The Subprime Mess: Now What?

I explained in an earlier post that I would tell you what the whole Subprime Mortgage Mess means to you and how it changes everything. Then I went off on a credit scoring tangent. I apologize.

The world is a different place now. A few short months ago, you could have been able to secure 100% financing with a 580 credit score and practically no money in the bank. Those days are gone.

Now, you have to work for your approval. You have to get educated about the world of credit and how you can take advantage of knowing what other people don't. That's the whole idea behind this blog!

The subprime banks all went belly-up. What's left? Well, mostly two options: conventional financing and FHA financing.

Conventional financing is great! The interest rates are low, however, plan on paying for Mortgage Insurance, or PMI. PMI is an extra charge that you need to pay that kicks in when you finance more than 80% of the house's value. You can get around this by breaking your lending up into two loans: an 80/20.

Conventional financing uses an underwriting model to determine approvals. Generally, you'll need credit scores in the 600's to qualify. You'll need a 680 to qualify for the 80/20 option. If you have less than perfect credit, you can sneak in an approval by showing significant assets. Those underwriting models love assets. Even if you have a large 401(k), that could be enough to give you the approval you're looking for.

FHA is another option. These programs take more time and effort to underwrite. I figure that's why they haven't been very popular. Now, they are a great way to not only get an approval for a less than perfect credit borrower, but to get the finest rates under the sun! There is also a PMI requirement for this loan, but the government makes the PMI much more affordable in an FHA loan.

My advice? If you're thinking about buying or refinancing within one year from now, go to a local mortgage company immediately. Tell them your goals and take this opportunity to get expert advice on your credit report. Ask them what you have to do to become approved in the time period you are working with. And then do what they say! Take action to improve your credit to get the best possible approval.

Also, stay tuned for my Good Faith Estimate Report E-Book. It's just about finished and it's lookin' good. I'll keep you updated.

How to Use Your Payment History to Increase Your Credit Score

As I stated in a previous post, your Payment History is the most important factor when it comes to determining your credit score. Roughly 35% of the entire score is based on this one factor.

Well, it all makes perfect sense. If you pay your bills on time, you'll have a good credit score. If you don't, you won't. That's true, but there are ways to optimize your credit report to show your payment history in a positive light.

A credit report will show each of your current and delinquent credit accounts including the pay history for the last 24 months. This is usually represented by a number.
1= paid on time
2= 30 days late
3= 60 days late
4= 90 days late
9= account charged off as bad debt
X= unknown status

For every month that goes by, you get a new number. If you paid on time, you get a "1". Let's say you fell on bad times and went 30 days late on an account three months ago, but then caught back up. Your report will look vaguely like this:
ABC Credit Company 112111111111 111111111111

The left-most number represents your most recent payment. Your credit score punishes you for making a late payment, but the effect of that punishment wears down as time goes by. Every "1" you get from now on pushes that "2" farther and farther away to the right, making your credit look better and your score rise.

You may find that your report shows an account with many "X"'s, indicating that the status of your payment is unknown. If you believe without a doubt that those x's should be 1's, then it may be worth your while to dispute this information with the credit bureaus. They will force the creditor to come up with the accurate information or they will have to assume you were on time. This could result in an increase in your score.

There is another lesson that can be learned from this explanation of Payment History. If you have a bunch of collections and not much else, you'll quickly find yourself in the dumps as far as your score goes. This is simply because the bureau scores you based on your Payment History. If all your payment history is bad, than your score will be too.

What can you do about it? Put some darn 1's on your report! Open up a new credit account. It may take a few months to get a positive rating, but eventually the bureaus will recognize that you're not all bad. You've got some good credit too! Make sure to start off with a reputable Secured Credit Account at first to avoid a credit denial.

Well, there's some ammunition in the fight to improve your credit and get the loan approval you desire. The best ammunition in any fight is knowledge. I encourage you to read through the rest of my posts and search the internet for other free credit advice.

