesday the 15th so enjoy some of the classics while I’m gone. 

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In part 1 of this series on credit we talked about how important credit has become in surviving the current home depreciation environment and avoiding the ARM Reset Foreclosure Trap. In part 2 of the credit series we looked at the elements that comprise your credit score. Hopefully now you have a good understanding of why your credit score is so important and how it is calculated. Here is a recap of the series so far and where we are at to date:

Credit Series Overview

1. Why credit is so important
2. Understanding elements of credit
3. Improving your score organically
4. Improving your score using 3rd party help
5. Managing your score

As I said in my last post you are going to use the understanding of the elements of your credit score to help you improve your score organically. When I say organically I mean “by yourself.” In this post we are going to talk about some of the most powerful ways to improve your credit score on your own. So let’s get started.

Setting a Baseline

Before you can work on improving your score you need a baseline; you need to know where you are at so that you can set some realistic targets for improvement. “If you don’t know where you need to go, any road will get you there” - someone famous. This is true with your credit score as well. You won’t know which of the following tactics to use or not use unless you understand your credit file and the items in it. In order to establish your credit score baseline you need a copy of your credit report.

Getting a Copy of Your Credit Report

There are thousands of services that offer “free” credit reports just for joining their service. As in mortgages - anything that is too good to be true probably is. These sites really don’t offer free reports, and in fact many of them have been subject to lawsuits over their deceptive advertising tactics. The government passed legislation that mandates that each of the three main credit bureaus Equifax, TransUnion and Experian, provide you with free copies of your report once a year. That sounds like the route to go; unfortunately the bureaus are not compelled to (and don’t) provide you with your credit score - only the raw data of the report. While this can be helpful it doesn’t allow us to set the baseline we need.

To get your scores I recommend using MyFICO.com. MyFICO.com is run by the Fair Issac Company which developed the basis for the scoring model FICO. FICO is the score that is given to you based on the information in your credit profile (as discussed in the Elements of Credit article). MyFICO.com offers many services that allow you to view your credit as often as you like with out any penalties. They have very reasonable subscription programs. I highly recommend getting a subscription to their service. For around $3/month you can have access to the information that can save or cost you hundreds each month in mortgage and other loan payments.

I must disclose at this point that (1) I use MyFICO.com and have had exceptional results (which I’ll discuss in more detail below) and (2) that I receive affiliate commission if you choose to sign up for MyFICO.com through this site. This should not taint my advice. If you’ve been reading Blown Mortgage for some time now you’ll no doubt remember in very old posts (before I was a MyFICO affiliate) that I recommended MyFICO to Blown Mortgage readers. In fact I’ve only been an affiliate for about a month but have been recommending them for over 3 years now to clients and friends.

Once you subscribe to MyFICO.com you’ll have access to your reports and scores. Now this is where the fun begins. We are going to look at the best ways that you can improve your scores with out the assistance of credit repair or other type credit services.

Understanding Your Score

First, look at your credit score. What is it? In today’s lending market (which is getting tougher every day) here are the ranges of credit in the order of best to most marginal and the lending category you typically qualify under:

850-720 - Prime (excellent credit)

719 - 620 - Alt-A (good credit)

620 - 540 - Subprime (fair credit)

500 & below - Hard Money (poor credit)

Depending on where you are on this credit ladder will dictate the goals you set for yourself and your score improvement. Let’s set a goal to move you up one credit grade. This is not an easy task but ultimately what we are trying to do is get you to a point where you can avoid the ARM Reset Foreclosure Trap and that will require excellent credit. “Every journey begins with a single step.” - another famous person.

The Information in Your Report

One of the first things to do is to go through your report line-by-line and review all of the accounts listed. Consider this: In June 2004, The U.S. Public Interest Research Group published the results of a survey it conducted involving 200 adults in 30 states to test the validity of credit reporting. Their findings were as follows:

• Twenty-five percent (25%) of the credit reports contained errors serious enough to result in the denial of credit;
• Seventy-nine percent (79%) of the credit reports contained mistakes of some kind;
• Fifty-four percent (54%) of the credit reports contained personal demographic information that was misspelled, long-outdated, belonged to a stranger, or was otherwise incorrect;
• Thirty percent (30%) of the credit reports contained credit accounts that had been closed by the consumer but incorrectly remained listed as open.

Those numbers should be startling to you; and they should remove any doubt in your mind as to why you would want to review your credit. Credit plays a large factor in your quality of life by determining how much you pay for money. Why would you let erroneous information cost you money? You shouldn’t.

Correcting Errors

As you comb through your report look for errors and incorrect or outdated information. Verify all sections including :

• Accounts - are they updated correctly and marked as either closed, paid off or open?
• Public records - are there judgments, liens, bankruptcies or other actions that shouldn’t be on there?
• AKA’s - is someone else’s name on your credit report (especially common if you have a common last name)
• Inquiries - are their inquiries from companies you don’t recognize (could be an early indicator of credit fraud)
• Employment - is there an employer listed that you are unfamiliar with? (could be an indicator of mixed up information in the rest of your report)

If you find errors in your reports here are some simple steps to help fix them. Fixing erroneous information is the number 1 fastest way to improving your credit score.

