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Do not fall into the Sub-Prime Trap!
Many mortgage companies — lenders and brokers alike — try to push you into expensive "sub-prime" mortgage loans if your credit is not excellent. You will pay tens of thousands of dollars in extra interest if you are put into one of these loans.
Lenders and brokers often push people into these loans for a couple of reasons:
- 1. They make more money on these loans!
- 2. They are much easier for the lender/broker to
process!
It does not matter if you go to a broker or a direct lender. Both may try to convince you that you are a sub-prime borrower. And that may not be the case!
If you have had ANY credit difficulties at all in the past, please read this report. It just may save you a ton of money!
Two of the most dangerous loans in the mortgage business today are called a 2/28 or a 3/27.
Both will have a very unpleasant surprise for you after the initial “fixed” period. But lenders and brokers use it to their advantage.
See, after they have you convinced that you are a sub-prime borrower, they will tell you that if you choose a 30 year fixed rate, the interest rate will be a high. So instead of that, they will tell you that you should opt for a 2/28 or a 3/27. These are loans which will give a lower interest rate for the first 2 or 3 years. They'll tell you that after that during that initial fixed rate period, they will work with you to get your credit repaired. And they will help you refinance into a new “conventional” fixed rate loan at “A” rates. Great, right?
Here's the problem: First off, most lenders and brokers have no idea how to help you raise your credit score. And even if they did, they have no one on staff that is paid to help you. If a loan officer tells you that they will help you raise your score, ask them exactly how they plan to do it.
Most likely, they'll give you a runaround. They'll tell you that you should send letters to all the credit bureaus. The letters should tell the credit bureaus that all of your negative items are false....that they don't belong to you!
Boy, if it only was that easy!
True, some lenders will direct you to a company that will help you improve your credit profile by removing negative items. There are a few legitimate companies out there that provide this service...but very few. If you are ever directed to such a company, the first thing you should ask is if the company is a law firm. By law, only a law firm can legally get negative items removed from your credit profile.
I can tell you about one such law firm. Here's a surprise: they are NOT expensive! I'll get to that in a minute. But right now, it is important that you learn a bit more.
One of the first things you will be asked when applying for a home loan is “How is your credit?”
The fact is that your credit rating has become a much larger part of the entire mortgage process over the past few years.
There was a time just a few short years ago, that your credit was either good enough to be approved for a mortgage, or it wasn't. That was in the days before "Credit Scores." Then, in the 1990's a company named Fair Isaac developed a credit scoring system which assigned a numerical value to your credit history. Since then, it is no longer a matter of having good or bad credit; you now have a number. That number represents your credit risk to a lender.
Here's the basic breakdown of these numbers:
A+ |
720 and up | |
A |
680-719 | |
B |
640-679 | |
C |
620-639 | |
D |
580-619 | |
F |
Below 580 |
Now this is not an exact representation from Fair Isaac. As a matter of fact, Fair Isaac does not represent at all, what constitutes good or bad credit. That is entirely up to the lenders. But it does represent what I have seen over the last decade and 99% of the lenders would agree with me.
The scores are based on many factors, but here are the items that will most influence your score:
Late payments (over 30 days past due), especially over the course of the past 12 months. High balances as a percentage of available credit. Too many or too few accounts with balances. Too many "new" accounts (recently opened) Too many inquiries.
Of course many other factors can come into play,
but those are the most influential. The information in your
credit history, and especially your score, helps mortgage lenders
decide how much credit and what interest rate you are eligible for.
The better your credit history, the more likely you are to qualify
for the best available interest rate terms.
One thing that you absolutely must be aware of is that mortgage lenders typically will earn more when providing “sub-prime” loans. Because of this, many lenders automatically throw you into the sub prime category if your score falls below 620. Don't let this happen to you!
First of all, just because your credit score may fall below 620, it does not, I repeat, it does not mean you are automatically a sub-prime borrower. Secondly, just because your score is below 620 doesn't mean you cannot get your score raised to a level above that. That's right, you CAN get you score raised. We'll get to that in a minute.
The first step, even before you apply for a mortgage, should be to obtain your credit reports. This is very important. With your own personal credit report in hand, at least you will know that a lender is being honest with you about your credit score.
There are three major credit bureaus: Experian, TransUnion, and Equifax. All three are needed because when you apply for a loan, the lender will more than likely request a copy of a “triple merged report,” which is a compilation of all the information the three bureaus have about you.
Did
you know?
Recently, a new law was put into effect that requires
lenders to send you a disclosure form that does tell
you what your
score is.
Even so, I constantly hear horror stories about unscrupulous lenders who push people into sub-prime loans by not being completely honest about the score.
Do yourself a favor and get a copy of your
reports.
If you don't know how to get a copy of your credit reports, it's very simple.
Read on to learn how!
What is a credit report?
A consumer credit report is a document that contains a factual record of an individual's credit payment history. The report lists all the credit lines, loans, credit cards and inquiries that you have had, as far back as 10 years. What is interesting is that the entire credit report industry is self-sustaining. Meaning that it is the lenders, banks and companies that you do business with that actually report your payment history to the bureaus. And then mortgage lenders will review your credit report in order to determine what mortgage program you may qualify for. Mortgage loans all have what are called “underwriting” guidelines. Underwriting guidelines are set by the “end” lender. This is the company that your loan gets sold to. If you have ever had a mortgage, you know that you end up paying someone other than the company that you closed your loan with. Even the major banks sell their loans.
