Your Credit Guide: •
Credit Score Evaluation
Credit Impact Evaluation
Credit Repair Strategy
Identity Theft: Impact/Prevention/Repair
What are they? â€˘
Credit scores are numbers that summarize your credit risk based on a snapshot of your credit report at a particular point in time.
The most widely used credit scores are FICO scores.
In 1956 Fair Isaac Corporation was founded.
Fair Isaac used advanced math and analytics to help business make smarter decisions on lending.
In 1963 Fair Isaac built a credit scoring model for Montgomery Ward
In 1989 the first general-purpose FICO score debuts – BEACON at Equifax
In 1991 the FICO risk scores are made available to all three major US credit reporting agencies: 1. 2. 3.
BEACON – Equifax EMPIRICA – Trans Union Experian – Experian
How are they determined?
FICO scores are produced by software developed by Fair Isaac Corporation.
The FICO scores are calculated by a mathematical equation that evaluates many types of information from your credit report.
In order for a score to calculate on a report, there generally needs to be a least one account with a six month history or longer and that has been reported to the credit reporting agency within the last six months
A FICO score takes into consideration five main categories of information.
Five Main Categories
1. Types of credit in use = 10% • Is it a “healthy" mix? - Revolving and installment type accounts - Total number of accounts 2. Payment history = 35% • What is your track record? - Payment history on many types of accounts - Public record and collection items - Details on late payments - How many accounts show no late payments
Five Main Categories
3. Amounts Owed = 30% â€˘ How much is too much? - The amount owed on all accounts - How many accounts have balances - How much of the total credit line is being used on revolving credit accounts - How much of an installment loan is still owed 4. Length of Creditt History = 15% â€˘ How established is yours? - How long your credit accounts have been established in general - How long it has been since you used certain accounts
Five Main Categories
5. New Credit = 10% • Are you taking on more debt? - How many new accounts you have - How long it has been since you opened a new account - How many recent requests for credit you have made (inquiries)
o Inquires: FICO scores consider inquiries very carefully. There are three important facts about inquires to note here: o Inquires usually have a small impact o Many kinds are ignored completely o The score allows for “rate shopping”
Your FICO score considers both positive and negative information
Five Main Categories
Credit score range: •
FICO scores have a 300 – 850 range - The higher the score, the lower the risk - Your score may be different at all three credit reporting agency’s o XYZ company may only report payment history to Equifax
Mortgage Impact: Credit Scores
Total Interest Paid
Buying Max LTV Power Loss
720 - 739
700 - 719
680 – 699
660 – 679
640 – 659
Score impact: Conventional conforming 30yr Fixed rate loan, $200,000, Date 6/5/09 *In a Declining market (11 county Metro), Minimum credit score of 700 required at > 80% LTV
Mortgage Impact – Credit Scores Primary Residence, Purchase, Single Family • • • • •
If LTV > than 80%: Minimum credit score of 660 is required. - In a Declining market (11 county Metro), Minimum credit score of 700 required at > 80% LTV Minimum credit score for loans with LTV less than or equal to 75% = 620 For First Time Home Buyers, LTV of 95% available with credit scores of 720 Two unit home, minimum credit score of 680 is required. FHA – Minimum credit scores of 580 – 620 depending on the lender (vs. no minimum historically) - FHA credit score impact to rate is ranges from .125% - .25%
Secondary/Vacation Home, Purchase •
If LTV greater than 80%: Minimum credit score of 740 is required.
Summary • • • •
Higher rates, payment, and interest paid. Loss of buying power/Debt to Income impact Down payment increase Real Estate Industry Impact: - Housing selection decrease - Fewer lending/Product/Program options
Adverse Credit Adverse Credit •
Credit history for the most recent 24 months is considered predictive of future repayment vs. older references.
All adverse information will be analyzed by lenders.
Lender’s consider the reason for the adverse information and whether any delinquency is likely to recur.
Several types of adverse credit: -
Late payments, past due accounts, collection accounts, charge offs, liens, judgments, repossessions, settled for less than full payment accounts, bankruptcy, foreclosure, and credit counseling.
