Friday, January 30, 2009

Loan Modifications

What is a Loan Modification? The technical answer is an amendment of the loan to reamortize or alter the schedule of payments for the remaining balance and/or extend the current term of the loan in order to reduce the monthly payment, the interest rate and/or loan balance allowing the borrower to keep their home.

Today’s Economy - Because of the current economy, many families can no longer afford their homes and are losing them to foreclosure. The foreclosure rate in many states is reaching record numbers. The more foreclosures there are, the more downward pressure is put on home values. When there is a declining real estate market, mortgage lenders lose money. In many cases they can lose thousands of dollars on each home they have to take back in foreclosure. When the number of foreclosures is at a record number, it is easy to see why there are many banks going out of business.

The Feds – The Federal Government has made many announcements recently about how they will help homeowners in an effort to slow down the foreclosure rate. It seems as though the more announcements they make and the more bail out bills they pass, homeowners get more confused. I receive calls every week from homeowners that are so confused with their options that they think the best option is to just walk away from their home and do nothing.

Options - Foreclosure, Short Sale, or Loan Modification are the main options available to homeowners today that are unable to make their house payments. Foreclosure and Short Sale will have a dramatically negative impact on a credit score. A loan modification will not have a negative impact on a credit score. In addition to being the best option to preserve credit scores, Loan Modifications will help stabilize real estate values.

Mortgage Lenders - Contrary to many beliefs, lenders do not want to take homes back in foreclosure. They want to work with the homeowner to see if there is a viable option to help them keep their home. They are willing to reduce interest rates, extend the term of the loan and in many cases forgive any past due payments in order to help the homeowner make their home loan payment fit their current circumstance.

Hardship – The key to a loan modification is having a financial hardship. Hardships come with many different faces. There are two different types of financial hardships. One type is a reduction in income. The other type of hardship is an increase in monthly expenses. It doesn’t matter which type of financial hardship the homeowner may have, both are considered acceptable by most lenders.

Examples - Here are a few examples of a financial hardship: A homeowner might have a reduction in pay because of a divorce, lay-off, reduction in commission or an illness. A homeowner who was out of work for any length of time and had to live on charge cards for a while, causing an increase in their monthly payments can also be an acceptable hardship to many lenders. A homeowner may simply have an adjustable rate mortgage that will be adjusting to a payment they can no longer afford.

Loan Modification or Short Sale – Did you know that less than 10% of homes listed for sale as a short sale are actually sold? The rest of the homes go to foreclosure. Even if a homeowner is fortunate enough to sell their home on a short sale, it could have a devastating impact on their credit score. A Loan Modification does not have the same negative impact on credit scores. A short sale can cause home values to drop because the home is being sold for less than what is owed to the bank. When a loan is modified the value of the home is not reduced, only the monthly payment is reduced. As more people start to modify their loan instead of short selling, home values will begin to stabilize.

The Right Answer - There are many different options available today. Contact a professional to discuss which option is the best for you.

Need more information? Email me or visit Credit Strategies online.

Monday, January 5, 2009

5 Ingredients of an Ideal Credit Score

A lot of consumers have the mindset that making payments on time automatically equates to a good credit score. This couldn’t be further from the truth. Paying your bills on time is an important ingredient of your credit score; however, there is a lot more to having a high score. Making your payments on time only makes up about 1/3 of the points in your credit score. The other 2/3 of your credit score has nothing to do with making your payments on time.

Making your Payments on Time is the most important ingredient of having a good credit score. Likewise, if you have a history of late payments, collections or charge offs you will not do well in this category. The more negative items you have on your report, the more your score will suffer. The more recent your delinquencies, the more they will impact your score. Time will heal in this category.

