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!