Understanding & Improving Credit

Understanding & Improving Credit Scores

Why should You care about Credit Scores and having a good one? Many people don’t. Smart people do. A good credit score will allow you to choose who you want to do business with instead of who will do business with you.

With a good credit score you will get much more favorable interest rates on your loan, e.g. mortgages, auto loans, credit cards and more. You’ll also get better rates on your insurance premiums, auto, homeowners and renters insurance to name a few. Many employers also check your credit before hiring you for employment.

What are credit scores designed to do? Many will tell you it’s your ability to pay back a loan, say if you’re a good or bad credit risk or something like that. Credit scores are actually a predictor to show the likelihood that a borrower will become 90 days delinquent on an account within the next 24 months.

How do the CRAs (credit reporting agencies) come up with the credit scores? There are a few factors that matter more than others.

35% = Payment History

10% = Types of Credit

10% = Credit Inquiries

15% = Credit History

30% = Amount, i.e. proportion of balance to limits

What about those credit repair companies? All I can say about those companies is to use extreme caution. A lot of them are very confusing. Some lead you to believe that they know some secret that is unavailable to you. Not true. There’s nothing they can do that you cannot do yourself. Improving your credit score is not brain surgery.

With just a little education you can improve your score. Many of those companies make outrageous claims. They say things like, we can remove negative credit from your report or we can improve your score to 720 in 30 days and all kinds of other “guarantees”.

The truth is, there are No guarantees when you are attempting to improve your score. In fact, many times your score will go down when you wake up the negative sleeping giants that are reporting on your credit report.

Some lenders will require you to pay off old collections before extending you credit. Just by waking this sleeping dog, they may update the collection and your credit score will reflect this negativity like it is a new collection. It can be best to pay the collection at closing or get them to remove it from your report altogether when paid. This needs to be in writing.

You can dispute negative credit, collections, judgments, etc. Many times they will be removed. Many times they will not. Anyone that tells you that they guarantee these will be removed is either not being truthful or doesn’t know what they are talking about. It may be best for you to do a 180 and keep walking.

What about those that say you can set up a whole new credit file with an EIN (employer identification number) or some other way? I have never seen a way to do this. At least, not that I know of legally.

The bottom line is there are no magical ways to improve you credit score. There are ways that you can improve your credit score.

Some of the ways to improve your credit score include:

·      Pay Your Bills on time

·      Don’t necessarily close older and/or paid off accounts

·      Don’t get unnecessary inquiries

·      Keep balances in proportion to limits at 30-40% or less

·      Dispute incorrect information

·      Add a Fraud statement

We will be discussing “Understanding and Improving Credit Scores” at the Help Clinic at the monthly meeting at 6:30pm January 16, 2015. Come early to learn and stay late to network with fellow investors.

http://www.stlreia.com

(314) 962-9255

STLREIA™ meets the 3rd Friday of every month (except December). At 6:30PM we begin the evening with a “Help Clinic” that includes advice on physical repair, marketing, and networking. At 7:30PM, we continue with the “Main Meeting” which includes local and nationally known guest speakers.

Location: St. Louis Association of Realtors®

12777 Olive Blvd. (1-1/4 miles west of I-270) St. Louis, MO 63141

I look forward to seeing you then J

Happy Investing,

John Lee

Changes Pave the Way for More First-Time Buyers in 2015

~Reprinted from Realtor.com~by John Lee~the Deal'ionaire~

Even as the housing market gets back on track, the numbers of first-time buyers continue to disappoint. This is strongly associated with the tight credit requirements facing would-be buyers. Recent important government policy changes and the introduction of new low down-payment programs, however, should set the stage for increased first-time buyer activity in 2015.

Clarity on Mortgage Qualifications

Both Fannie Mae and Freddie Mac finalized mortgage qualification guidelines that went into effect on Dec. 1. These guidelines clarified murky qualification standards set in place as a result of the Dodd-Frank reforms, which were intended to prevent a repeat of the financial crisis.

Up until now, the absence of specific rules and clear guidance on what types of errors would prompt Fannie or Freddie to reject a loan, leaving the underwriting bank or lender on the hook, led to very conservative lending practices. To avoid the risk of Fannie or Freddie rejecting a mortgage months or years after it closed, banks added “overlays,” or additional requirements, to the proposed guidelines.

As a result, according to Ellie Mae, a mortgage software company, the average denied credit score on conventional purchase mortgages in October was 723 even though the minimum standard set by both Fannie and Freddie was 620.

The new standards should lead to thousands more consumers being able to get a mortgage and should also speed up the underwriting and approval process.

Measures of mortgage credit availability from the Mortgage Bankers Association already indicate a slight loosening of credit in November prior to these rules going into effect. All three measures of mortgage credit availability were also higher than November of last year, between 3% and 5%. If that trend continues, it will indeed mean that we are seeing standards revert to more normal levels.

More Attractive Low Down-Payment Mortgages

Earlier this week, Fannie Mae and Freddie Mac both announced the details of new low down-payment mortgage programs they will be offering that enable qualified buyers to purchase a home with down payments of as little as 3%.

While these programs only lower the down payment threshold by 0.5% from similar loans available from the Federal Housing Administration (FHA), they will likely be far more attractive to consumers than the FHA loans. These new programs avoid the FHA fees that effectively increase the rate charged. Another advantage over FHA is the borrower’s ability to stop paying private mortgage insurance fees once the equity of the home reaches 20%.

Fannie Mae’s offering will be the first available to qualified borrowers who have not owned a home before or within the last three years. But Fannie Mae doesn’t lend directly, so it may take some time before we see specific lender offerings—perhaps in early 2015.

Clarifying when lenders are at risk and offering low down payment programs should increase flexibility in mortgage qualification.   This should pave the way for more first-time buyers in 2015. If we start to see specific competitive low down-payment lender offerings and evidence that standards are loosening, the spring selling season may start earlier than normal. After all, first-time buyers do not have to sell an existing home and can jump into the market at any time.

Jonathan Smoke is realtor.com®’s chief economist.