Big mortgage changes are happening...or maybe not!

Watching the Federal Housing Administration try to change their guidelines over the last few months reminds me of a bad movie where a random person is mistaken for a trained Police Officer. Then thrown out in the middle of a busy intersection and expected to direct traffic. The person tries their best but after several “go, stop, wait, slowdowns and ut oh’s” we are left with a 50 car pileup and a huge mess to clean up. Let’s take a look at how they have done so far and what the proposed changes have been.

In late February, they announced they were set to go ahead with new changes effective April 1^st, 2012. The main issues that were to be affected by these new rules were “disputed accounts” and unpaid collections, Profit & loss accounts and charged off accounts. The highlights of this first proposed change that was if the total outstanding balances of ALL disputed accounts and ALL collection, P&L and charged off accounts regardless of age, is $1,000 or greater, the account must be:

· Verified as not a debt to the borrower; OR

• In a repayment arrangement with a minimum 3 months of verified payments documented as paid as agreed and those payments included in the borrower’s debt-to-income ratios; OR

• Paid in full, prior to, or at the time of closing.

After this bold stance they came back around the start of April with a slight “slowdown” and made a few concessions. Here is the summary of those changes;

• P&L, charged off and repossession accounts will NOT be considered collection accounts or subject to the guidance of the new changes

• Borrowers will be exempt from the new rules if the disputed collection with an aggregate amount of $1,000 or greater was a result of “life events” such as medical, death, divorce, loss of employment, etc. may be acceptable as long as the borrower provides a written explanation AND documentation.

Also in this set of updates if the credit report reveals that the borrower is disputing any credit accounts, there will be additional restrictions placed on that persons ability to qualify for an FHA loan unless;

• The total outstanding balance of all disputed accounts are less than $1,000 AND

• Disputed accounts are aged no less than two years from the date of last activity as indicated on the most recent credit report.

Now it is time for the “ut oh” just before the 50 car pileup took place…they announced the latest set of changes have now been postponed until July 1^st!

Watching this unfold, one is left scratching their head. It is just another classic case of people making decisions about something they really don’t know anything about in the first place and having no clue at how massive the ripple effect of a terrible change like this might be.

By restricting people’s ability to “dispute” inaccurate, unverifiable or outdated accounts on their credit report , FHA is basically taking the stance that the credit bureaus rarely make a mistake and they are deeply concerned about the accuracy of what they report on a persons credit report. The problem with that stance is it’s been estimated that roughly 79% of credit reports have serious errors on them! Not exactly a number that says the system is so good that we can actually strip consumers of their rights to have an accurate report.

This bit about if a collection is more recent than two years old based on the date of last activity then it falls into these new guidelines, just might be the biggest joke of all in my mind. Let me preface, I am not making an opinion about whether the collection needs to be paid or not, I am committing on the method that will be used to determine if it needs to be paid. The date of last activity is supposed to reflect the last time a payment was made on the account or new terms were agreed to. The problem with this is most collection companies know as much about this as FHA apparently knows about credit reporting. Collection companies already falsely update this date all the time. What do you think will happen once they realize that as long as they keep updating this date, the chance of them collecting on this debt is astronomically higher? I’m going to make a prediction that a lot of collection companies will just make this normal business practice and always update that date on a monthly basis.

If these rules come into play, the big winners will be collection companies and credit bureaus. If that was FHA’s goal when they threw out these changes, then mission accomplished. Let’s hope this waiting period is one that will help FHA realize their changes will completely miss the mark of what they are trying to accomplish!

Why is 50 points such a big deal?

Just about everyone understands that your credit score is a very important number when it comes to your financial livelihood, but have you ever thought to understand why? The purpose of the FICO score is to predict the statistical chance of a consumer being 90 days late or more in the next two years. But more importantly let’s take a look at categorically how this breaks down in the eyes of your potential lender.

Below is a chart that indicates the odds of a consumer becoming 90 days late or more.

Score	Odds
800 & above	1%
750 to 799	2%
700 to 749	5%
650 to 699	14%
600 to 649	31%
550 to 599	51%
500 to 549	70%
Below 500	89%

Here is a real world example of how this chart works. Let’s assume that two people come to you and ask to borrow $5,000 from you. The only difference is that one person has a FICO score of 740 and the other has a score of a 549. How long would it take you to decide who you would give the money too? Understand the person with a 549 score means there is a 70% chance that person will be 90 days late or more in the next two years vs. the person with the 740 who has only a 2% chance of being late! Do you think that if you decided to lend your money to both people that you might have different rates and or fees between the two loans?

I understand the credit scoring process can be frustrating and very complicated, but the purpose of the system is very clear. It is all about predictive information for the purposes of lenders deciding who to lend money too and with what terms.

Based on this chart you can see how critical a few points can be, in some instances it means over a 50% less chance of being 90 days late or more depending on the score.

You Still Have Options!

If you recently applied for a credit card but were declined because you have bad credit or no credit history, don’t lose hope. You still have options!

