MoneyWiseWomen

The New Credit Score Rules

If you only read one article about credit scores this year, read this one.

The average credit score nationwide is 666, according to CreditKarma.com. That’s not only an ominous number, but can be a costly one.

Based on CreditKarma.com’s data, the trend amongst lenders shows that a 660 credit score is the threshold to be approved for a mortgage, auto loan and unsecured credit card. Digging deeper into consumers' credit health, nearly 40% of consumers have a credit score below 660. That means 4 out of 10 Americans would likely be denied for a mortgage and auto loan, charged sky-high interest rates, and only qualify for a secured credit card.

With credit scores controlling consumers’ access to credit and the prices they pay for lending products, Americans must take control of their credit health.

In the fine line between approval and denial in lending, consumers deserve to know more so they can do more about their credit health. While recent federal regulations have nudged open the door on consumers’ access to credit, it’s not enough. Consumers must be empowered to actively manage their credit, not just when they are transacting but also in their daily financial life.

As legislation and economic changes evolve the credit industry, consumers’ access to credit scores must be broadened. Here’s what you need to know about credit now.

1) It’s your consumer right to get a free credit score! Thanks to a recent federal regulation, consumers who are denied on a credit application or receive higher interests due to their credit profile are entitled to see their credit score for free. This only applies to declined consumers, so it begs the question: why aren’t all consumers getting their credit score for free? With such significant impact on accessing and pricing of financial products, free credit score access should be a right of all consumers. We may see government efforts to provide free credit score access on the horizon. Once a mysterious and proprietary secret of the credit industry, credit scores are becoming a powerful tool in the hands of consumers. 

 

2) Standards for accessing credit are always in motion. Once upon a time, the general “good” credit score standard was 660. During the recession’s credit crunch, the standard jumped to 720. It appears some credit card issuers are again expanding their credit standards and approving lower credit tiers. Some mortgage lenders say a 720 credit score is needed to get the best mortgage rate, while others say 750 is the new standard. Additionally, lenders are increasingly focusing on other credit details aside from your three digit score. For example, a consumer can have a 780 credit score, considered in the excellent range, and  be denied on a credit card application because their credit history is simply not long enough. It’ll take time and economic stability till lenders comfortably agree on credit score standards; hopefully that keeps you on your toes and improving credit health everyday. 

 

3) It’s not enough to check your credit score. One drawback of the federal regulation is its limitations. Giving consumers access to their credit after being denied is too little, too late. Credit scores can fluctuate suddenly, so a single snapshot isn’t enough. What’s necessary is for consumers to monitor their credit. Whether you have a 550 or an 800, tracking trends in your credit use and credit score helps identify areas to improve, habits to avoid, and most importantly, makes you conscious of how day-to-day financial decisions impacts your credit health. You might need several months’ cushion to polish up your score, so begin monitoring your credit as soon as you plan to buy a home or car, or apply for a loan or credit card. If you aren’t applying for credit but currently have a credit card, it’s still imperative to stay on top of your credit health. Issuers periodically do an account review, and if any new credit blemishes appear, it could affect your card terms. Proactively use free tools like CreditKarma.com’s free credit score monitoring service so you, and not lenders, are the first to know about recent changes on your credit. 

 

4) Expect credit score differences. The federal regulation also shined light on the fact that there are dozens of credit score models in use. While many consumers consider FICO to be the “real” score and everything else to be a “FAKO”, the truth is that every lender chooses differently: there are the credit bureau-specific models, the VantageScore, the FICO score, scores specific to lender type like mortgage, auto and credit card issuers, and even models particular to certain banks. If your TransUnion score and VantageScore have a 40 point difference, there isn’t a “more accurate” score. It’s similar to weighing yourself at home versus the gym or the doctor’s office; the scales show different numbers because they’re calibrated differently, but ultimately, they all measure your weight. Rather than obsessing over the three-digit score, focus on the risk factors involved such as your debt, number of accounts, and credit use. Just like diet and exercise will reflect in your weight across all scales, taking action to holistically improve your credit health will reflect across the broad spectrum of credit score models.

While the recent federal regulation is a positive move for consumers, lenders have already found loopholes, reports SmartMoney. For example, if the lender uses its own scoring model, they aren’t required to disclose that credit score to consumers. Also, insurance companies, which also use a credit score model to evaluate customers and price premiums, are excluded from this regulation and aren’t required to disclose credit scores to consumers who are charged a higher premium.

