Credit FAQ

CREDIT- Frequently Asked Questions

What is a middle score?

ANSWER: A middle score is the minimum qualifying score that 97% of available mortgage programs require for a borrower to have to qualify for that program. The middle score is simply the middle number (i.e. 600, 625, 671) of a tri-merge or 3 bureau credit report. There are a handful of loan programs that only use the Experian score for qualifying. The middle score is also not the score from any specific credit bureau (i.e. your FICO score is NOT always your middle score). Your middle score any be from any of the 3 bureaus.

YOUR MIDDLE CREDIT SCORE IS THE MOST IMPORTANT ITEM ON YOUR CREDIT REPORT. If your middle score is high enough, any negative item that may also appear on your credit report WILL NOT prevent you from qualifying and DOES NOT have to be paid or settled to qualify for the loan.

What is the lowest credit score that I can have to qualify for a loan?

ANSWER: A middle score of 585 is the lowest score a borrower can have and still qualify for a mortgage. The maximum loan to value at that score is 90% so a 10% down payment would be required. When your score is below 585, you actually can still qualify for a loan, but at a very high interest rate and a substantial down payment (30% or more). You can qualify for an FHA loan with a mid score of 585 but the chances of the underwriter approving you with that low a score is about 20% and you would have to have extremely good compensating factors to offset the low scores. It would be advisable to try to work on raising your scores to qualify for a better program.

What does FICO stand for?

ANSWER: FICO stands for Fair Isaac Company. This company specializes in credit data and are the originators of the scoring criteria that is use to analyze credit risk. Fair Isaac also created the 2 other systems that Transunion and Equifax use for their analysis. Experian uses Fair Isaac, Transunion uses Emperica and Equifax uses Beacon 96.

What specific law governs creditors and credit reporting?

ANSWER: The federal law that covers creditors and their reporting procedures is the Fair Credit Reporting Act. The Federal Trade Commission is the governing body and enforces these regulations. The specifics of the law can be viewed at the FTC website- http://www.ftc.gov/os/statutes/fcra.htm. Section 609 is the specific section governing the procedures that a creditor MUST follow in reporting any information to the bureaus.

How long after a bankruptcy must you wait to qualify for a mortgage?

ANSWER: The length of time will vary depending upon what type of loan that you are trying to qualify for. If you are qualifying for a CONVENTIONAL loan, the bankruptcy must be seasoned (from the discharge date NOT the filing date) a minimum of 5-7 years. This would apply for both a Chapter 7 & 13. If you are trying to qualify for an FHA loan, the bankruptcy only has to be 2 years old from the DATE OF DISCHARGE (NOT the filing date). If you are still in a Chapter 13, an FHA loan and some ALTERNATIVE loans will allow you to get a mortgage while still in the Chapter 13. You must have at least a 12 month history with no late payments and you have to get authorization from the bankruptcy court to get the mortgage. Occasionally on Chapter 7 discharges you can get an exception and reduce the seasoning time to only 12 months IF AND ONLY IF there were extenuating circumstances that caused the bankruptcy (i.e. death in family, severe illness, car accident etc.). The circumstances must be documentable in detail.

How long after a foreclosure must you wait to qualify for a mortgage?

ANSWER: A foreclosure is more damaging on your credit report than a bankruptcy. If you are trying to qualify for a CONVENTIONAL loan, then the seasoning time after the house has been SOLD is 5-7 years. FHA & USDA 103% No Down loans require you to be 3 years from the date the property TRANSFERED out of your name. Pay attention to this detail very closely. If you've had a foreclosure and left the property, the bank DOES NOT automatically transfer the property into their name. 90% of the time the property is still titled in your name until AFTER its been sold. Sometimes this can be 2-3 years after you've left the property. It will be this date that the 3 year seasoning starts. If you are late or are going into a foreclosure, you best opion is to execute a deed in lieu of foreclosure or do a short sale. Either action will immediately transfer the title into the lender's name once executed and therefore start your seasoning time on the date of the transfer out of your name. You have nearly a ZERO chance of getting qualified with any FDIC Bank if you have a bankruptcy or especially a foreclosure on your credit. You are a high risk because you just defaulted on a mortgage obligation so to have to have the seasoning time between the foreclosure event to give your credit time to stabilize again.

How do I handle negative items (charge-offs, collections, repos, judgments, tax liens etc.) on my credit report?

ANSWER: ALL negative items can be settled for less than the full amount. Even tax liens and judgments. Your credit score will be affected the same whether you paid an item in full or settled it for 30 cents on the dollar. With regards to settling a negative credit item, time is on the borrower’s side. Collection companies are paid ONLY on a commission basis. If they do not collect anything, they don't get paid. The older a collection or charge-off item is, the higher the probability that they will settle the account for less. There is also the likelihood that because the account may have been sold several times that the current creditor DOES NOT have the ORIGINAL documentation to validate the debt. In that case, the negative item can be removed from your report without having to pay the item.