Best of luck!

What Makes Up a Credit Score?

Your credit score is the most important factor when determining whether you qualify for a loan. When you submit an application for a mortgage, car loan, or credit card the potential lender will check you scores with the three credit bureaus: TransUnion, Equifax, and Experian.

If you understand what makes up your credit score, you can use that information to make your score go up or down. Of course our goal would be to increase it as much as possible.

FICO's website explains what factors make up your total credit score:

Payment History - 35%
Amounts Owed - 30%
Length of Credit History - 15%
New Credit - 15%
Types of Credit Used - 10%

This information doesn't just tell us what the credit scores are made of. It can also tell us at least 5 ways to increase your credit score.

My next 5 posts will focus exactly on that. How to increase your score by affecting the factors that FICO uses to determine your score.

What's so important about a Credit Report??

Lots, I tell you.

Your credit report is a tool that lenders use to determine whether or not to approve your mortgage, car loan, credit card, store credit, etc..

It tells a potential creditor whether you have good or bad habits when it comes to paying your bills. This is broken down very simply into a score between 300 and 800 more or less. This way, the lender can quantify whether you are a good or bad credit risk. They can place guidelines on their approval process that include a minimum credit score required for approval.

The banks and lenders loose money by lending to people with bad bill-paying habits. Banks and lenders HATE loosing money. That is why credit reports exist.

Lenders are mostly looking at two aspects of your report:

• The Score
• Your Payment History

There are other aspects of the report and they are important because they affect your score. But these two are what lenders are grading while they make their decision whether or not to extend credit to you.

The Score

If your goal is to buy a home with no money down, you should be shooting for a minimum score of 600. (It used to be 580 but banks are getting tougher now because of high foreclosure rates)
You should be pushing for a higher score at all times. The higher your score goes, the lower interest rates you could qualify for. At high scores you also have access to more flexible mortgage programs that make the process go more smoothly for you.

Your Payment History

It may happen that you could have a great score but still don't get approved. That's because the lender doesn't underwrite a file blindly. They don't just look at the score. They want to know why your score is as high/low as it is.

If you have only just started using credit, you may have a high score because you have an account with good payment history and no bad accounts at all. Lenders look to see that you have about 3 accounts that you've kept in good standing for the last 12 months. They like to see at least one of those accounts have a high credit limit of one or two thousand dollars.

Now that we know how a potential lender uses your credit report, we can start to adjust things to make your credit look better in their eyes, resulting in that glorious loan approval!

The #1 Most Important But Overlooked Way to Raise Your Credit Score!

First, an apology... I have been away from my blog for quite a while. Some things are just more important. My first baby boy was born Nov 1. I've made him and his mom my #1 priority for the last few months. I'm back now with a fresh new perspective on life.

I appreciate the constant traffic to my site. It tells me that the information I offer you has true value. Many of my visitors arrived here by typing a question into a search engine. I've collected this information and will use it to form my future posts. I'd like to answer any and all questions you have so please feel free to email me directly at: YDL1423@yahoo.com or comment on this blog post. If you live in Pennsylvania, you can head on over to my company's site and work with me directly.

Now, on to credit. It's the big pink elephant in the room that I've danced around up to this point. I wanted to make sure before we dive into this complex and involved topic that you had a strong understanding about how the mortgage process itself works.

The #1 way to raise your score can be found by focusing on the reason credit scores exist in the first place and what they represent. A credit score is simply a numerical value to show lenders what type of credit borrower you are. It asks and answers the basic question "Will this chump pay me back if I lend them money?". You can probably answer this question yourself and create a good estimate on where your credit score will fall.

When any discussion about credit comes up most people begin by asking defensive questions. That's because everyone has tried to get consumers concerned with "fixing" their credit. Everyone tries to get you to focus on all the bad stuff on your report and how these bad accounts are killing your credit score. There are ways out there to dispute information on credit and getting your score adjusted. I don't believe that these are the best ways to raise your score, and I know these methods are certainly not overlooked. Here's what I'm talking about:

Pay your bills on time.