As the Consumer Financial Protection Bureau stretches its reach and more financial reform finds its legs, consumers must keep challenging Uncle Sam to keep the heat on the financial industry when it comes to credit score access. Consumers must also keep putting in the legwork to build healthy credit and keep an eye on their credit score.

We’re headed in the right direction when it comes to consumers' access to their credit score. But don't walk away from this topic just yet; we barely have our foot in the door.

 

Justine Rivero is the Credit Advisor and resident Credit Rockstar for CreditKarma.com, the pro-consumer credit advocate that helps more than 3 million consumers realize the everyday cost savings of having great credit health.

 

 

 

Getting a Mortage After a Short Sale or Foreclosure

Just a couple of years ago, Lisa and Laura (names changed for privacy) were caught in a housing nightmare. They had moved back to Sarasota, Florida from Nashville, Tennessee at the height of the housing market boom, and rented an apartment just long enough to decide they wanted to own their own home again.

They found a home in a community they really liked. It was a fixer upper that needed a lot of work, and the sales price was $365,000, but they jumped at it. “At that time there were lines of people waiting to buy, and there were bidding wars,” Lisa explains.

Within a couple of years, though, their home’s value had dropped by more than half. They had also put about $30,000 into repairs using a separate second mortgage, but the punch list just kept getting longer. “We were looking at (the decline in value) plus the fact that we needed a new roof; pool resurfacing and a new pool cage; plus a new kitchen, bathrooms, air conditioning and more,” says Lisa.

At that point they decided to cut their losses, and they got lucky. Their lenders allowed them to sell their home for $180,000 in a short sale. The mortgages totalled $435,000, so the banks took a total loss of $255,000. The remaining debt was forgiven. “We didn’t owe anything when it was done,” explains Laura.

After that harrowing experience, you might think they would never want to buy again. Once burned, twice shy, perhaps? But Lisa and Laura realized what a lot of experts are saying: it can be a great time to buy a home if you qualify. Mortgage rates are low, and home prices are within reach in many areas of the country.

But buying after foreclosure or short sale isn’t as common as one might think. Since the housing downturn, Sarasota-based real estate professional John Scherden has found himself working with many buyers and sellers involved in the short sale process. Buyers who were in bidding wars when prices were twice what they are today are often skittish now. “They don’t realize that when rates go up, they may not have the opportunity they have right now,” he says. John finds that buyers often focus on the monthly payment and waiting to purchase after mortgage rates have gone up will substantially increase their monthly payments and the overall cost of the property.

Deciding to jump in again, the couple’s main questions for me were, “How long do we have to wait after the short sale to buy?” and “What do we need to do to clean up our credit to qualify for a mortgage?” (For the record, I don’t offer credit repair services. I agreed to help Lisa and Laura in order to write about their experience for this article. If you have questions about your credit, I recommend you visit Credit.com where I and other experts answer questions for free.)

Reviewing their credit reports, we found several issues that needed to be addressed:

• Lisa’s credit reports show several older collection accounts from bills they didn’t receive when they moved back to Florida.

• Laura’s credit reports show a $5000+ charge off from a corporate card her previous employer had not paid.

• Lisa’s credit report showed the short sale, just over two years ago. She had obtained the mortgage on their previous home alone so it was not listed on Laura’s credit reports. It was just over two years old.

With regard to the collection accounts, I explained to both of them that paying a collection account generally doesn’t help boost your credit scores. However, mortgage lenders may sometimes require you to pay them off before the loan closes. I also explained that they may be able to settle those collection accounts for less than the full amount owed, and still bring the balance listed on their credit reports down to zero, but I wanted them to talk with a loan officer first. Credit strategies can be different when you are trying to get a mortgage loan, and I didn’t want them to do anything to jeopardize that.  

Laura’s collection account from a previously held company card opened another can of worms that I researched and wrote about for Credit.com. [Read: Important Warning If You Have A Corporate Credit Card.]

To answer their question about how soon they can get a loan after a short sale, I turned to Joe Kelly at ArcLoan.com, who in turn asked one of his loan officers, Carrie Chienyuen, to review their credit reports and financial situation, and explain their options.

Carrie shared the latest Fannie Mae guidelines with us. After a deed-in-lieu of foreclosure, preforeclosure sale, or short sale, there is a mandatory waiting period of two years for a loan with an 80% maximum LTV (loan-to-value ratio), or four years for a loan with a 90% LTV. If the borrower can document extenuating circumstances, the waiting period for a loan with a 90% LTV drops to two years.

Since the couple had the money for a down payment, they could get back in the game if they were ready. Carrie also explained that another option: Laura could try to qualify for the loan on her own. They could still hold title to the home jointly, even if Lisa wasn’t a co-borrower.  

