Foreclosures show up under the public record portion of your credit report and can remain on your credit for 7 years. This is one of the worst things that can happen to your credit but it's not the end of the world.
Many people are losing their homes now a days due to the poor economy and rising unemployment. So much noise was made about sub-prime loans when the mortgage market imploded that it was hardly mentioned what the trickle down effect would be for everyone else. Now we are seeing the effect nationwide. Some areas have been hit harder than others. Some people simply walked away from their homes after the homes lost so much value that they couldn't justify paying for them any longer.
They will take a big hit on their credit score. One can't predict how many points their scores will drop. Everything in their credit history file will be weighed and measured I'm sure. And how fast their scores will bounce back will be effected by how they handle their other debts.
As with any other event that lowers your credit score, having a foreclosure will effect your interest rates on credit applications such as credit cards and car loans. Expect to pay higher rates and fees while your scores are down and out.
Currently to get a conforming home loan you would have to wait three years after a foreclosure before being able to apply. (That's even more of a waiting period than the bankruptcy waiting period of two years.) Mortgage rules and regulations change without notice from time to time so keep that in mind if you think you can go through a foreclosure and then wait three years to buy another home. These rules may not apply in three years!
After the 7 year waiting period, contact the three bureaus and ask them to purge the negative information from your credit report. Always remember that if you don't contact the bureaus, the negative stuff on your report might linger around forever.
Tuesday, July 14, 2009
Chapter 7 Bankruptcy
When you file a chapter 7 bankruptcy it's a fresh start, complete liquidation bankruptcy for the most part. You would still have to pay your government backed student loans or any other money you owe government such as back taxes. (You still have to pay your child support too.)
Chapter 7 will show up under the public record portion of your credit report. It will remain on your credit report for 10 years from the date that you filed for bankruptcy. Then it can be purged.
You need to send a copy of your bankruptcy documents to the three credit bureaus so they can update your report to show which accounts were included in the bankruptcy. If you don't take this step, your credit report will not necessarily show that your past due and collection accounts were included in the bankruptcy and that will make it even harder on your credit scores.
From the date you file for chapter 7 until the date it's discharged usually takes a few months. Most are discharged in 3 months but I've seen some that took a few months longer. It will depend on your personal circumstances. But two years from the discharge date (not the filing date) you may be able to purchase a home.
There are currently two types of home loans that allow you to try to qualify this quickly. They are the FHA home loan and the VA home loan for veterans or active duty military. You will have to establish a new, good credit history in this two year waiting period to prove that your finances are back under control. You can't have anything else derogatory happen to your credit within this two year period. And of course you would have to show that you have a solid work history and enough income to support the proposed new house payment.
I read somewhere recently that "Capitalism without bankruptcy is like Christianity without hell." And that being true, there were more people who filed bankruptcy in America last year than those who filed in the entire decade of the 1960's!
While filing bankruptcy can be personally humiliating, it is no longer seen as the most horrible deadbeat thing a person can do. You will pay a price to be sure. After bankruptcy your consumer credit card rates and car loan interest rates will be much higher for the first few years than rates for those who have good credit.
With the economy the way it is and the increasing unemployment we can expect to see the bankruptcy filings increase as well. If you want to learn more about chapter 7 and other bankruptcies click the link.
http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/process.html
Chapter 7 will show up under the public record portion of your credit report. It will remain on your credit report for 10 years from the date that you filed for bankruptcy. Then it can be purged.
You need to send a copy of your bankruptcy documents to the three credit bureaus so they can update your report to show which accounts were included in the bankruptcy. If you don't take this step, your credit report will not necessarily show that your past due and collection accounts were included in the bankruptcy and that will make it even harder on your credit scores.
From the date you file for chapter 7 until the date it's discharged usually takes a few months. Most are discharged in 3 months but I've seen some that took a few months longer. It will depend on your personal circumstances. But two years from the discharge date (not the filing date) you may be able to purchase a home.