NOTE: If the majority of the items that are on your credit report are negative or if you have no positive OPEN accounts, DO NOT repeat DO NOT settle or pay the negative accounts in an attempt to raise your scores! If you attempt to pay or settle these accounts you wil LOWER your scores. To raise your scores you need to obtain NEW accounts to bring up your scores. Paying off old (2-5 years) negative accounts will drop your score. If you have the ability to settle CHARGE-OFFS, they WILL raise your scores as much as 50-100 points. COLLECTIONS will drop your scores if settled. The only time a collection can raise your scores is if the creditor agrees removes the account after it settled.

Can I deal directly with the creditors in making a settlement?

ANSWER: Yes you certainly can. Its your credit and you can respond to it on your own. Will it be easy? That's a yes and no answer. How successful you will be in settling your negative credit items depends upon how much of the following characteristics you possess- persistence, patience and time. Depending upon the creditor and the specific account manager that is handling the file, you could have a relatively easy experience or an absolute nightmare achieving your goals. Some of the creditors just will not negotiate directly with the borrower. Others are very helpful. The one thing that most consumers just don't have enough of to successfully settle negative credit items is time. It will take numerous phone calls and constant follow-up to start just making any headway, but many consumers have attempted and successfully addressed their negative credit issues on their own. If you decide to tackle this type of task on your own, please remember to DOCUMENT EVERYTHING. Get receipts for payments and SETTLEMENT LETTERS IN WRITING. If you choose not to go through the frustration you can utilize the efficient services of credit settlement companies such as BCS America.

What has the most affect on credit scores?

ANSWER: Different types of credit references score differently. If you have current active accounts (i.e credit cards, installment loans, car payments, etc) any single 30 day late on those accounts can reduce your credit score between 50-120 points. A late car payment because of the loan size, will lower your score more (as much as 100 points) than a late credit card payment. Foreclosures carry more weight than a bankruptcy. ANY public record item (i.e. Bankruptcy, foreclosure, judgment, tax lein etc.) has a higher reduction value than a charge-off, collection or repo. Tax leins and judgements can be placed against your house, so prior to applying for a mortgage it would be advisable to settling those issues. One Thing that you should NEVER do is close a credit. If a credit account has a zero balance, just leave it alone. Close the account can an will lower your score because you just reduced the overall amount of credit extended to you.

LOWEST SCORING credit reference- Car loan or ANY installment type loans. This account is a debt item. It scores the LOWEST number of points. If you need to move your scores 60-80 points to qualify, this is the WORST type of account to have because it scores few points (5-7) and it takes AWAY income from your qualifying ratios. For every $100 of debt servicing payment that shows up on your credit report, you lose $10,000 of loan size (i.e. $400 car payment drops your loan size by $40,000)

HIGHEST SCORING credit reference- Revolving credit cards (VISA, Mstercarda or Discover). These accounts score the most points of ANY credit reference that you can obtain. The more accounts you have (within reason, no more than 3-4 accounts) the more points they score. Each account can score between 18-45 points per ACCOUNT per MONTH (depending upon size of credit limit). These accounts are considered universal because they can be used just about anywhere and can be applied to anything. A department store credit card is an ok credit reference, but since they can only be used at a specific retailer, they score 45% less points than a universal credit card. It would be best that these account be zeroed out and not used.

When would it be advisable to file a bankruptcy?

ANSWER: Avoid that if possible, but if you have to, only when the there is no realistic way of paying the debt. Some examples are large medical bills, debt from a failed business and an unamicable divorce. Only in those extreme situations is contemplating filing a bankruptcy a reasonable course of action.
What is my qualifying status if I have had a short sale with mortgage lates?
ANSWER: If you have shortsaled your property because it was upside down in value and you had any mortgage lates (30,60, or 90 day lates), It is considered a credit foreclosure even though you may not have gone through the formal foreclosure process. The combination of lates with the short sale is universally considered a credit foreclosure and you will need to have three (3) years seasoning since the event to qualify for another mortgage. If you NEVER HAD mortgage lates and your lender(s) allowed you to short sale the house, you will be able to requalify within 30 days.

Do I have to place ALL my credit in a Chapter 7 filing?

