Archive for the ‘Credit Information’ Category

Using government loans after a derogatory credit event

February 21, 2017

blog-author-clayjeffreys3

Last week, we focused on using conventional loans to purchase a home after a major derogatory credit event such as a bankruptcy, short sale, foreclosure, etc. This week, we will focus on VA and FHA loans offered by the government.

In every instance, a government loan has a shorter waiting period after one of these events. It is the loan of choice to use if it will fit your needs. Let’s discuss the waiting periods:

  • Chapter 7 bankruptcy: requires a 2-year wait
  • Chapter 13 bankruptcy: requires a 1-year wait from the beginning of the payout period
  • Multiple bankruptcy filings: VA requires only 2 years, but FHA is a case-by-case basis
  • Foreclosure: VA once again is only 2 years, but FHA is 3 years.
  • VA Specific: in order the qualify for a VA loan (in addition to being a veteran), there must be a 1 year minimum of re-established after the judgement dates and other derogatory events paid/resolved
  • FHA Specific: If HUD has a claim against a borrower for a foreclosed/short sold home (and that home was financed using an FHA loan), a borrower isn’t eligible for a new FHA loan until after 3 years from the date of the claim being paid.

As anyone can read here, government loans have a much shorter waiting period than conventional loans. As low as one year, but mostly just a 2-year wait. An FHA or VA loan would be the preferred method for buying a home after one of these major events. That said, there a couple of situations that make conventional loans the way to go:

  • the borrower is not eligible for a VA loan (so you go FHA unless….)
  • the loan needed to purchase a home will exceed the maximum FHA allowed loan amount
  • there is a claim against the borrower from HUD
  • a borrower is not eligible for an FHA loan due to CAIVRS (a government credit monitoring tool to ensure people who take out government loans pay them back)

The last two on the list are not that common, so buying a home within the FHA maximum loan limits would be the way to go. In addition to a shorter waiting period, the interest rate tends to be better than conventional loans, the borrower only needs a 3.5% down payment, and the monthly mortgage insurance rate is lower. A borrower’s credit score will confirm those items, but in general, those are all reasons why FHA loans are the best way to go after a derogatory credit event.

Completed a bankruptcy two years ago, and ready to buy a home in Georgia? If so, we can get started today in the process. Contact me and we’ll make sure you qualify for a loan, and then send you out looking for your next home.

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Mortgage life after a derogatory credit event

February 14, 2017

blog-author-clayjeffreys3

An unforeseen event takes place… a medical event, job loss, divorce, death of a spouse… before you know it, bills are piling up and they never seem to end. Eventually this buildup could result in a bankruptcy, foreclosure, short sale… a major derogatory credit event. Once it is over, will you ever be able to buy a home again?

The answer is yes. During the housing boom, someone could apply for a loan the day after completing a bankruptcy. Let’s just say guidelines are different now, but not insurmountable. Most people assume there is a 7-year wait after something as big as a bankruptcy or foreclosure. That is true if you are looking to qualify for a Jumbo loan (any loan amount over $424,100). On the other hand, if you are looking to buy a home for say $350,000 with the minimum down payment, is it still a 7-year wait?

No, definitely not.

This post will focus on conventional loans. Next time, we’ll discuss government loans.

What are the waiting periods? Using today’s guidelines*:

  • Chapter 7 bankruptcy: requires a 4-year wait
  • Chapter 13 bankruptcy: requires a 2-year wait from the discharge date, but 4 years from the dismissal date if the Chapter 13 bankruptcy application isn’t accepted by the courts
  • Multiple bankruptcy filings: 5-year wait
  • Foreclosure: 7 years unless the home was included in a bankruptcy filing. In that case, it drops from 7 to 4 years
  • Other: There is a 4-year wait for a deed-in-lieu of foreclosure, short sale, or the sale of a home during the foreclosure process

*Those are Fannie Mae guidelines. Technically, Freddie Mac does not have minimum waiting period. Underwriting goes by the Automated Underwriting Services findings from Freddie Mac. That said, the “findings” often mirror the guidelines of Fannie Mae. 