Minor adverse credit â€˘
Consists of information that is not indicative of the borrowerâ€™s overall credit reputation. - Isolated late payments, even if several accounts show sporadic late payments, provided the following exist: o o o o
The late payments are not recent. Number and size of delinquent accounts is not large in relation to the overall credit. The credit history does not show multiple revolving accounts with high balances-to-limits or high overall utilization of revolving credit. All other credit has been paid as agreed.
Adverse Credit Significant adverse credit â€˘
A pattern of derogatory information that is indicative of the borrowerâ€™s overall credit reputation. -
Several accounts show recent late payments. Multiple 60 or 90-day late payments. Delinquent housing payment(s). The number/size of the delinquent accounts are large in relation to the overall credit. Late payments demonstrate a pattern of delinquency. Public record information reveals judgments, tax liens and/or collection accounts. There is a bankruptcy, foreclosure, deed-in-lieu of foreclosure or credit counseling within the last seven years. Credit history shows derogatory credit information within the two most recent years combined with multiple revolving accounts with high balance to limits. The acceptable credit history of one borrower may not be used to offset the unacceptable credit history of another borrower on the loan.
Adverse Credit When significant adverse credit exists, the borrower must meet the reestablished requirements for either extenuating circumstances or financial mismanagement. Cause: Extenuating Circumstance •The
borrower must have reestablished credit for at least the most recent 24 months. •All of the borrower's credit is current. •No new public records. •No payments 60 or more days past due. •No more than one payment 30 days past due •No housing payments past due. •Borrower’s credit history does not contain multiple revolving accounts with high balance to limits or high overall utilization of revolving credit.
Adverse Credit Cause: Financial mismanagement •
• • • •
Too much credit or the inability to manage credit. - i.e. borrowers increased credit usage and were no longer willing or able to support the debt service. The adverse credit is reflective of the overall credit history of borrowers. Typically 48 months waiting period required with no derogatory credit and a demonstrated ability to manage credit. When credit issue is not bankruptcy or foreclosure, 24 months may be considered. No derogatory credit or late payments reported since bankruptcy, foreclosure, or period of significant adverse credit and within the period of required reestablished credit. The most recent 24 months shows all of the following: - No new public records. - No payments 60 or more days past due. - No more than one payment 30 days past due. - No housing payments past due. Borrowers’ credit history does not contain multiple revolving accounts with high balance to limits or high overall utilization of revolving credit. If bankruptcy or foreclosure or deed-in-lieu foreclosure exists, borrower(s) must have a credit score of at least 680 (for conforming) or 700 (for nonconforming)– see Bankruptcy or Foreclosure in this guideline.
Adverse Credit Mortgage Impact - Short sale, Deed in lieu, Foreclosure Short Sale •
• • • •
Definition: Lender, in cooperation with the borrower on the sale of their home, agrees to accept less then the amount owed on the mortgage. Cause: Extenuating Circumstances At least two years must have elapsed since completion date of the short sale. Cause: Financial Mismanagement At least four years should have elapsed since completion date of the short sale.
Adverse Credit Foreclosure –
Conventional Lending impact • Cause: Financial Mismanagement
- Conventional o Minimum credit score of 680 o Requires 5 year re-establishment of credit from the completion date - FHA o Requires 3 year waiting period with re-established credit
Cause: Extenuating circumstances:
- Conventional o Minimum credit score of 620 o Require 3-year re-establishment of credit from the completion date. - FHA o Less then 3 years allowed with extenuating circumstances o Documented extenuating circumstances that were beyond the control of the borrower o Borrower has re-established good credit since the foreclosure, Extenuating circumstances include serious illness or death of a wage earner, Does not include the inability to sell the house because of a job transfer or relocation to another area
Adverse Credit The following ADDITIONAL CREDIT REQUIREMENTS apply to both Financial Mismanagement and Extenuating Circumstances: â€˘The
borrower's credit record under the re-established credit history must include:
- No more than two installment or revolving debt payments 30 days past due in the last 24 months - No installment or revolving debt payments 60 or more days past due since the discharge or completion of the bankruptcy or the completion of the foreclosure-related action - No housing debt payments past due since the discharge or completion of the bankruptcy or the completion of the foreclosure-related action - No new public records for bankruptcies, foreclosures, deeds-in-lieu, unpaid judgments or collections, garnishments, liens, etc., since the discharge or completion of the bankruptcy or the completion of the foreclosure-related action - Evidence that the Borrower's credit history does not contain multiple revolving accounts with high balances-to-limits or high overall utilization of revolving credit of revolving credit
*Deed-in-Lieu â€˘ Conventional - Cause - Financial Mismanagement: o o
Evidence that each Borrower has a minimum credit score of 680 Requires 4-year re-establishment of credit from completion date (deed-in-lieu executed)
- Cause - Extenuating circumstances: o o
Evidence that each Borrower has a minimum credit score of 620 Require 2-year re-establishment of credit from the completion date.