There are currently two types of home loans that allow you to try to qualify this quickly. They are the FHA home loan and the VA home loan for veterans or active duty military. You will have to establish a new, good credit history in this two year waiting period to prove that your finances are back under control. You can't have anything else derogatory happen to your credit within this two year period. And of course you would have to show that you have a solid work history and enough income to support the proposed new house payment.
I read somewhere recently that "Capitalism without bankruptcy is like Christianity without hell." And that being true, there were more people who filed bankruptcy in America last year than those who filed in the entire decade of the 1960's!
While filing bankruptcy can be personally humiliating, it is no longer seen as the most horrible deadbeat thing a person can do. You will pay a price to be sure. After bankruptcy your consumer credit card rates and car loan interest rates will be much higher for the first few years than rates for those who have good credit.
With the economy the way it is and the increasing unemployment we can expect to see the bankruptcy filings increase as well. If you want to learn more about chapter 7 and other bankruptcies click the link.
http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/process.html
Chapter 13 Bankruptcy
This bankruptcy is also called the wage earner plan. This plan allows you to reorganize your debts and make payments to the bankruptcy trustee for a period of 3 years up to 5 years in some cases. Your monthly payment amount will be determined by what your current monthly income is and how much you can afford to pay. The trustee will take your monthly payments and distribute them amongst your creditors.
Chapter 13 will show up under the public record portion of your credit report. You will need to send a copy of your bankruptcy papers to the three credit bureaus so that they can show that each of your creditors have been included in the bankruptcy. Otherwise, it might look like you have unpaid past due or collection accounts that are not part of the bankruptcy. This will hurt your credit scores even more if potential lenders can't see what was in the bankruptcy and what wasn't.
Make all your payments to the trustsee on time each month to re-establish a good payment history.
After making 12 months worth of on time payments to the trustee you might be able to purchase a home, providing that you haven't had anything else derogatory happen to your credit since filing bankruptcy. You would have to qualify for the new house payment and you would have to obtain permission from the trustee to purchase a home but I've seen this work out many times.
A chapter 13 bankruptcy will stay on your credit report for 7 years from the date you filed it and then it can be purged. To learn more about chapter 13 click the link below.
http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/process.html
Chapter 13 will show up under the public record portion of your credit report. You will need to send a copy of your bankruptcy papers to the three credit bureaus so that they can show that each of your creditors have been included in the bankruptcy. Otherwise, it might look like you have unpaid past due or collection accounts that are not part of the bankruptcy. This will hurt your credit scores even more if potential lenders can't see what was in the bankruptcy and what wasn't.
Make all your payments to the trustsee on time each month to re-establish a good payment history.
After making 12 months worth of on time payments to the trustee you might be able to purchase a home, providing that you haven't had anything else derogatory happen to your credit since filing bankruptcy. You would have to qualify for the new house payment and you would have to obtain permission from the trustee to purchase a home but I've seen this work out many times.
A chapter 13 bankruptcy will stay on your credit report for 7 years from the date you filed it and then it can be purged. To learn more about chapter 13 click the link below.
http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/process.html
Student Loans
You will pay the government what you owe them!!
Most student loans are government backed. When you don't pay them they will go into collection and eventually show in default status as an unpaid government debt. I'm not sure how other creditors treat them but for home buying purposes, you could not get a conforming home loan if you were in default over any government debt!
How can you get out of default status? You will have to bring the past due amount current and in some cases, after you have brought it current you will need to keep making your monthly payments on time for a year before they will allow you to be considered no longer in default. They can also take any tax refund you might have been due until your debt is paid in full. So either pay them in full or bring them current and keep them on time for a year to get them out of default.
If you owe the government money you can't even discharge it in a bankruptcy! It's that serious!
Most student loans are government backed. When you don't pay them they will go into collection and eventually show in default status as an unpaid government debt. I'm not sure how other creditors treat them but for home buying purposes, you could not get a conforming home loan if you were in default over any government debt!