In only one of these instances is there a 7-year waiting period. That would be if there was a foreclosure on a home that was not included in a bankruptcy. In every other situation, one could be ready to purchase a home much sooner than 7 years. Government loans are much more forgiving, but conventional loans are to be used in situations where a borrower doesn’t qualify for a VA or FHA loan (more on that next week). Also, the maximum loan amounts on FHA loans are lower than conventional loans, so the purchase price could also play into determining which loan program to use.

Have you filed a bankruptcy, but want to own a home again? You don’t have to wait seven years. If you have re-established credit to a qualifying score, buying a home can come sooner than you think. Unsure of your situation? Purchasing a home in Georgia? If yes to both, contact me today. We can start the prequalification process and see how quickly we can get you into a new home.

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Credit Score Basics for Home Buyers

February 9, 2017

A recent survey reported that 2.7 times more first time home buyers than repeat buyers believe they must improve their credit scores before buying a house.  First let’s dispel credit score myths.  A home buyer can possibly win mortgage approval with a credit score as low as 620.  If your score is 620 or higher, you can possibly win loan approval.

If your score is less than 620, you need to work to improve it before you can qualify.  If your score is 620 or higher, you may want to take steps to increase your score as better scores tend to lower mortgage costs.  Note that I am not a credit score repair specialist, but here are some basic, fundamental tips to improve your credit score:

Pay down your credit card balances:  You get the best score on each credit card account when your balance is less than 1/3 of that account’s credit limit.  Your score drops when your balance is more than 1/3 of the limit.  And your score drops even further if your score is more than ½ of the credit limit. 

Pay your bills on time:  Late payments lower your score.  The later the payment, the more your score is penalized.

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Time heals all wounds:  The more time that has elapsed since your last late payment, the less those late payments will affect your current score.  Some credit issues have mandatory waiting periods.  For example, if your credit report shows a bankruptcy, 2 years must elapse before you can obtain a FHA mortgage, and 3 years must elapse before you can qualify for a conventional mortgage. 

Resolve account disputes now:  Mortgage underwriters hate account disputes.  If you have disputes on credit accounts, go ahead and resolve them prior to applying for a mortgage.

Be aware of collections accounts:  Note that I didn’t say to pay them off.  Sometimes, paying off a collection account will actually lower your credit score.  If you want to buy a home in the next 12 months or so, it may be best to just know about the collections accounts – you may have to deal with them as part of your mortgage process.  In some cases, we require the borrower to bring enough cash to close and to pay off collections account balances as part of the mortgage closing process.

If you want to buy a house in Georgia, get a good idea of your credit score and your monthly debt payments.  Then call me to discuss your loan options.  I’ll invest time coaching you on the best ways to help you win loan approval. 

More mortgage questions?  Check out our home buyer educational videos.

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Credit Reports and Qualifying for a Mortgage #3

October 19, 2016

In prior posts we reviewed the credit score and public record components of a credit report.  But even with a qualifying score and a clean public record history, that doesn’t mean you are in the clear.  There are other credit report factors that can create underwriting hurdles which we must overcome.  Here are some other details we consider…

The credit report shows a history of open and closed credit accounts.  Data shown for each account includes:

  • Current account balance.
  • Account credit limit.
  • Account type – credit card, mortgage, student loan, auto loan, etc.
  • Account status – open, closed, collections, etc.
  • Minimum payment – these are important because they are included in the client’s (let’s call her Mindy) debt to income ratio.  If the total of all monthly payments is too high, Mindy might not qualify for the loan desired.
  • Late payment history – late payments are categorized as follows — 30 day lates are not good; 60 day lates are bad, and 90 day lates are really bad.  The report shows the dates of the most recent late payments.

If Mindy’s late payments were made more than 2 or 3 years ago and she has been consistently making on-time payments since then, it likely will not cause loan denial.  However, if Mindy’s late payments occurred after a bankruptcy, then underwriting may deny the loan.  I’ve had this happen where the underwriter said no to a client with a bankruptcy in 2010 followed by two 30-day late payments in 2012.

