• Paying your bills on time (Late payments are HUGE credit killers)

• Don’t get in over your head (A good rule of thumb is never use more than 45% of your income on Housing and Transportation expenses combined) This actually has little bearing on your actual credit score, but the implications are obvious, people in over their head tend to get in trouble, have late payments etc.

• Get on a Budget (Like the old saying goes, those that fail to plan, plan to fail) Its hard…I KNOW it is, but this is one of the single greatest indicators of financial success. Those that dont have discipline in their spending rarely have a good credit score for long.

• Use credit as a tool. (It is a means to an end. ALWAYS have your outcome in mind when you use credit. Using it without a purpose is a recipe for disaster) Building a credit score by charging items that you HAVE the cash to pay for, or supplementing cash flow for a business are valid reasons to use a credit card. Christmas spending that you didn’t save up for…is NOT.

Dave Ramsey often refers to credit scores as “I Love Debt Scores” and he is right. He is the prototypical “millionaire next door” meaning despite him having an above average income, he lives below his means, saves money, invests it well, follows a budget and DOES NOT USE CREDIT AT ALL. For this reason, he does not have a credit score.

Credit Cards: Your Best Friend…Your Worst Enemy

This scenario plays out at least 3-4 times a week when I meet with people about getting a home loan.

I ask the borrowers if they know anything about their credit. If it is good they tell me how they ALWAYS pay everything on time and always have since 1982 and they have cut up all their credit cards because they don’t believe in them.

I then pull their credit and they are dismayed to find that they do not have amazing credit scores. They might be average, or low, or non existent.

“WHY!?” they ask.

And I tell them; You don’t believe in Credit cards.

There are essentially two factors that come in to obtaining and maintaining good credit. Depth, and Credit usage. These are my own terminology, and are not actual words used by the credit bureaus or the industry at large per se. I simply use them to illustrate ‘how it works in the real world’.

You see paying your house or car on time every month is OUTSTANDING…when a human looks at your credit. It says you are responsible, it says you care about paying your debts.

On the other hand the mathematical equation used to determine your credit score (called an Algorithm, and typically provided by FICO or Fair Issacs Corporation) looks at this factor with little weight in the over all big picture.

On the other hand, a person with the very same credit profile who also has 3 revolving (read credit cards) lines of credit that had perfect payment histories over a 5 year period, who never carried more than a 30% balance (this number is somewhat debated amongst credit experts and varies from 10-45%) would likely have a much higher credit score.

So in laymans terms…a Credit score is an indicator of who borrows money and pays it back the most often. Or who makes the banks a lot of interest. THEY will have high credit scores.

Why? Because Credit Bureaus are in the business of selling information.

They sell YOUR information to lenders.

Lenders want to know who will make them money.

Credit scores indicate who will make them money.

Thus, having and using credit cards will get you a high credit score.

Lesser Known Facts

Here are some pointers that are not quite so commonly known about obtaining and maintaining a great credit score

• Never use more than 30% of your available credit (It’s a good rule of thumb for your spending, but its crucial for your credit score) There are times when you actually need to “go into debt to go into debt” meaning if you know you are coming up on a large purchase such as a house, refinancing or a car it might be worthwhile to put a balance on your credit card(s). This needs to be done well in advance of applying for the new credit because creditors typically only update once a month. So if you charge your groceries on the 20th, and go apply for credit the next day, it won’t show up and your credit score won’t be affected.

• Open and Maintain 3 revolving lines of credit for 5 years (Often opening a new revolving line of credit for a borrower with zero credit cards will provide an immediate boost to their scores) Having said that, over time they will need two more to establish good credit depth in the eyes of the credit bureaus. The longer this history is reported the better credit scores tend to be.

• Become an Authorized User (This was supposedly done away with, but we have proven it still works with certain companies) The idea comes from a law that was passed in the 1970’s to allow parents to help their kids build up a credit history. Essentially you can take and add your child or spouse (or relative, or…well anyone) and add them as an authorized user to an existing credit card account. Once this information reports to the credit bureau they “piggy back” on your account and your good credit history would report on your report AND theirs. In theory this could allow whoever was added to the account to make charges. However if the card holder provides their own address for the new authorized users card to be delivered to, they can destroy the card and make it impossible for the authorized user to make any charges to the account. For those looking to build a credit history this can be a valuable tool.

• Open an Overdraft Protection Line of Credit Often people who “dont believe in credit cards” will simply refuse to give in, even for the sake of getting better credit scores. If you fall into this category, one option is to apply for an overdraft protection line of credit. Yes it is still technically a credit card. However its purpose is very different. It merely protects you in the event that you ever go beyond your checking account balance. However the bureaus see it as a credit card. This is a great strategy for building a credit score without having to give in to the evil forces of capital one.

• Stay Away From Store Credit Whether its a Jewelery store, Home Depot, Best Buy or Sears…just pass. Not only are the rates and fee’s often exorbitant, even in comparison to some major credit cards, but they are not “created equal” in the eyes of the credit bureaus. For the purposes of building credit stick to good old fashioned credit cards.