How can you get out of default status? You will have to bring the past due amount current and in some cases, after you have brought it current you will need to keep making your monthly payments on time for a year before they will allow you to be considered no longer in default. They can also take any tax refund you might have been due until your debt is paid in full. So either pay them in full or bring them current and keep them on time for a year to get them out of default.
If you owe the government money you can't even discharge it in a bankruptcy! It's that serious!
Judgments
One section of your credit report shows if there are any public records against you. Public records would be things that have been filed in a court somewhere. If you've filed a bankruptcy it will show under public records. If you have a collection account that went for so many months and you just didn't or couldn't pay it, the creditor may have decided to sue you. If they went to court against you (whether you were in court or not) they got a judgment against you.
Judgments look much worse on a credit report than unpaid collections and you usually won't be able to purchase a home as long as you have an unpaid judgment. You will have to call the courthouse where the judgment is filed in order to pay this off. I'm not aware of a court allowing monthly payments on judgments. They want it paid in full.
Once a judgment is placed against you, then your wages can be garnished and in some cases your bank accounts can be seized. Better to pay those off as soon as possible!
In all my years as a loan officer I did have one case where a man had just recently found out he was a father. An old girlfriend had come forward saying he was the father of her child from 12 years ago. A DNA test was done and it determined he was indeed the father. The court found that he owed 12 years of back child support. They placed an immediate judgment against him and set up monthly child support payments, a portion of which went toward the back child support. Even though he had a judgment against him for over $50,000 in back child support, he was able to show the documentation needed to prove that he had been paying all those child support payments on time as ordered for about a year. In other words, my loan underwriter could see that he wasn't a deadbeat. So he is the only one I've known who had a judgment and was still able to purchase his home with a conforming home loan.
I'm aware that when the sub-prime loan business was booming, anyone with terrible credit could get a home loan that was non-conforming with terrible interest rates and terms. But I didn't originate sub-prime loans. My customers couldn't purchase a home if they had unpaid judgments or unpaid child support except for the one man I mentioned here.
Judgments look much worse on a credit report than unpaid collections and you usually won't be able to purchase a home as long as you have an unpaid judgment. You will have to call the courthouse where the judgment is filed in order to pay this off. I'm not aware of a court allowing monthly payments on judgments. They want it paid in full.
Once a judgment is placed against you, then your wages can be garnished and in some cases your bank accounts can be seized. Better to pay those off as soon as possible!
In all my years as a loan officer I did have one case where a man had just recently found out he was a father. An old girlfriend had come forward saying he was the father of her child from 12 years ago. A DNA test was done and it determined he was indeed the father. The court found that he owed 12 years of back child support. They placed an immediate judgment against him and set up monthly child support payments, a portion of which went toward the back child support. Even though he had a judgment against him for over $50,000 in back child support, he was able to show the documentation needed to prove that he had been paying all those child support payments on time as ordered for about a year. In other words, my loan underwriter could see that he wasn't a deadbeat. So he is the only one I've known who had a judgment and was still able to purchase his home with a conforming home loan.
I'm aware that when the sub-prime loan business was booming, anyone with terrible credit could get a home loan that was non-conforming with terrible interest rates and terms. But I didn't originate sub-prime loans. My customers couldn't purchase a home if they had unpaid judgments or unpaid child support except for the one man I mentioned here.
Unexpected Collections
Just a quick post here to tell you about a pattern I saw becoming more widespread when I was a home loan originator. Often I would pull someone's credit report and find collections for parking tickets, unpaid overdue library book fees, and collections for movies you may have rented and either didn't return them at all or you didn't pay the late fees on them. Most of the amounts owed were ridiculously low but they ended up as unpaid collections anyway.
These are items that you might not think of as having to do with your credit so I thought it best to warn you. If you think you're doing a great job managing your credit, and yet you have a little something like an overdue library book fee, you better pay it or it could hurt your credit score when you least expect it!