Carrie also described FHA guidelines, which are even more generous. The couple could get an FHA loan with a down payment of only 3.5%. The APR at the time of the quote was a jaw-dropper, at less than 5%. (Keep in mind rates can change daily, and depend on individual circumstances.) FHA requires a three-year wait after a short sale or foreclosure, however.

Carrie warned that if they were to get a conventional loan, they would probably have to pay off the collection accounts first. But with an FHA loan, it likely wouldn’t be required. In the meantime, Laura is trying to work with the card issuer to resolve the corporate card account, by far the largest collection account listed.

Not surprisingly, the two were thrilled at the prospect of getting a do over. They will decide shortly whether they want to make the plunge back into homeownership. But more importantly, they feel like they are starting to gain a sense of control again.

“I know there are a ton of people out there like us, and I know I feel so lost with everything that’s happening with the economy,” said Laura.

If you’re thinking of buying a home after going through a foreclosure, short sale, or other credit problems, I recommend you:

1.       Get your credit reports from AnnualCreditReport.com or a credit monitoring service and review them carefully. Make note of anything you don’t understand. If you are hoping to get a mortgage soon, don’t dispute or close accounts until you have talked with a loan officer.  

2.       Understand your credit scores. You can get an idea of where you stand using a tool like Credit.com’s free Credit Report Card or by purchasing at least one of your FICO scores. FICO scores are the most commonly used scores in the mortgage loan evaluation process. Listen to my podcast, Credit Score Fact or Fiction, with former FICO executive Tom Quinn.

3.      Get prequalified by a loan officer to review your credit and your financial situation to see if you qualify. Listen to my podcast with ArcLoan.com’s Joe Kelly where he explains how to get a mortgage after credit problems.

I am not trying to imply that getting a mortgage after foreclosure or bankruptcy is going to be a walk in the park. I am sure plenty of loan officers will read this and start recounting of all the hassles they’ve gone through with their clients. Lenders are much more careful than in the past, and you must be able to document your ability to pay the loan. Your credit must be on the mend as well. But still, if you’re in the same boat as Lisa and Laura, it can be encouraging to know that it may be possible to put your past behind you – possibly sooner than you think.

Gerri Detweiler

Personal Finance Expert: Credit.com

Co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis and Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.

Disclosure: Credit.com and ArcLoan.com are both currently sponsors of my radio show, Talk Credit Radio.

 

 

Financial Chore #2: Refinance Your Mortgage

This is a continuation of my series about knocking out those financial chores you may be putting off. You can read Part I here.

If you haven’t taken advantage of low mortgage rates and refinanced your mortgage, you’re probably running up against one of these three hurdles:  low credit scores (which have dropped, on average), lack of equity (which has also dropped in many markets) and lack of adequate income (which has also dropped for many - see a pattern here?)

FHA Relief for People Facing Foreclosure

http://www.fha.gov/about/fhasfact.cfm

We're all been hearing countless stories of people facing foreclosure on their homes.  Often times the reason is an 'arm' that has all of a sudden inflated to a ridiculous interst rate and the new monthly payment is hundreds of dollars if not a thousand dollars more than the previous amount.

Click on the link above to read about just-announced FHA (Federal Housing Administration)-insured refinance options available to home owners.  They have to show income to pay for the mortgage, been previously making on-time payments, and show that the inflated arm is the reason for the need to re-finance.

Every 3 Months 167,000 New Families Enter Foreclosure

According to Consumer Federation of America 2.2 million foreclosures are predicted as repayment terms on about $ 1.3 trillion of adjustable-rate loans will increase in 2006 and 2007.  These increases will force some borrowers to pay up to 150% more per month resulting in an estimated 167,000 new families entering foreclosure every 3 months.  The updated statistics were just released from Neighborhood Works Center of America, a nonprofit center for foreclosure solutions.

Subprime Mortgages 101

By Karen Ramsey

Subprime mortgage lending has been a popular topic in the news lately. It’s even been discussed in our own Money Wise Women blog (see “A Womans Lifetime Lender - Protecting Women and Their Families” by Marcia Rodriguez). So I thought I would provide a little background on what Subprime mortgages are and why they are in the news.

A Womans Lifetime Lender - Protecting Women and Their Families

Women are primary targets of subprime lenders and unscrupulous lending practices according to a recent Consumer Federation of America report.  Minority women were reported as the most prone to victimization. 

The statistics are alarming and the destruction that these unethical practices cause is already being seen in our communities. Awareness and education are necessary in order to preserve the financial well being of single women and their families.