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  • Account disputes – if Mindy has officially disputed an account, it will show on her report.  Underwriters do not like account disputes.  This is especially true for FHA mortgages when a disputed account balance exceeds $1,000.  In some cases, the dispute can lead to loan denial.  I’ve had clients who had to go through a multi-week process to get a dispute removed from their credit before we could win loan approval.  I search for the word “dispute” on all credit reports.
  • Collections accounts – when an account has a collections status, this can cause loan denial.  This is especially true for FHA mortgages.  If the total outstanding amount of all collections accounts exceeds $1,000, underwriters will not approve an FHA loan until the balances are paid in full.  I had a client with 3 collections accounts earlier this year.  The client had plenty of cash, so we simply included the payoff of all collections accounts at the closing of her home purchase.

Once again, there is much more to a credit report than the score.  If you know someone who wants to buy a home in Georgia, don’t let them get mislead by a lender in a hurry.  Refer them to Dunwoody Mortgage, we will invest enough time up front to give everyone great confidence that the mortgage will actually close.

 

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Credit Reports and Qualifying for a Mortgage #2

October 12, 2016

The last post covered the credit score component of a credit report.  But remember, there is much more to a mortgage credit report than just the score.  After looking at a client’s credit score, I next review any public record filed against the client (let’s call him “Matt”) in a court of law.  These include liens, judgements, foreclosures, and bankruptcies.  How do these items affect Matt’s ability to win loan approval?

  • Liens – A tax lien is a big red flag. The IRS doesn’t play around when it comes to collecting money you owe them.  And lenders don’t want to get in line behind the IRS when it comes to collecting payments.  If Matt has a tax lien, he will likely need to pay it off before we can win loan approval.  We may be able to win loan approval if Matt has a tax lien, but it will take some extra work.
  • Bankruptcies – Bankruptcies stay on a credit report for 7 years.  Matt cannot obtain a conventional loan for 4 years following the bankruptcy discharge date (the date when Matt was officially released from personal liability for debts included in the bankruptcy).  For FHA loans, the waiting period is 2 years after the bankruptcy discharge date.  There are some differences in how we treat Chapter 13 vs. Chapter 7 or 11 bankruptcies.
  • Foreclosures – Foreclosures also stay on a credit report for 7 years.  It is possible to win loan approval even with a foreclosure.  For conventional loans, a 7 year waiting period is required.  For FHA loans a 3 year waiting period is required.  And note that the clock starts when the foreclosing bank sells the old house to someone else.  Not when the bank first takes the house.
Gavel with money background

Gavel with money background

  • Short Sales – Once again, short sales stay on the report for 7 years. A short sale occurs when a loan servicer agrees to the sale of a property by the borrower to a third-party for less than the outstanding mortgage balance.  Waiting periods are 4 years for a conventional loans and 2 years for FHA loans.
  • Legal Judgments – Outstanding legal judgements must be paid off prior to or at closing.  Note that we can include payment of Matt’s legal judgments as part of the closing itself.

There is much more to a credit report than just the score.  When a lender pulls your report and quickly says “you qualify,” he or she might be doing you a disservice.  You want a lender who will take some time to look closely at your report, and deal with any potential issues up front.  If you plan to buy a home in Georgia and expect your lender to invest time in the details, call Dunwoody Mortgage Services.  We will help you avoid surprises.

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Credit Reports and Qualifying for a Mortgage #1

October 5, 2016

Portrait of Rodney Shaffer

This news may shock you – mortgage underwriters actually look at a borrower’s credit report.  Notice I said, credit report, not credit score.  The score is only one component of the full report.

When we pull a credit report, the first thing we do review is the credit score.  If the score doesn’t qualify, there’s no need to spend time on the report details.  My lending guidelines state that minimum qualifying credit scores for my clients are:

  • 620 for FHA and VA loans.
  • 620 for conventional loans.

Mortgage credit scores are different from consumer credit scores people get from websites like credit karma.  Issues pertaining to past mortgages carry more weight on a mortgage score than a consumer score.  So your mortgage score may differ significantly from a consumer score given to you by a credit card company or a website.  I’ve had clients with mortgage scores higher than their consumer scores and other clients with scores less than their consumer scores.  You never know for sure until you actually pull the mortgage report.