• DON’T dispute every single thing on your credit report Often so called credit repair companies will dispute everything on a persons credit that isn’t a perfect account. This can do more harm than good at times. The math behind your credit score is complex to say the least. It is heavily weighted towards the newest items, and as things age they become less important to how your score is calculated. One curiosity is that sometimes removing a negative item from your credit can LOWER your score. One example is a satisfied collection account that was revolving. Odd as it may sound, sometimes these get reported as open and revolving accounts. Losing that history will lower your score.

Following these tips will help anyone get the best rates on any type of loan be it a Mortgage or a Car Loan. Credit is increasingly used in Insurance as well to help determine risk. Not to mention by prospective employers for Job candidates.

Here are some tips to help you understand what the bank is looking for, and how you can present them with the right information that will give you the greatest chance to get the kind of modification you are looking for.

Make sure its actually the house or mortgage that’s the problem

Recently a client called telling us how they had tried and tried to get a loan modification but the bank just wouldn’t work with them. After speaking for a bit and asking questions about their finances, it was discovered that their mortgage payment was rather modest, but they had nearly $2,000 dollars a month going out in credit card payments and other debts. The house wasn’t the problem, but its often something people rationalize. They figure its easier to change the mortgage than it is to get rid of their credit card debt. On a fixed income, their best solution was to do something about the debt and leave the house alone.

Understand what qualifies as a hardship and what does not

This point is best made by telling a story of a client I was working with years ago. It was this client that caused me to revise my list of necessary documentation that I give out. One item that is required is a hardship explanation. She was very thorough in explaining what happened. 4 Pages worth of explanation…front and back…in Spanish.

The next day I got a call from the negotiator assigned to the file. I’m paraphrasing but his response went something like this “I just opened your clients file, and noticed that her explanation is 4 pages, front and back and in Spanish”. I replied, “yes it is” with a little laugh. He then asked why she didn’t make her payment and I told him it was because her husband had lost his job. He said “OK thanks, that’s all I needed” and our call ended. The lesson? They don’t care what the reason is. They are simply going by the book. If it fits whats considered a hardship in their eyes, they don’t care about all the details.

Here is a list of what banks will consider a hardship for consideration of a loan modification:

• Divorce
• Death, loss of a spouse or child (due to the expenses)
• Major Medical expense
• Loss of employment or Loss of Income

These are broad parameters are what a bank will consider, so you will need to figure out how to get your situation to fit within one of them. Now, having said that I’m sure someone will make a comment about how they had some situation that didn’t fall under any of these guidelines and got approved…my answer is GREAT, that’s awesome, but I am trying to make this apply to the broadest amount of people and this is what banks look for.

Here are some others that probably fall under one of these different categories that can also be considered a hardship

• Too much debt
• Mortgage payment increases
• Business failure
• Job relocation
• Damage to property
• Military service
• Incarceration
• Tax or insurance increase

Make sure you are doing all you can to help solve YOUR problem

I love what I do, its fun and very rewarding to see someone have the weight of facing foreclosure come off their shoulders. But I have little patience for someone who is just looking to game the system.

When you do an analysis of your budget, make sure you have eliminated all the non essential expenses that you reasonably can. Look for ways that you can make it work before you go asking the bank to make concessions for you.

Talk to a HUD approved counselor

I’m going to say this with a lot of hesitancy. But you should go see one. Why? Because sometimes it actually helps (terrible I know) but its true, they are horribly understaffed and in many cases under qualified to help. But the government in its wisdom (sarcasm) has decided that it will create a plan to help and then under fund it and under staff it so that its demise is inevitable.

In my opinion, the greatest advantage to talking with a HUD approved Counselor is that you get someone to bounce your questions off of who does not have an agenda. They will give you strait answers based on the best information they have available and wont be trying to sell you on an expensive legal service that you probably don’t need.

Having said that, I do believe there is a place for paid loan modification services. What doesn’t exist yet is a way to know who to work with and who not to. So until something comes about to bring fee’s into reality and an ethical framework for what and how clients are given recommendations and what they are being told, I am approaching this field with a huge caveat. I am giving away all of my years of experience and knowledge for free, in hopes that I can help people avoid huge pitfalls and hopefully find a way to save their house in this uncertain time.

It seems reasonably logical that a bank would work with a homeowner facing foreclosure right? So why don’t more loan modifications get approved?

I regularly hear homeowners repeat this old adage “well the bank doesn’t want another house on their books so…”

But this is one of those maxims that’s both true and false at the same time.

How?

Well I’m really having to fight my urge to toss in a shameless Schrodinger’s Cat reference here, but only physics geeks like me would get it…so ill use a better known example to illustrate.

Its like how in Action movies the ‘good guys’ always say that they wont negotiate with Terrorists. In this example, a homeowner thinking this way is using the logic that they have the upper hand because the bank does not want to go through with a foreclosure since it results in a financial loss for them.

The reality is, yeah they don’t want to take your house but they will.

In this sense the bank is using Keanue Reeves logic from the movie Speed when he says to “Shoot the Hostage”. If you were to shoot a terrorists hostage, they lose their only source of leverage. Not that I necessarily agree with it, but from a logical stand point you could argue that it serves the greater good. Save many, lose one.