You may have heard of Fannie Mae. Or the FHA. They are government (or government sponsored) agencies that either buy or insure mortgages. So they set the rules. And if they say that you need a 620 credit score in order to qualify for their loans, well that's the rule. But see, they don't do that. There are no hard and fast rules for credit scores if the loan gets sold or is insured by a government (or sponsored) agency.
BUT LENDERS AND BROKERS DON'T WANT YOU TO KNOW THAT!
They will make you think that you absolutely must have a particular credit score in order to qualify for a particular loan. But the truth of the matter is that ONLY SUB-PRIME AND NO INCOME VERIFICATION LOANS HAVE HARD AND FAST RULES ABOUT CREDIT SCORES. The fact is, the less you know, the better it is for the lenders and brokers.
Most brokers and many banks and mortgage bankers do not have the ability to sell your loans through the FHA. Actually loans are not “sold” to the FHA. The FHA "insures" loans so that more people can qualify for loans, even with sub-prime credit!
That's right, the FHA is there to help you get a very competitive interest rate WITHOUT having to go through a sub-prime lender.
But in order for a lender or broker to be approved to close FHA loans, they have to go through a strenuous approval process. Most lenders/brokers don't bother. Why should they? They just put their more difficult loans through sub-prime programs with much higher interest rates. By doing so, their work is cut in half. First, they do not have to deal with getting approved by the FHA. Secondly, processing FHA loans does require more work for the lender/broker.
Some programs (the ones that are advertised) have very low rates and require good credit. Some programs may have slightly higher rates yet require excellent credit because of some other reason. For example, let's say you were not able to verify your income. Now, your interest rate may be a bit higher than the “advertised rates.” Yet, you will need nearly perfect credit in order to get a reasonable interest rate.
Then there are loans that have very relaxed underwriting guidelines. They carry higher interest rates, but you can be approved with very marginal credit. There are 190 million credit active people in the United States who have a charge account, car loan, student loan, home mortgage loan, liens, bankruptcies, foreclosures etc. It is obvious that bad credit will result from any reported late payments and any other derogatory reporting. As those people pay their bills, most lenders report credit payment information to credit bureaus. Both the good and the bad! So most of the information in your consumer credit report comes directly from the companies you do business with.
Now, what is a credit bureau?
A credit bureau or credit reporting agency is in the business of gathering, maintaining, and selling information about consumers’ credit histories. It collects information about consumers' payment habits from credit grantors like banks, savings and loans, credit unions, finance companies, mortgage companies and retailers. The credit bureau stores this information in a computer database and sells it to credit grantors in the form of credit reports.
When you apply for a mortgage home loan, the mortgage company orders your credit report from at least one credit bureau, but usually all three, and analyzes the information to decide whether to grant you credit. The credit bureau charges the mortgage lender a fee for every credit report sold. Although credit-reporting agencies provide your credit report to mortgage lenders when you apply for a mortgage, they do not make actual lending decisions. It is up to individual mortgage lenders to evaluate your credit report and any other factors they consider important and then decide whether or not to offer you credit. You will need to find a mortgage lender that works with you and understands that bad credit can happen, and that often there is a good explanation.
The 3 leading credit reporting agencies:
| Experian (formerly TRW) |
TransUnion | Equifax | ||
| Phone: |
Phone: |
Phone: |
||
| Fax: (972) 390-3809. |
Fax: (714) 447-603 (714) 830-2449 |
Fax: (888) 664-4535 (888) 729-0083 |
||
| Mail: P.O. Box 2002 Allen, TX 75013 |
Mail: Customer Disclosure Center PO Box 1000 Chester PA 19022 |
Mail: PO Box 105851 Atlanta, GA 30348 |
||
| Web: www.experian.com |
Web : www.transunion.com |
Web: www.equifax.com |
||
What is a credit risk score?
A credit risk score is a statistical summary of the information contained in a consumer's credit report. The most well known type of credit risk score is the Fair, Isaac or FICO score. Sophisticated mathematical processes calculate the score by assigning numerical values to various pieces of information in the credit report. Credit bureaus provide risk scores to mortgage lenders to objectively evaluate an applicant's credit-worthiness.
The score itself is relative and will be viewed differently by mortgage lenders depending on numerous factors, including the creditor's risk level, marketing goals, and mortgage underwriting guidelines. Your risk score will change over time as your credit history develops. Scores range from 375- 900. The higher the score the better the credit rating. Usually any credit score under 620 is considered bad credit. When we refer to bad credit, we are referring to anyone who may not qualify for a conforming mortgage. Your credit may not be that bad, but your credit score can still be low, causing you to be declined by a mortgage lender who does not accept any scores below 620. Your goal should always be to continuously work towards obtaining a higher credit score. However, this can take time.
You have a copy of your credit report. Now what?
Read it carefully!