These are items that you might not think of as having to do with your credit so I thought it best to warn you. If you think you're doing a great job managing your credit, and yet you have a little something like an overdue library book fee, you better pay it or it could hurt your credit score when you least expect it!
Unpaid Collections
When unpaid collections show up on your credit report they may be described as collections, write offs or profit and loss accounts. No matter what they're called they are collections and the company wants you to pay the money that you owe usually with penalties and interest tacked onto the debt. Here's how to handle them.
Call the company that you owe the money to. Ask them if they will settle the debt for less than what's owed. Many times they will. If they agree to settle the debt have them send you something in writing that you can keep for your records. It should state the terms of the settlement. For example, if you owe someone $2000 and they agree to settle this debt with you for only $1000, make them put it in writing before you send them any money. When you get the written proof you will want to make payment in a way that can be verified such as a check or money order or some way that has a paper trail for you to keep in your records.
Make a credit file and keep all your correspondence and proof in that file for later reference. After you pay the debt, the company should report it as a paid in full or settled in full account to the three credit brueaus. But if they don't report it, then you will have your proof in your credit file. You can make three copies of it and mail it to Experian, Transunion, Equifax and ask them to update your credit history.
Sometimes collections are in such large amounts that it's hard to pay them in one lump sum so you could ask the company if they will enter into an agreement with you to make monthly payments until you can get it paid off. For example: If you have a debt of $2000 and you don't have a large amount to settle this debt in one lump sum payment, you might arrange to start sending them $100 per month until you get it paid in full. Again, ask for the agreement in writing. Make all your payments on time and in the agreed amount so that you will be establishing a responsible track record with your new agreement. Keep copies of all your checks or money orders. When the bill is finally paid in full the company needs to report it to the three bureaus. If they don't, you will have your proof of payments so that you can report it paid. Make three copies of your proof and mail it in.
Always remember that the company you owe money to is not in a hurry to update your credit for you. You will sometimes be the only one who cares enough about your credit to see that it gets updated in a timely manner.
When you pay off an old debt it will remain on your credit report for 7 years from the date that it first went delinquent. But while it's sitting there for 7 years it looks much better to be showing as paid collection instead of unpaid collection!
I saw a financial guru on tv the other day that said some companies will work with you to delete an old account off your credit report after you've paid it off. He said to request a PTD letter which stands for "Pay to delete". So apparently there's a fee involved. I had never heard of this in all my 12 years as a loan officer but according to him it can be done. It might be worth checking into to see how much the company would charge you to delete that part of your credit history.
Call the company that you owe the money to. Ask them if they will settle the debt for less than what's owed. Many times they will. If they agree to settle the debt have them send you something in writing that you can keep for your records. It should state the terms of the settlement. For example, if you owe someone $2000 and they agree to settle this debt with you for only $1000, make them put it in writing before you send them any money. When you get the written proof you will want to make payment in a way that can be verified such as a check or money order or some way that has a paper trail for you to keep in your records.
Make a credit file and keep all your correspondence and proof in that file for later reference. After you pay the debt, the company should report it as a paid in full or settled in full account to the three credit brueaus. But if they don't report it, then you will have your proof in your credit file. You can make three copies of it and mail it to Experian, Transunion, Equifax and ask them to update your credit history.
Sometimes collections are in such large amounts that it's hard to pay them in one lump sum so you could ask the company if they will enter into an agreement with you to make monthly payments until you can get it paid off. For example: If you have a debt of $2000 and you don't have a large amount to settle this debt in one lump sum payment, you might arrange to start sending them $100 per month until you get it paid in full. Again, ask for the agreement in writing. Make all your payments on time and in the agreed amount so that you will be establishing a responsible track record with your new agreement. Keep copies of all your checks or money orders. When the bill is finally paid in full the company needs to report it to the three bureaus. If they don't, you will have your proof of payments so that you can report it paid. Make three copies of your proof and mail it in.
Always remember that the company you owe money to is not in a hurry to update your credit for you. You will sometimes be the only one who cares enough about your credit to see that it gets updated in a timely manner.