The Amount of Debt you carry is by far the second most important ingredient. Your mortgages and auto loans (installment debt) are included in this part of your score, but it’s the credit card debt you carry that is really the most important part of this ingredient. This includes anything from MasterCard, Visa, American Express, and any other revolving account you have like gas cards and even department store charge cards. The balances you carry on your cards versus your available credit calculates your “revolving utilization percentage.” The higher your utilization percentage is, the more of a negative impact on your credit scores. You can calculate your “utilization percentage” by adding up all of your charge card balances and dividing them by the total credit card limits you have available, then multiply that number by 100.

The Age of Your Credit History is a secondary ingredient. Don’t confuse this with your age. The longer your accounts have been open, the more points you’ll earn for your score. Never try to remove old, good accounts from your credit report because that will shorten the history of your credit file. As your accounts get older, you will gradually (automatically) earn more points.

Credit Mix is another secondary ingredient. What types of accounts do you have? You will do well in this category if you have a diverse list of accounts on your credit report. The ideal mix is 3-5 revolving accounts, a mortgage account and an auto loan. You can have a really high credit score if you don’t have this exact mixture because this is a secondary category. DO NOT START CLOSING ACCOUNTS IF YOU HAVE MORE THAN 5 REVOLVOING ACCOUNTS. Remember the category we discussed in the previous paragraph? Closing established accounts with a good, lengthy history can potential have a much more devastating impact on your score than having the proper mix of credit. Best advice here: if you have less than 3 revolving accounts, open a new account. If you have more than 5, only close an account if it has been opened for a short period of time.

New Credit Inquiries is the last ingredient and it also is a secondary ingredient. When you apply for credit you are giving the lender permission to check your credit history and credit scores. Each time this happens your credit report will reflect an “inquiry.” To maximize your score in this category, only apply for credit when you really need it.

Now you have the recipe for an ideal credit score.

Need more information? Email me or visit Credit Strategies online.

How To Raise Your Credit Score 100 Points In 45 Days

Did you know that paying a collection account can actually reduce your score?

Here’s why: credit scoring software reviews credit reports for each accounts’ date of last activity to determine the impact it will have on the overall credit score.
When payment is made on a collection account, collection agencies update credit bureaus to reflect the account status as “Paid Collection.” When this happens, the date of last activity becomes more recent. Since the guideline for credit scoring software is the date of the last activity, recent payment on a collection account damages your credit score more severely. This method of credit scoring may seem unfair, but it is something that must be worked around when trying to maximize your score.

How is it possible to pay a collection and maximize your score? The best way to handle this credit scoring dilemma is to contact the collection agency and explain that you are willing to pay off the collection account under the condition that all reporting is withdrawn from the credit bureaus. Request a letter from the collector that explicitly states their agreement to delete the account upon receipt/clearance of your payment. Although not all collection agencies will delete reporting, removing all references to a collection account completely will increase your score and is certainly worth the involved effort.

Within the delinquent accounts on your credit report, there is a column called “Past Due.” Credit score software penalizes you for keeping accounts past due, so “Past Dues” destroy a credit score. If you see an amount in this column, pay the creditor the past due amount reported.

“Charge Offs” and “Liens” do not affect your credit score when older than 24 months. Therefore, paying an older charge off or lien will neither help nor damage your credit score. Paying the past due balance, in this case, is very important. In fact, if you have both charge off and collection accounts, but limited funds available, pay the past due balances first, then pay the collection agencies that agree to remove all references to credit bureaus second.

Contact all creditors that report late payments on your credit and request a good faith adjustment that removes the late payments reported on your account.

Be persistent. If they refuse to remove the late payments at first, remind them that you have been a good customer and would deeply appreciate their help. Since most creditors receive calls within a call center, if the representative refuses to make a courtesy adjustment on your account, call back and try again with someone else. Persistence and politeness will pay off in this scenario. If you are frustrated, rude and unclear with your request, you are making it very difficult for them to help you.

Make sure creditors report your credit limits to bureaus. When no limit is reported, credit scoring software scores the account as though your current balance is “maxed out.”