Now, you might think I’m getting off topic, but I’ve always wanted to be in a court room and say to the Judge “Just follow me on this one your honor, I promise I’m going somewhere with this” So, just indulge me here a second.

The reasoning behind why we don’t negotiate with terrorists, is so that we take away their leverage, or at least we hope to discourage them from trying to use it again in the future. In this way we are actually saying “while horrifying, we are willing to lose a few for the greater good of all”

Now, to come full circle with this example, Banks know that if they were to begin wholesale negotiating with the public the incentive to continue making your payments would disappear in many peoples eyes. I’ve seen it first hand… I had a guy call me asking about doing a loan modification. He had perfect credit, perfect payment history but was unhappy with his 5.75% rate (WHAT). So he was contemplating ceasing to make payments so that he could try and strong arm his lender into dropping his rate down to “something in the 3 or 4 percent range”.

Aside from the fact that this is a stupid plan, as the bank would look at your ability to pay and say no, leaving you with some missed payments to catch up on and damaged credit its also exactly why banks are so reluctant to work with people who are legitimately in trouble and need the help. They are worried that no one will want to make their payments and will use the pain involved in going through a foreclosure as leverage to try and negotiate with the bank. So the banks shoot the hostage. Thus very few modifications get approved.

More often than not, what you will get offered at the very beginning of any discussions with your lender is whats called either a repayment plan or a Special Forbearance. These can take many forms and the numbers can be set up any number of ways, but this is the most common boiler plate version:

1. 50% of the arrears (The money you are behind) as an upfront payment
2. 50% of the arrears paid back in equal installments over a period of time ranging from 6-24 months

Its no surprise that these plans fail more often than they work. It doesn’t take a rocket scientist to figure out that someone who couldn’t make their payment as is, won’t be able to make a higher payment let alone write a check for half of what they are behind.

It’s setting people up to fail, and the failure rates are staggering to say the least. Its closer to 100% than it is to 50%.

However, there is hope. A plan can be set up to not only help someone save their home from foreclosure, but actually come out of the experience better off financially than when they fell behind. This is something that everyone should know about whether they are already in foreclosure, or simply face the prospect of it sometime in the future. I’ve always said that I could do so much more if people contacted me before they actually fell behind.

Finally, its worth noting that it doesn’t hurt to have some leverage when you go in to negotiate. I work with a Law Firm that does a Forensic Audit on mortgages to look for violations that would cause the lender to have some liability. Its relatively inexpensive and can really tip the scales back in your favor, or at the very least even them out.

More on this at a later time though, as this is not the intent of the post.

If you are looking for more information on whether you should or can do a loan modification, feel free to email me or shoot me a call and I’d be happy to discuss your situation with you further and give you recommendations as to what your different options are.

Today, a new video was released by Freddie Mac titled “Stop Foreclosure: Documents Your Lender Needs To Help You” and Many people right here in [STATE] are searching for more information about loan modifications and this video is helpful to learn what is needed. With the crush of phone calls from people inquiring about a loan modification, many lenders are swamped. This video does a good job of helping people be more fully prepared in advance of calling their lender.

Documents Your Lender Will Need

• A copy of your most recent paystubs that show your net take home pay
• Copies of your most recent tax returns
• If you have a second mortgage or HELOC, a copy of that statement
• Account balances and minimum monthly payments on credit cards, car loans, student loans or other debt
• The most recent mortgage statement that you have

[STATE] Loan Modification: Don’t Forget The Hardship Letter

If you are wondering if you really need to write a hardship letter — don’t wonder. A well written hardship letter is a vital part of the loan modification process.

But did you know there may be a better option? Many people are finding that it is possible to do something called an FHA short refinance – which essentially has the same result as a principal reduction loan modification without the fees and time – you end up owing less on your mortgage than your home is worth.

How A FHA Short Refinance Works

An FHA short refinance works much like a short sale – except that you get to keep the house rather than sell it to someone else.

The first step to getting a FHA short refinance done is to get on the phone with your lender and tell them that you are interested in SHORT SELLING your home. Once they hear that, they will usually transfer you to the loss mitigation department – which is the right one.

Once you get to the loss mitigation department, you want to negotiate for something called a SHORT PAYOFF – which means that the lender will agree to accept less than you currently owe. If they say they won’t allow short payoffs, then ask them what they are doing when they accept a SHORT SALE.

No matter what – don’t take NO for an answer! Many times (most of the time) the lender will give you a different answer depending on who you talk to. If you don’t get the answer you want – just try back the next day and speak with someone else.

Once you get the SHORT PAYOFF, then you should be able to get any FHA loan officer to help you get a new FHA loan for that amount – and easier than you can say the words “loan modification”, you will have a new fixed rate FHA loan that is 95% of what your home is now worth.

No matter what, don’t give up! A FHA short refinance can be a much better long term solution than a loan modification. And for many people in Utah – the FHA short refinance is easier, cheaper and better than a loan modification.

Easier. Cheaper. Better.

Excellent!