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We look at scores from all three credit bureaus – Equifax, Experion, and Transunion.  We are required to use the borrower’s middle score for loan qualification.  And if there are multiple borrowers, then the lowest middle score is the score we use to qualify the application.  When I pull a report, if the score is less than 620, the client and I will discuss ways that they can improve their score, which may be simply waiting for their score to rise while they pay their bills on time, or contacting a credit counselor who might be able to help improve their score.

Regardless of how good the score is, I will look carefully at additional report details.  Sometimes these details can cause some underwriting questions or challenges, even if the score qualifies.  It’s usuaully best to deal with any credit questions proactively.

Home buyers deserve to know as early as possible whether they can realistically win loan approval.  There’s no need for them to waste their time or a Realtor’s time searching for a home when they cannot qualify for a mortgage.

We will review other key credit report details in future blog posts.  But for now, if you know someone looking to buy a home in Georgia, and this person may have a few “skeletons” in their “credit closet,” (hey Halloween is approaching!), refer them to me.  I’ll take the time to look at all the details, giving them the level of service they truly deserve.


 

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Who pulls your credit can impact the credit score

June 19, 2012

Really?!? Can the company pulling a copy of your credit impact the credit score? The answer is yes, it can impact the score. The better question now is “why”? The reason is simple. Each credit bureau has a different formula they use for determining a score.

Beyond that, each bureau has different versions of each of their formulas. For example, according to www.myfico.com*, one of the formulas FICO uses when someone is rate shopping (for a mortgage, car loan, student loan, etc.) ignores all inquiries within the past 30 days. Rate shopping is treated differently than when applying for a credit card. Credit card companies disclose their rate up front, so there is no need for rate shopping. Recent inquiries to different credit card companies may not be ignored and can have a negative impact on your credit score.

* the mortgage blog does not endorse www.myfico.com, but used information from their consumer credit information section of the website as an example for this post.

This is important to remember when you are in the planning stages of purchasing a home. Even though the credit card company that recently approved you for a new card said you had an 800 credit score, it doesn’t mean your credit score will be 800 when applying for a mortgage.

In addition to the industry you are applying for credit, there are additional factors that influence your credit scores. Here are a few examples:

  • the more recently you opened a credit account, the more of a negative impact it can have on a credit score
  • once you pass the halfway point of your available credit on a credit card, your scores are negatively impacted. Let’s say you have a $5,000 limit, and have charged $2,600. Once you pass $2,500, your credit scores are negatively affected.
  • this impact is greater as you move closer and closer to maxing out your credit card(s)
  • the number of recent inquiries into your credit report by various creditors can negatively impact your score

This brings us back to an important point that isn’t a recording, but should be… planning ahead is key. If you are looking to make a home purchase in the next year, ensuring everything is in order now is better than finding out there is a problem the day you are ready to make an offer on your new home. Talking with a mortgage professional to review your credit, income, assets, and more is essential to help the mortgage process to run as smoothly as possible.

If you are looking to buy a home (primary residence, second home, or investment property) in the state of Georgia, I can help you get started.

Understanding your credit score.

March 2, 2007

Credit scoring is (deservedly) a big topic.  In the mortgage industry, your credit score reigns supreme.  You know the commercial (one of the ones with the family and the dog and the children and all the smiling) and they say, “You’re more than a score” or something like that, remember that one?  Well . . . they’re lying.  Ok.  So, maybe they aren’t lying, but it’s not like a mortgage lender is going to give you a great rate on a big mortgage debt because you are a really nice person, right??  The truth of the matter is that YOU aren’t a score, but your credit certainly is.

In the past, the credit scoring models of each of the three credit bureaus were guarded as closely held secrets.  Even for people like me in the mortgage industry, the score was described as a “black box” of the credit bureaus — customer data goes in, the computer “looks” at it (that’s anthropomorphic, I think), the computer looks at all of the data and returns a credit score between 400 and 850.  Computers thinking?  and looking?  and deciding things about our lives?  Hmmmm . . . .