Don't kill me. There's more to it than that. I want to shift your attention away from the bad stuff on your report and towards the best way to raise your score: establish good credit accounts.

Believe it or not, lenders don't only look at your credit score to determine whether or not they will lend you money to buy your new home. They look at what they call "tradelines". Tradelines are credit accounts that show up on your credit report.

So, you have a hundred collections and chargeoffs spanning 20 years. If you have established credit accounts (tradelines) with reputable companies and you've kept them solid, on-time, for 1-3 years, most lenders will still consider you strongly for a mortgage.

There are exceptions to the above but mostly, if you keep 2-4 credit accounts current, you should be fine. Why? Well, you are providing rock-solid proof that you have the ability and the means to pay your bills on time. Even despite your sordid credit past, you've been able to overcome and establish a new respectable routine of paying your bills. It's the loan officer's job to make sure that the lender sees your situation in this light.

Problem : I pay all my expenses with cash. I don't have credit.
Solution: Get some!

The entire world revolves around credit in this day and age. Like computers, it's nearly impossible to get around important technological advances that affect our daily lives. Credit reporting is such a technological advance.

Don't sweat. It's easy to establish good credit if you are disciplined. Stop at your local banks and ask for applications for a SECURED credit card. You may have to visit quite a few banks to find one that has one but keep looking. You will have to put down about $200 of your cold hard cash, but if you use it right, this could be the best $200 you've ever invested.

Use this card once a month for a tiny purchase. Buy some tic-tacs. Put the card away. Pay the bill in full well before the due date. Every month you will get credit for an on-time payment on a credit card with a VERY low balance-to-credit limit ratio. It's important to keep your balances on credit cards low compared to their limit. Also, make sure that your card is sponsored by Visa or Mastercard or some other very respectable company. These cards are more likely to be reported to all three credit bureaus. Many car loans and department store cards promote the fact that they help you build your credit. This may not help you at all if they don't report to at least 2 of the 3 bureaus. Ask them before you apply, always.

Eventually you will be rewarded for paying your bill on time. The bank will give you your $200 back and allow you to keep the card open with a $200 limit. They may even increase your limit. Always take the increase. It lowers that all-important ratio I mentioned. Eventually you'll get flooded with with new sexy offers in the mail with low rates. Use them to build up the 2-4 accounts you need but use them in the way I just mentioned.

You can take a look at some of the traditional credit problems and this solution fixes or helps with most of them. Examples?

Problem: I have a bunch of medical collections that are keeping my score down.
Solution: Establish good credit accounts.

The real problem here is that you have a history of not paying your bills on time and a lack of good credit. Two things are working for you here.

1. Establishing new credit increases your score because you are a better credit risk with recent on-time payments.
2. Each month that goes by is another month further from that nasty collection. As they get older they will hurt your credit less and less. After two years, even though it sits on the report like a sore thumb, it barely effects your score.

Problem: I have a recent Bankrupcy and nobody will give me credit.
Solution: Establish good credit accounts using a secured credit card.

It's practically impossible to get denied. If you are able to open a savings account, you can get these cards. After all, the bank is never lending you any more money than you've already given them.

Mortgage lenders look at a bankrupcy as a fresh start. The government is bailing you out of an awful situation and allowing you to start all over again. If you come out of a bankrupcy and get a bunch of new collections your credit will surely tank. If you come out and establish new accounts immediately, you will be rewarded for your rehabiliation with a great credit score.

The previous paragraph also applies to people with no credit history at all. Many people are worried because they've never had credit before. Well, you're starting from scratch. Do it right and you may have a better score than someone that's been working for years to overcome bad credit. Take advantage of these situations.

Let me know if some of your credit concerns can be answered by my #1 solution.

Pay your bills on time.