1. Make a copy of the report and circle the items you are questioning. Keep your original copy for your own records.
2. Prepare a letter to the bureau that provided you with the report in question, and request to have the erroneous item(s) removed. If you have proof of payment for an item in question, include a copy of that documentation.
3. Prepare a letter to the creditor reporting the problem, especially if you feel you are a victim of fraud or identity theft. Inform the creditor that you are disputing an error reported to the bureau, state why the claim is inaccurate, and include any relevant documentation to prove your point.

You can find the addresses for each of the bureaus at the end of your credit report. You can also dispute much of the information online as well; but for record keeping it may make more sense to do it via regular mail. You should keep a file for any items that you dispute.

If you’d like some sample letters requesting updates, changes and fixes to your credit report please email me at morganb@blownmortgage.com.  I will be happy to send these templates to you.

When my wife and I first signed up for MyFICO.com and pulled copies of our reports we couldn’t believe the errors that were on our report.  It was truly amazing.  Over the next 6 months (and yes it can take that long, and longer) we systematically cleared each piece of erroneous information.  There were credit cards that weren’t ours, information from people with similar names (my last name Brown is extremely common) and more.  By correcting those errors our scores each went up approximately 50 points.  It was amazing.  While you may not have the same success you will more than likely get a bump in your score if there is incorrect information on your report that is impacting you in a negative way.

Account Balances

Another easy way to add points to your score is to keep your account balances low.  We talked in a previous post about the utilization rate of your credit.  The lower that is (except when it’s zero) the better your score will be.  However, the magical numbers seem to be 50% and 33%.  If your account balances are below 50% of the total line of credit your score will improve than if they are over that mark.  Further if you are able to reduce them down below 33% of the available credit you may receive another bump to your score.

The simple solution here is to pay down balances so that you get accounts below the magical 50% utilization line.  Going from 52% to 49% can earn you a good chunk of points on your score.  Even shifting debt around to a different card to reduce one high-balance card can earn you points even if you aren’t improving your overall debt picture.

Leveraging Seasoned Accounts

One of the biggest mistakes that people make that cost them points is closing charge cards and other accounts that they have had for a long time that are in good standing.  The urge to pay it off and cut up the card is strong; but its a head-fake.  The longevity of your accounts factors in to your score.  The more seasoned your accounts are the more weight they receive.  If they are in good standing the more they act positively towards your score.  Closing a long-held account is a bad idea and can cost you points.

The solution: keep accounts in good standing open - don’t close them out!

Time

Time heals all wounds is just as true in relationships as it is in credit.  Each month that goes by where you make payments on time and meet credit obligations means a few more points to your score.  These are important.  There are magical breaks (listed above) on the credit ladder that those few points can mean the difference in qualifying for a loan or not.  Run together enough positive months and you will amass points while improving your score.  Some estimates suggest that by making your mortgage payment and other debt payments on time for a period of 2 years you can increase your score 40 - 70 points.  In the scheme of things 24 months is not that much time.

Authorized Co-Signer Accounts

These accounts have recently come under fire and Fair Issac (FICO) has started eliminating these from their score calculations.  The premise is that you are added to an account of a spouse or family member who has excellent credit (like a credit card).  That account shows up on your report and improves your credit score based on the good payment history on the account.  This has been a common practice between parents and children for years; however, just recently changes have been made to discount those accounts.

Solution: Don’t count on authorized signer accounts to improve your credit!

Utilizing Credit

Another common mistake made is that people with previous credit problems shy away from using credit for fear of abusing it again or losing control of the charges and payments.  Unfortunately by not using credit you are not working on improving your score.  If you have damaged credit you should attempt to qualify for a low-limit card (say $350) or apply for a secured credit card.  A secured credit card is one where you credit availability is backed by the amount of money posted to an account that secures that credit.  You can usually open one of these with as little as $500.  By utilizing your credit and showing your ability to use credit in a responsible manner you’ll increase your score.  If you don’t use your credit there will be no track record of good payment history to improve on your credit scores.

Solution: Use credit wisely and actively.  Make small purchases such as gasoline and groceries and repay a substantial part of the bill off each month.

Final Thoughts

Improving your credit score organically really comes down to managing your credit wisely over time.  That is why it is so important to get started today.  If you are in an adjustable rate mortgage that will recast in 9 months start today.  Same advice applies if you have 5 months or 3 years left before you will need to consider refinancing.  The more time you give yourself the better results you’ll be able to achieve through responsible credit management.

Erroneous information can be costing you thousands of dollars.  Sign up for MyFICO.com and review your information. Dispute inaccurate items and watch your credit improve as faulty data gets cleaned up.  Remember you have to drive that process.  The bureaus are slow to react and slow to make updates.  Get started now on cleaning up any wrong data.

Utilizing the above advice can gain you anywhere from 30 to 100 points or more in credit score improvements.  I hope that you are able to clean up your credit and improve your history and profile to climb the credit ladder up to the excellent rung; it gives you the best chance of avoiding the ARM Reset Foreclosure Trap.