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In the last couple of years, credit companies have begun to disclose what factors affect your credit score.  While this information is very helpful, it is impossible to say with certainty, “If you do this . . . your score will go up by this many points.”  However, there are a handful of easy things you can do to improve your credit score.  Here are a few suggestions to help you understand your credit score (these suggestions are in addition to the obvious of making your payments on-time, not letting accounts go in to collections, clearing tax liens, judgments, etc):

1.  Don’t carry a balance on your credit accounts of more than half of the available credit.  The credit score model hates maxed-out credit cards.  A credit balance that is at or above the credit limit hurts your credit score; it hurts less once you owe less than 75% of the available credit, even less if you owe less than 50% of the available credit.  Here’s an example:  if your credit card has an available credit of $1,000, your goal should be to have a balance of $499 or less.  If you aren’t able to pay down your credit accounts to below half, then call and see if the creditor is willing to raise your credit limit amount.  Raising your credit limit may accomplish the same thing.  For instance, if you owe $499 on a credit card with a high balance of $500, your score is going to be lower . . . if the creditor would raise your available high credit to $1,000, your score would improve.  I have had clients with seemingly perfect credit (no late payments, no collections, etc), but because of the number of accounts with balances and because every account was somewhere between 50% to 90% maxed-out, their credit score suffered . . . in the 620’s (no so good).

2.  Don’t close old accounts.  In the past people would recommend closing old accounts.  And in the mortgage world, underwriters would look at what a borrower might be able to borrow in credit on old accounts and even require that the borrower close those accounts (especially if income and debt numbers were tight on the loan).  With credit scoring models and automated-underwriting even trumping some underwriters these days, the length of time is no longer a factor and the fact that accounts have been open (and have a long term, well-established credit history) is a big plus.

3.  If you have little or even no credit, ask a relative, spouse, significant other, lover, or parent to add you as an authorized user to one of their accounts.  This will add additional credit history to your credit report (and the act of adding an authorized user to an account is usually as easy as a phone call and generally does not require any type of approval or credit inquiry). 

Speaking of credit inquiries . . . credit inquiries (or the number of times you have had your credit pulled) does have an affect on your credit score.  BUT, it is almost never the top thing affecting someone’s credit rating.  In the grand scheme, or let me re-phrase that, in the grand-matrix of credit scoring, the credit model  has to assume that an excessive number of inquiries means one of two things:  either, one, the person continues to apply and get turned down for credit (and has to have more and more and more people pull their credit) or, two, they are desperate for credit and are looking to open up multiple accounts (to borrower as much as they can).  If you are shopping for a mortgage, you need to have someone pull your credit as early in the process as possible.  Waiting until the last minute to have your credit pulled (for fear of losing 4 or 5 points) makes very little sense (for too many reasons to go into here).  However, once you have had one mortgage broker pull your credit and you know your credit rating, it is usually not necessary to have anyone else pull your credit until you are ready to move forward (to lock-in your rate, complete an application, etc.)  If the mortgage person you are talking with will not or does not give you your credit rating, it is probably because they are afraid you will use that information to shop for a mortgage.  And usually those people are afraid for a good reason.

4.  A few points may make a HUGE difference . . . or it may make NO difference at all.  Credit scores generally range from 400 to 850.  In the mortgage world, a 660 credit score is considered average, 700 is considered excellent and anything below 580 is somewhere between difficult and very-difficult to get financing.  At a credit score in the lower tiers (580 to 660), every point counts.  On mortgage financing, the products available and the interest rate you may be able to qualify for is driven (partly) off of your credit score — and almost all 1st mortgage products have guideline minimums such as 580, 600, 620, 640, 660 or 680.  On 2nd mortgage financing products, the credit score can be even more important.  However, in most situations, at the higher tier of the credit scores (720+), there is absolutely no difference between a 720 credit score and an 820 credit score.  Both are considered great credit and both are able to get the best rate and best terms for financing.

And as far as your credit and your credit score . . . you can take my advice or leave it . . . but remember (in the wise-words of Morpheus) ” . . . I can only show you the door. You’re the one that has to walk through it.”  (Sometimes I even make my own self laugh — where do I come up with this stuff??)

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