When you pay off an old debt it will remain on your credit report for 7 years from the date that it first went delinquent. But while it's sitting there for 7 years it looks much better to be showing as paid collection instead of unpaid collection!
I saw a financial guru on tv the other day that said some companies will work with you to delete an old account off your credit report after you've paid it off. He said to request a PTD letter which stands for "Pay to delete". So apparently there's a fee involved. I had never heard of this in all my 12 years as a loan officer but according to him it can be done. It might be worth checking into to see how much the company would charge you to delete that part of your credit history.
Co-signing
When you co-sign a loan for someone else you are responsible for the repayment of their loan just as much as they are.
If they become 30 days late on a payment it will show up as a late payment on your credit history too. So be very, very careful about becoming a co-signer for someone else's loan. Consider whether you would be able to make their monthly payments if they stop paying. If you are not prepared financially to make that extra payment then it's simple...Don't co-sign!
If they become 30 days late on a payment it will show up as a late payment on your credit history too. So be very, very careful about becoming a co-signer for someone else's loan. Consider whether you would be able to make their monthly payments if they stop paying. If you are not prepared financially to make that extra payment then it's simple...Don't co-sign!
How to Start Building a Credit History
Unless you have a co-signer, the easiest way to start a credit history is to apply for a credit card. Because it will be your first credit, you will probably not get very good terms on your interest rate that will be charged. So it's important to charge small amounts each month and pay the balance off fully each month so that you don't have to pay that high interest rate. Make your payments on time and soon you will have built up a good credit history.
If you aren't able to get approved for a traditional credit card then you can apply for a secured card. With a secured you will be sending money to the card company to be held as collateral against your charging. For example: If you send them $250 to hold, they will grant you a credit limit of $250. As long as you don't try to charge more than $250 at a time you will be okay. Again, only charge small amounts, pay the bill on time and balance in full each month to avoid paying interest.
If you aren't able to get approved for a traditional credit card then you can apply for a secured card. With a secured you will be sending money to the card company to be held as collateral against your charging. For example: If you send them $250 to hold, they will grant you a credit limit of $250. As long as you don't try to charge more than $250 at a time you will be okay. Again, only charge small amounts, pay the bill on time and balance in full each month to avoid paying interest.
Wednesday, July 8, 2009
Information Blackout
I've already discussed in a previous article the importance of your three FICO scores. This time I will tell you about changes that have made it more difficult for the consumer to know their three scores.
In February of this year Experian stopped selling the FICO score to consumers. They still sell it to commercial lenders but not to you. They use their own credit score model called "PLUS" and they also use Vantagescore that was developed between the three credit bureaus. Are they trying to create scoring systems to give FICO some competition? I think so. Will it work? I don't know. It is estimated that 90% of lenders still use FICO score models and prefer them as the most accurate scoring model compared to Vantagescore or PLUS. As consumers, we are stuck in the middle of their battle.
It was already difficult for consumers to understand how credit works. Now, if you no longer have access to your 3 credit scores you don't know if you really qualify for a loan or not. Before February, you could go to myfico.com and purchase your three scores. (The ones the lenders would be looking at if you were to go apply for a loan.) At the moment you can only get two. That's a real set back. The score you can purchase from Experian will be different from the FICO that they sell to the lender. Can you see how this could be a problem when you're trying to be an informed consumer? When you try to compare a FICO score to a Vantagescore or PLUS score it's like comparing Apples to Oranges!
At the moment you can still purchase two FICO scores. However I've been reading the speculation that the other two bureaus, Equifax and Trans Union might follow Experian's lead and only sell the Vantagescore system to consumers. This is bad timing to be sure since the economy is in the tank and causing so many changes in who can get credit and who can't.
But this credit reporting and scoring business is all about the money. I don't think it was ever intended to be consumer friendly to start with. We'll just have to keep a watchful eye out for more changes to come.