*FHA does not differentiate between Deed-in-lieu and foreclosure
Deed-in-Lieu The following ADDITIONAL CREDIT REQUIREMENTS apply to both Financial Management and Extenuating Circumstances: â€˘
The borrower's) credit record under the re-established credit history must include:
- No more than two installment or revolving debt payments 30 days past due in the last 24 months - No installment or revolving debt payments 60 or more days past due since the discharge or completion of the bankruptcy or the completion of the foreclosure-related action - No housing debt payments past due since the discharge or completion of the bankruptcy or the completion of the foreclosure-related action - No new public records for bankruptcies, foreclosures, deeds-in-lieu, unpaid judgments or collections, garnishments, liens, etc., since the discharge or completion of the bankruptcy or the completion of the foreclosure-related action - Evidence that the Borrower's credit history does not contain multiple revolving accounts with high balances-to-limits or high overall utilization of revolving credit
Financial Mismanagement: o Evidence that each borrower has a minimum credit score of 680 o Four years re-establishment of credit since the discharge or dismissal date of a bankruptcy Multiple bankruptcy filings: o Five years re-establishment of credit after the discharge or dismissal of a bankruptcy when the borrower has filed more than one bankruptcy petition in the past seven years Extenuating Circumstances: o Evidence that each borrower has a minimum credit score of 620 o Two years re-establishment of credit after the discharge or dismissal of a bankruptcy Multiple bankruptcy filings: o Three years re-establishment of credit after the discharge or dismissal of a bankruptcy when the borrower has filed more than one bankruptcy petition in the past seven years
- Two years re-established credit after discharge of Chapter 7 bankruptcy - 1 year ‘paid as agreed’ payment history on open Chapter 13 bankruptcy possible
Conventional The following ADDITIONAL CREDIT REQUIREMENTS apply to both Financial Mismanagement and Extenuating Circumstances: o
Credit record under the re-established credit history must include:
- No more than two installment or revolving debt payments 30 days past due in the last 24 months - No installment or revolving debt payments 60 or more days past due since the discharge or completion of the bankruptcy - No housing debt payments past due since the discharge or completion of the bankruptcy - No new public records for bankruptcies, foreclosures, deeds-in-lieu, unpaid judgments or collections, garnishments, liens, etc., since the discharge or completion of the bankruptcy - Evidence that the Borrower's credit history does not contain multiple revolving accounts with high balances-to-limits or high overall utilization of revolving credit
Adverse Credit Mortgage Impact, collections, Judgment, tax lien
Conventional Loan • Unpaid collections, liens, or judgments may impact the borrower’s ability to repay the mortgage or may impact title to the property. • Date of last payment is used to determine date of delinquency • Lenders may have additional requirements
$ amount per Trade line
< = $500
> = 24 months
< 24 months
Adverse Credit Credit Counseling - Conventional â€˘ There are several types of credit counseling. - Type One: designed to help first time homebuyers prepare for the financial responsibilities associated with home ownership. - Type Two: designed to assist borrowers who have had problems managing their debts and may have delinquent accounts. o
The borrower makes monthly payments to the credit counseling agency, which then pays the creditors. For this type, lenders must: ď ą
Consider the type of credit counseling in conjunction with a thorough review of the credit report to determine whether the borrower has demonstrated the ability to manage credit. Identify the acceptable and unacceptable risks associated with credit counseling
Adverse Credit Credit Counseling - Conventional Acceptable Risk: • • • •
The credit report shows an acceptable history of managing credit The credit reports show minor problems with managing credit, but no significant derogatory credit. The borrower has participated in counseling to learn credit management skills Creditors have been paid as agreed and borrower has corrected the problems. - If the borrower has not completed credit counseling, the credit counseling agency may need to approve the request for the new mortgage.