For a copy of my free white paper on your credit score please email me atmorganb@blownmortgage.com.  I’m happy to send it along.  If you’d like the template letters to send to the credit bureaus you can email me there as well.

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This post is from the Blown Mortgage Hall of Fame.  It originally appeared back in July 2007 on my series on credit.  Now more than ever your credit score is vital to securing financing.  I’m on vacation from Saturday until Tuesday the 15th so enjoy some of the classics while I’m gone. 

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Credit is king. In the mortgage industry credit makes or breaks loans. In this five-part series we’ll look at credit from a variety of angles:

1. Why credit is so important
2. Understanding elements of credit
3. Improving your score organically
4. Improving your score using 3rd party help
5. Managing your score

In a lax credit environment - like the one we’re quickly coming out of - your credit score is relatively unimportant; there is ample money and credit guidelines are lax. You can get money from almost anywhere. In 2005 whether you had a 500 FICO score or a 720 FICO score you were looking a low-to-mid 5% interest rates on a 30-year fixed mortgage. And only the lowest credit graded borrowers were being denied 100% financing. Credit was rarely an obstacle and money was exceptionally cheap.

In a tightening credit market your score becomes precious. Today you can’t get 100% financing unless you have over a 720 FICO score (or qualify for some niche-type purchase products); and even then, the rates on the second mortgage are not pretty. It has become cost-prohibitive to have high-loan to value (LTV) mortgages, even with excellent credit. Subprime borrowers face exceptionally high interest rates and borrowing cut-offs at 90% for refinance transactions. Poor credit borrowers are being squeezed by tightening credit and falling home prices. Prime borrowers in high LTV scenarios are feeling the crunch as well.

If you are a subprime borrower and in the middle of an Adjustable Rate Mortgage (ARM) with a prepayment penalty and are worried about your loan there is one thing you must be doing: improving your credit. Improving your credit is the key to avoiding the ARM Reset Foreclosure Trap.

Why Credit is So Important

1. Get Approved - As automated underwriting (AU) became more popular your credit score was made the driving factor of your interest rate and loan approval.  While it was always a factor in the past - automated systems needed something they could easily incorporate in to simple logic and the FICO score fit that bill.  And with that its importance went through the roof.
2. More Options with Less Equity - As your credit score increases you become eligible for higher loan to value (LTV) loan products.  This is extremely important in a falling property value environment because it allows you to refinance out of adjusting rate mortgage (ARM) loans even with little equity left in your property.  With out a high FICO score it is extremely difficult to refinance out of your ARM loan and in to a new fixed rate product.  The resultant ARM reset can put substantial payment stress on you and your family.
3. Access to Cheaper Money - Late payments on your mortgage can disqualify you from the most consumer-friendly mortgage programs.  Avoiding late payments on your mortgage means a substantially higher credit score and the ability to refuse mortgage products that include prepayment penalties and higher interest rates.  Good credit means cheaper money and more flexible loan terms, in all market conditions.
4. Access to More Programs - Good credit not only makes money cheaper; it also provides you access to credit that isn’t available to all borrowers.  If you are a subprime borrower you can’t get a stand-alone second mortgage these days.  The only option you have is to refinance your complete mortgage.  However, if you have good credit 2nd mortgages are available at competitive interest rates.

Understanding Credit and the ARM Reset Foreclosure Trap

The ARM Reset Foreclosure Trap is one of the biggest culprits for foreclosures in the country today.  Here is how it works:

• Subprime borrower takes out a high-LTV ARM loan (cash out of other) under loose credit guidelines
• Property values decrease reducing equity in the property
• Interest rates rise
• Credit guidelines tighten eliminating high-LTV mortgage products for subprime borrowers
• Subprime ARM loans reset to much higher interest rates and monthly payments
• Borrowers are locked out of high-LTV mortgage products due to poor credit
• Borrowers are faced with payment shock
• Borrower have no option but short sale or foreclosure

The only way to avoid this trap is to short-circuit it by improving your credit score.  It gives you the ability to maneuver at the high loan-to-value limits; your only chance to secure a new loan with out experiencing the pain of super-high payments on your now-adjusting adjustable rate mortgage. Credit is the only thing that can save you if you plan on keeping the home.  It is imperative that if you are in the situation above that you spend however much time you have between now and your rate adjustment date improving your credit score - and don’t stop until you’ve gotten above 720.

If you are in a prepayment penalty period it’s OK.  Work on your credit.  If you have 6 months until your rate resets - start now; same advice applies if you have 2 years!  By improving your credit score you improve your prospects of being able to secure financing at high loan to value ratios.  And that is the key to stemming payment shock and avoiding foreclosure, short sale or other not-so-fun remedies.

Now, some people may be in a negative-equity position.  At that point improving your credit will not help you find new financing.  Please see my post on avoiding foreclosure for recommendations to manage that scenario.

In the next part of the series we will focus on the elements that make up a credit score and how you can use the information to improve your personal credit score.  Please stay-tuned to this important series for the rest of the week - it has the potential to save your home; and with banks sitting on short sales it may be the only way you have out of the ARM Reset Foreclosure Trap.

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