» If there are any disputes or inaccuracies, contact the credit bureau right away. Do this in writing.
» Also, if the same dispute is on more than one credit report, you need to contact each one.
» If bad credit is reported inaccurately, get it removed. This is very important.
» To dispute inaccurate information on your Experian, Trans Union or Equifax credit report, write to the bureau that supplied the information. In your letter be sure to include: Your full name, first, middle and last and including any applicable suffixes (Jr., Sr., II, etc.)
- Your complete mailing address
- Your date of birth
- Your Social Security number (this is necessary to access your credit report)
- The name and account number of the creditor and item in question
- The specific reason for your disagreement with the disputed item
- Request an updated credit report
- Your signature
» Once you feel all the information obtained within your credit report is accurate, there are several things you can do to improve your credit report and credit scores.
I want to improve my credit scores
If you have a low credit score, thus bad credit because of lack of credit, apply for credit with a local business, such as a department store or a local bank or credit union. These local merchants may have lower credit standards than larger lenders. Before you apply for credit, make sure the credit grantor reports credit history information to one of the major U.S. credit bureaus so you can build your history.
Other options if you are having difficulty opening a credit account include asking a friend or family member to cosign your loan or credit card application or obtaining a secured card, which is guaranteed by a deposit you make with the card issuer.
3 Steps to Improving
Your Credit Score
1. Pay your bills on time
Mortgage lenders always look for indications that the prospective borrower is a good credit risk: a person who will pay back his or her debts in a timely fashion. Obviously, a history of on-time payments demonstrates that you are just such a person.
But that doesn't mean your credit history must be perfect for you to qualify for a mortgage home loan; few people's do! Bad credit with late payments can be changed over time. Make an effort to pay all bills on time. You do not want any payments to arrive over 30 days past the due date, as this will be reported as a 30 day late. The more late payments the lower your credit scores and bad credit. Also, the later the payment arrives, the more damage can be done as they also report late payments as 60, 90 and 120 days late. If you happen to miss a payment, make sure to send it in, before it reaches 60 days late, as this can be more harmful and cause the bad credit rating.
2. How much debt do you have?
One factor any mortgage lender must assess before offering a mortgage approval is the total debt of the person applying. If a large portion of your income each month is already committed to paying off other debt, the mortgage lender will wonder if you may have trouble paying back an additional loan. This is referred to as your debt to income ratios.
As a rule of thumb, mortgage lenders say that non-mortgage debt payments should not exceed 10-15% of your take home pay each month. If your debts are currently too high, consider ways to pay some down before you apply for a new mortgage.
If you have bad credit, due to too much debt, one option is to do a mortgage loan debt consolidation loan. Oftentimes, you can drastically lower your monthly payments, thus enabling you to make on-time monthly payment. Over time, this will increase your credit rating and credit scores.
3. Avoid unnecessary inquiries
Whenever you authorize a mortgage lender, creditor, employer, or other business to check your credit report, an "inquiry" is added to the report itselfa note that someone has checked your credit. (Checking your own credit report, however, does not lodge an inquiry.) An inquiry usually stays on your credit report for two years.
A lender considering you for a loan will look at the number of inquiries recorded there and when they took place. A large number of inquiries occurring in a short period of time may be interpreted as a sign that you are either:
- Applying for lots of credit because of financial difficulty.
Overextending yourself by taking on more debt than you can actually repay.
Therefore, it's always a good idea to minimize inquiries into your credit report. If you're shopping around for mortgage lenders who do bad credit mortgages, don't let every lender you consider run a credit check. You might have to settle for slightly more approximate estimates on what the mortgage lenders can offer you, since they can't verify your credit history. Explain in detail to them what bad credit is on your credit report and they can give you a good estimate. But that's still better than doing all that shopping around only to find that the mortgage lender of your choice now perceives you as a less solid credit risk and wants to charge a higher interest rate. Too many inquiries can decrease your credit scores. However, do not panic, as it is normal to have a few inquires every few months and this is OK.
What information does a credit report contain?
A consumer credit report contains four types of information: identifying information, credit information, public record information, and inquiries.
Identifying information includes:
- Your name
- Your current and previous addresses
- Your Social Security number
- Your year of birth
- Your current and previous employers
- If you're married, your spouse's name
Good and bad credit information includes credit accounts or loans you have with:
- Banks
- Retailers
- Credit card issuers
- Mortgage lenders
- Other lenders
Public record information includes any information that's contained
in state and county court records such as:
- Bankruptcies
- Tax liens
- Monetary judgments
Inquiries indicate to other credit grantors that you have applied for new credit that could result in additional debt. Potential lenders view multiple recent inquiries on your credit report as a sign that you are overextending yourself.
These are some of the basic rules, to improve bad credit as it relates to credit reports and credit scores.
When applying for a mortgage home loan with bad credit, make sure you find a mortgage lender who can approve you even with bad credit. REMEMBER, bad credit does not mean you do not qualify for a mortgage home loan. You will probably pay a higher interest rate, but if you work on cleaning up your credit, in the future you will be able to obtain lower interest rates. A good rule of thumb is: the lower your credit score, the higher the interest rate you will have to pay.