ANSWER: ABSOLUTELY NOT! This is the one BIGGEST MISTAKE most people make when filing a Chapter 7. YOU DO HAVE TO LIST all creditors in a Chapter 7, but not all the accounts have to be discharged. You can REAFFIRM any accounts you are going to keep out of the bankruptcy. While that may make it easier for your attorney to do the filing, if you place good credit references in the bankruptcy, you're just digging a deeper hole unnecessarily. Look at this from an underwriter's stand point- You have a gas card or a department store card that you've had for 6 years. It only has a $500-1000 credit limit on it and you've never been late and the payment is only $20 a month. How could you in good conscience say you are a good credit risk for a mortgage when you filed bankruptcy on a $20 a month item? It makes NO SENSE. Also if you place all your credit references in the Chapter 7, after the discharge you are starting from square one. You have no history that future creditors can use to extend new credit to help you rebuild. The PROPER way to file a Chapter 7 is to leave at least 1 good reference, no matter how small it is, out of your filing. The more you leave out or reaffirm the better. Place the LARGEST debts in the filing. If you include a property in the Chapter 7, THAT IS AUTOMATICALLY A FORECLOSURE! It doesn't matter that you never were sent the notice of default, since you surrendered the property, its the same thing. There have been numerous instances where borrowers were given the wrong advise and placed a mortgage that had NO LATES into a bankruptcy. That is an outright disaster. Its better to sell the house and walk away with no equity than to have it be classified as a foreclosure on your credit.
What can I do if I have no credit after a bankruptcy? How do I rebuild?

ANSWER: The easiest would be to get an auto loan, but at a very high rate. This WOULD NOT be adviseable unless absolutely necessary or until AFTER you got the mortgage. Due to the size of the payment on a car loan, it actually disqualify you from buying the house, but the house will never disqualify you from buying the car. The quickest method would be to have a friend or relative add you as an authorized user to as many existing credit accounts they are willing to allow. This will immediately give you the entire history of that account as if you had been on it from day one. Each account can add as much as 25-50 point to your score in 60-90 days. If that isn't an option, then the next best item would be a secured credit card. It does not show up on credit reports as secured and its NOT based on score. New Millenium Bank, First Premier, Cross Country Bank, Orchard Bank and Vaya MasterCard are the easiest to apply for. We recommend New Millenium because they have the lowest set-up fee of all the secured cards. Go to this address for more info- http://www.nmbonline.com/secured_credit_cards.html. Once you have attained a secured credit card, you MUST maintain a SMALL balance on the account. If no payment history is reported that item will not score any positive points. When we mean SMALL balance, we are only talking about $10-20. Use the card to only buy essential items like gas for the car. DO NOT use it to buy a TV or furniture. That would defeat the whole purpose of getting the card. By the way. Maxing out the card every month even though you pay it off every month will only lower your score. The reason is the reporting date of the account is always BEFORE your due date so the card allways reports with a maxed out balance. If your balance exceed 70% of a revolving account, the card stops scoring. The higher you go above this percentage the less points the account scores until you have it maxed out and then it actually starts deducting points from your score. Jewelry and furniture accounts will also help rebuild your score. Just don't make the balance or payment too large.
What is the first thing that I should do after my bankruptcy has discharged?

ANSWER: Wait 30 days for your paperwork. You have to give the court some time for them to notify the creditors of the discharge. Once that has happened, you need tp pull a FULL tri-merge credit report and make sure ALL the items in the discharged are being reported correctly and ACCURATELY. ALL items in the bankruptcy should have a ZERO balance. ALL items that were in the bankruptcy SHOULD NOT be reported as a collection item. After a discharge, a credit reference should NOT be reported as a separate reference (usually in the collection section of a report) any longer. No mention of the individual item should show up on the report. The only reference to the bankruptcy should be in the public records. If there is any inaccurate information after 30 days, dispute the information DIRECTLY to the bureaus by sending them copies of the discharge AND the schedule of creditors and demand immediate correction and update.
What is Consumer Credit Counseling and are their any negatives in using this service?

ANSWER: Consumer Credit Counseling Services (CCCS) sets out to repay your debt owed, but at reduced payments without any interest. Although this sound good in principle, the execution is something less than desireable. Many credit counseling companies do help with reducing your payments, but 90% of the time fail in changing the due date of your various payments. They only make payments once a month and usually at the end of the month. If you have payments that are due on the 5th of each month, the credit counseling service will be making that payment late EVERY month. This action will only result in your creditors reporting repeated lates, but more importantly your scores will plummet. We are aware of numerous incidences were borrowers had signed up for CCCS and didn't check their credit for 3 years because they thought everything was being handled by CCCS and at the end of the 3 years expected to have a relatively decent score. They were shocked to find that not only had their scores not improved, but they had on several accounts a 30 day late for the last 3 years. CCCS is considered by the credit bureaus similar in impact to filing a Chapter 13 bankruptcy because the condtions are similar except the execution is being handled by a private company instead of the court. Whenever possible, AVOID using CCCS because there are other more efficent methods of achieving the same result without the negative side effects.