For example, if you know that you have a $10,000 limit on your credit card, make sure that the limit appears on the credit report. Otherwise, your score will be damaged as severely as if you were carrying a balance of the entire available credit.

Credit scoring software likes to see you carry credit card balances as close to zero as possible.

If it is difficult for you to pay down your balances, read the following guidelines to maximize your score as much as possible under the circumstances.

• There are difference degrees that scoring software can impact your score when carrying credit card balances.
• Balances over 70% of your total credit limit on any card damages your score the most. The next level is 50% of your balance and then 30% of your balance.
• In order to maximize your score without having to pay down your balances, evenly distribute your credit card balances amount all of your credit cards, rather than carry a large balance on one credit card. For example, if you are carrying a $9,000 balance on a credit card with a $10,000 limit and you have two other credit cards with a $3,000 and $5,000 limit, transfer your balances so that you have a $1,500 balance on the $3,000 limit card and a $2,500 balance on the $5,000 limit card and a $5,000 balance on the $10,000 limit card. Evenly distributing your balances will maximize your score.

Closing a credit card can hurt your credit score, since doing so affects your debt to available credit ratio. For example, if you owe a total credit card debt of $10,000 and your total credit available is $20,000, you are using 50% of your total credit. If you close a credit card with a $5,000 credit limit, you will reduce your credit available to $15,000 and change your ratio to using 66% of your credit.

There are caveats to this rule. If the account was opened within the past two years or if you have over six credit cards. The magic number of credit card accounts to have in order to maximize your score is between 3 and 5 (although having more will not significantly damage your score.) For example, if a card was opened within the past two years and you have over six credit cards, you may close that account. If you have more than six department store cards, close the newest accounts. Otherwise, do not close any at all.

Fifteen percent of your credit score is determined by the age of the credit file. Fair Isaac’s credit scoring software assumes people who have had credit for a longer time and are less risk of defaulting on payments.

Therefore, even if your old credit cards have horrible interest rates, closing those cards will decrease the average length of time you have had credit. Use the old cards at lease once every six months to avoid the account rating to change to “Inactive.” Keeping the card active is as simple as pumping gas or purchasing groceries every few months, then paying the balance down.

An inactive account is ignored by Fair Isaac’s credit scoring software. Therefore, you will not get the benefit of the positive payment history and low balance that card may have.

The one thing all credit reports with scores over 800 have in common is a credit card that is 20 years old or older. Hold onto old credit cards!

Did you know over 80% of all credit reports have incorrect information on them? It is important to review your credit report on a regular basis to check it for inaccuracies. The creditors are required by law to report accurate information. When we find discrepancies on your report we report them to the three credit bureaus. The credit bureaus then contact the creditors to have them verify the information they are reporting. If the creditor does not respond to the inquiry in a reasonable time, the credit bureau will remove the item we are disputing. Many times the creditor will respond and tell the credit bureaus the information they are reporting is accurate and they will refuse to remove the item from your report. In these cases only perseverance and a proven credit restoration program will be successful challenging these items and successfully removing them from your report. Credit Strategies has a proven credit restoration program.

Repairing credit can be a slow and time consuming process. Full knowledge of your credit profile and how it represents you to creditors and credit bureaus is pivotal to the credit restoration success.

Credit bureaus always advise individuals that they have a right to dispute their own credit files. However, when the rights of the credit bureaus slow you down, Credit Strategies is here for you. Call us for a complimentary credit consultation.

At Credit Strategies we are trained professionals in credit restoration and education. We are the only Certified Credit Restoration Experts in the State of Arizona. We have over 25 years of experience reading and analyzing credit reports.

The credit reporting models are always changing. You want to have a trained professional working for you that keeps up with the new credit reporting models as well as any new laws. We use the Fair Credit Reporting Act to take full advantage of the protection it provides our clients.