There are two types of cards that you need to be aware of in this situation: secured credit cards and prepaid cards. Both have pros and cons.

Secured Credit Cards

As the name suggests this is a credit card that is secured by a cash deposit that you make and is tied to the card. Once the deposit is made you can use the card just like any other credit card- charging purchases and paying monthly bills. In addition, if you maintain a regular payment history, the card issuer will typically reward you by increasing your credit line without requiring you to add to your security deposit.

Pros: The monthly payments made on most secured credit cards are reported to the credit bureaus. For this reason, a secured credit card can help you build a good credit history — as long as you pay the bills on time.

Cons: The main disadvantage of secured credit cards is the cost. Because these cards cater to higher-risk consumers, most issuers of secured cards charge higher fees and interest rates.

Watch out: Avoid online credit card applications that don’t enable you to see the card terms and conditions until you’ve gone through the application process. They are likely to hide sneaky terms, like charges for increasing your credit limit or high annual fees. Also watch out for secured credit cards with high interest rates.

Prepaid cards
Prepaid cards look like credit cards, but they function more like debit cards. Your credit line depends on how much money you have loaded onto the card, and each time you make a purchase you draw down those funds. In other words, with a prepaid card, you don’t have access to a line of credit. You can spend only the money you put into the card account.

Pros: Anyone can get approved for a prepaid card.

Cons: Prepaid cards have two main drawbacks: They come with a multitude of fees, and they don’t help you build a credit history!

Prepaid cards have been criticized, not only for the fees they charge, but also because the pricing and structure of most prepaid cards make it difficult to determine how much it will cost you to use them.

Watch out: Recently there has been a lot of publicity over prepaid cards, most notably with a new program launched by Suze Orman. She is partnered with TransUnion for this card and claim that there is a possibility that some day it could be used in credit scoring. Even on the card’s website Orman says, "I'm proud to say that the Approved Card is the first prepaid card in history to share information with TransUnion, a major credit bureau." The actual truth behind all of this is if you sign up for new card and then opt into an anonymous pilot program for 18 to 24 months you can give TransUnion permission to use that data to see if they can find anything with your spending habits on this card that might be helpful for credit scoring purposes! That information isn’t as catchy as simply saying “the approved card is the first prepaid card in history to share information with TransUnion!”

Just in case you didn’t know, the industry standard for credit scores is the FICO score, so really what this means is just about every lender that you might actually want to get a loan from is evaluating you based on your FICO score. Not some score made up by TransUnion with the help of data from Suze Orman’s approved card! Take my advice on this, if your motive for getting one of these cards is to improve your FICO score, get a secured credit card, use it properly and don’t get suckered into getting a prepaid card just because Suze Orman sticks her name on it. Do what is best for you and your family, not just blindly follow others with ulterior motives.

Your Credit Score- Top 7 things you need to do before buying a house

When it comes time to purchase a house one of the things that mortgage companies are going to do is evaluate your credit report and credit score. Just having a score high enough to qualify should not be the goal so here are 7 easy steps that you can take to ensure you have no unwanted surprises. The sooner you can start on these the better!

1. Get a copy of your credit report. The best place to do this is www.annualcreditreport.com. This is a website that is set up where every consumer can obtain all three of their credit reports every 12 months for free from the 3 largest credit bureaus. This site will not give you a FICO score so I suggest that you pass on buying the score they offer to sell you as it is not the score a mortgage company will be using when the time comes.

2. Review the report. This should go without saying but just to be clear I will say it! Taking the time to order a report but then not looking it over will not do you any good! Make sure the information is accurate, some studies suggest as much as 80 to 90% of reports have errors on them, don’t assume it is accurate!

3. If you find inaccurate items dispute them or ask for help. If it is on the report, it is consider accurate in the eyes of the FICO score until it is removed or fixed. Be careful as the bureaus have lots of tricky was to try to get rid of you. This might be a step that you need some help with as it can become very frustrating and turn into a full time job!

4. Check your revolving accounts (credit cards). See how many open and active accounts you have. The best mix is 3 to 5. Depending on how long you have until you want to buy your house it could make sense to open a new credit, but I do not recommend going out and getting 3 at once if you have a short time-frame. Just get one, if you have more than 5, do not close any of them!

5. Compute your Aggregate Revolving Utilization. What? I know that is mouthful, simply put how much do you owe on your credit cards compared to the limit. For example if I have $1,000 limit and I owe $500 my utilization is 50%. With this, the lower the better, ideally you want to be less than 10%.

6. Avoid apply for new credit. Inquires will never be positive for your score and usually are negative. Don’t apply for anything unless you are doing it for strategic purposes. Buying the house is more important that getting a new credit card to safe 15% at your favorite department store!

7. Be careful where you get advice. Understand all kinds of people or companies are quick to give credit advice, just be careful where you get that advice. With your credit score a little bit of wrong advice or incomplete advice might just cost you your dream house. Make sure you are getting advice from someone that is an expert when it comes to credit scores, not just someone that you think “should” know!