In February of this year Experian stopped selling the FICO score to consumers. They still sell it to commercial lenders but not to you. They use their own credit score model called "PLUS" and they also use Vantagescore that was developed between the three credit bureaus. Are they trying to create scoring systems to give FICO some competition? I think so. Will it work? I don't know. It is estimated that 90% of lenders still use FICO score models and prefer them as the most accurate scoring model compared to Vantagescore or PLUS. As consumers, we are stuck in the middle of their battle.
It was already difficult for consumers to understand how credit works. Now, if you no longer have access to your 3 credit scores you don't know if you really qualify for a loan or not. Before February, you could go to myfico.com and purchase your three scores. (The ones the lenders would be looking at if you were to go apply for a loan.) At the moment you can only get two. That's a real set back. The score you can purchase from Experian will be different from the FICO that they sell to the lender. Can you see how this could be a problem when you're trying to be an informed consumer? When you try to compare a FICO score to a Vantagescore or PLUS score it's like comparing Apples to Oranges!
At the moment you can still purchase two FICO scores. However I've been reading the speculation that the other two bureaus, Equifax and Trans Union might follow Experian's lead and only sell the Vantagescore system to consumers. This is bad timing to be sure since the economy is in the tank and causing so many changes in who can get credit and who can't.
But this credit reporting and scoring business is all about the money. I don't think it was ever intended to be consumer friendly to start with. We'll just have to keep a watchful eye out for more changes to come.
Wednesday, July 1, 2009
Everything Matters
This post will be short and to the point.
I want you to know that when it comes to your credit score, everything matters. I met many people over the years as a home loan officer who believed they could ignore small monthly payments and it wouldn't hurt them as much. These were people who would pay their big payments and ignore their small payments. They were everyone from college professors to active duty military men and women, business owners, factory workers. etc etc. That showed me that no matter what people do for a living, what their education level, there is still a lot of misconception across the board about how credit works.
It doesn't matter if your Mastercard payment is only $5 per month. If you aren't paying it, Mastercard will report it as 30 days, 60 days, 90 days past due. They will report it to Equifax, Experian and Transunion. These bureaus also called credit repositories, are the ones that score you based on that FICO scoring model I discussed in my last article. (They should not report you as late unless you become 30 days or more late.) You might have to pay a late fee for being 1 day late but it will not be reported as a late payment to the three bureaus unless it becomes 30 days late.
It doesn't matter to them if you are late on an $800 per month house payment or a $300 car payment, or a $5 Mastercard payment. So if you're one of those people who thinks it's okay to clump 3 months worth of payments together at a time....think again. You'll be ruining your credit score if you do that!! I know it can seem like a pain in the neck to send in $5 per month, but it really does matter. This is your first real lesson about making payments. Make all of them on time every month until they are paid in full.
I want you to know that when it comes to your credit score, everything matters. I met many people over the years as a home loan officer who believed they could ignore small monthly payments and it wouldn't hurt them as much. These were people who would pay their big payments and ignore their small payments. They were everyone from college professors to active duty military men and women, business owners, factory workers. etc etc. That showed me that no matter what people do for a living, what their education level, there is still a lot of misconception across the board about how credit works.
It doesn't matter if your Mastercard payment is only $5 per month. If you aren't paying it, Mastercard will report it as 30 days, 60 days, 90 days past due. They will report it to Equifax, Experian and Transunion. These bureaus also called credit repositories, are the ones that score you based on that FICO scoring model I discussed in my last article. (They should not report you as late unless you become 30 days or more late.) You might have to pay a late fee for being 1 day late but it will not be reported as a late payment to the three bureaus unless it becomes 30 days late.
It doesn't matter to them if you are late on an $800 per month house payment or a $300 car payment, or a $5 Mastercard payment. So if you're one of those people who thinks it's okay to clump 3 months worth of payments together at a time....think again. You'll be ruining your credit score if you do that!! I know it can seem like a pain in the neck to send in $5 per month, but it really does matter. This is your first real lesson about making payments. Make all of them on time every month until they are paid in full.
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