At Credit Strategies we use a credit restoration program that has been perfected over many years of working with thousands of credit restoration clients. We are consistently looking for new ways to help our clients obtain their highest possible credit scores.

We also offer credit education classes to groups, businesses and schools. It is a lot easier to manage your credit profile when you have credit goals. We can help you set short term, and long term goals. We will coach you on what to do, what questions to ask, and what type of credit mix you should have in your credit portfolio in order for you to have the highest possible credit score.

If you are currently experiencing credit problems, if you have had credit issues in the past or if you want to be educated to ensure you have the highest possible credit score, call Credit Strategies today at 480-502-5554 for a complimentary credit evaluation. You can rest assured you will receive the highest degree of professional service possible.

Need more information? Email me or visit Credit Strategies online.

Short Sale vs Foreclosure

This debate is racing across our nation. It is one of the questions I am asked the most, “Should I let my house go into foreclosure or should I do a short sale?” Everyone seems to understand a foreclosure will not only demolish their credit score , but it will also ruin their chance of getting a decent interest rate on any new financing they want to get in the next few years. A foreclosure is considered a major incident by the credit bureaus. Any major incident can have a devastating impact on your credit score. Other examples of major derogatory credit incidents are bankruptcies, charge offs, judgments and short sales, which are normally accompanied by the term “account settled.” Anytime your credit report has the term, “Settled or Settled for Less than Full Amount,” it is considered a major derogatory incident and can have a major negative impact to your scores. How much it will reduce your score is determined by many reasons some of which we can discuss and some that are kept a secret by Fair Isaac, the inventors of the FICO credit scoring system. We do know the higher your credit score, the more damaging a major derogatory incident will be. In other words, a major incident affects the people that have the furthest to fall.

Most people know what this is. A foreclosure is when the bank takes back a home because the homeowner doesn’t make the payments on their home loan or mortgage. In most cases a home doesn’t go into foreclosure until a homeowner is several months behind on the mortgage. A foreclosure can have a double negative impact on a consumer’s credit score. In addition to a foreclosure listing being a major derogatory incident, there are also normally a significant number of late payments reported by the lender to the credit bureaus. These late payments vary in severity from “30–days” late to the much more damaging “90-days” late incident. In many cases there are additional late payments more severe than 90 days being reported, such as the 120 and 150-day late payments. The number of the late payments and the severity of those payments will all contribute to the damage done to your credit scores.

Short sales are more of a mystery to consumers because there is some confusion regarding the impact they have on their credit scores. Fair Isaac has confirmed that they consider a short sale to be a major derogatory item because of it being listed as a “settled account.” Major derogatory incidents can have a severe negative impact on your credit scores. Most of the cases I’ve been involved with, the main difference between a foreclosure and a short sale is communication. During the foreclosure process the homeowner tends to be more invisible during the process. During a short -sale transaction there is constant communication between the bank and the homeowner. During that time the homeowner or the homeowner’s representative has the opportunity to negotiate with the lender. In addition to negotiating a reduced loan pay-off they could also be negotiating what the lender will report to the three credit bureaus when the transaction is closed. If the lender reports, “Settled or Settled for Less than Full Loan Amount,” the short sale will be considered a major derogatory incident. If the lender doesn’t report the short sale as “Settled or Settled for Less than Full Loan Amount,” then this will not be considered a major derogatory incident and will not have the negative impact. The homeowner may also choose to remain current on their home loan during the short sale process. If they remain current then they will not have the added negative impact of the late payments affecting their score.

The effect a foreclosure or a short sale has on your credit score is impossible to predict because of the variety of other variables impacting the scores. If you find yourself in the unfortunate situation of not being able to make your mortgage payment, do your research. Call your lender to see what options they have available before making any decisions. Call a professional; there are many different professionals that specialize in these types of transactions. The decision you make could have the largest impact on your credit score than any decision you have ever made.

Need more information? Email me or visit Credit Strategies online.