The credit report shows problems with managing credit, including significant derogatory credit, however, the borrower has completed the counseling, making payments to creditors as agreed, and has re-established acceptable credit.
Unacceptable Risk: • •
The credit report shows significant derogatory credit, borrower is currently in credit counseling and has not reestablished acceptable credit. The borrower is making monthly payments to the credit-counseling agency and has negotiated with creditors to repay less than the total amount owed to them. The borrower is still in credit counseling or has not re-established acceptable credit.
Credit repair strategy â€˘
Pay your bills on time
- Delinquent payments can have a major negative impact on your score o
Not an automatic score killer when isolated
- The longer you pay on time, the better the score - If paying on time is an issue, consider online bill payment options with auto-withdrawal features â€˘
Pay down your revolving debt - Keep balances low on credit cards o
A small balance paid monthly may improve scores vs. no balance.
- Payoff debt rather than moving debt around between credit cards o o
Start with the highest interest rate credit card Shift the saved $ on each paid account to the next highest rate account
Don’t close unused cards as a short-term strategy to raise scores - Owing the same amount with fewer open accounts can lower score
Don’t open a number of new credit accounts that aren’t needed
- Did you know? $449 That’s how much interest you’ll pay if you charge a $1,000 TV on a credit card with a 13% rate and make minimum payments of 2% per month. It will take six years to payoff.
Inspect your credit report for inaccuracies and duplication
- Contact the lender or credit agency to assist with removal/correction
Take care in selecting a credit repair agency for assistance
Be aware: paying off collections or closing accounts do not remove them from your credit report but ultimately will assist with improved scores - Older items less impactful on score - Bankruptcies remain on your record 7 – 10 years depending on type
Avoid opening new accounts. - Hang onto and maintain what you have o
Longer credit history will increase scores
- New accounts lower your average account age and scores o
Exception: Opening new accounts to re-establish good credit history will assist in raising scores over the long haul
Avoid numerous credit inquiries
- Multiple credit requests represent greater risk leading to lower scores - Inquiries impact scores up to 12 months o
On average, one inquiry takes less than 5 points off your score
- FICO score system distinguishes between rate shopping (i.e. mortgage and auto loans) and a search for many new accounts o
Do your rate shopping within a short period of time – 14 days
- Inquiries that DO NOT impact your score: o o o o
Personal inquiry ordered from credit reporting agency Employer inquiry Lender inquiry to review existing account Unsolicited “Pre-approval” offers (mail, etc.)
Trouble making ends meet? - Contact creditors directly for repayment options and arrangements o
Many will work out a repayment schedule
- Seek a reputable non-profit credit counseling agency for assistance
Credit Repair How to get Quick Credit Recovery •
- Apply for a secured credit card. o Lenders extend secured cards when you open a savings account and use as collateral •
- Take out a secured loan in a small amount from a local bank. Security may be assets, cash, etc. •
- Review your credit report and work through credit reporting agencies to remove duplicate and inaccurate accounts. o Experian 888-397-3742 o Transunion 877-322-8228 o Equifax 800-685-1111 •
- Make regular payments on your secured loan and credit card for several months. Time and consistency is key. •
- Pay your rent, utility bills, cell phone, insurance, etc. on time for use as ‘alternative’ credit.
Credit Repair How to Get Out of Debt •
- Cut up your credit cards except one or two (VISA/MC - lowest rate) for emergency use and credit maintenance. •
- Cancel all your credit lines except those left open above and request a lower interest rate on the debt you have left •
- Transfer balances to the credit card with the lowest rate. This may temporarily lower your credit scores but supports your strategy. •
- Use cash for all purchases and only buy what you can afford - Barter/trade/exchange/share •
- Commit to paying off your debts one at a time and DO IT! Start with the highest rate card or line first. •
- Double your payments on the next debt by taking the payment you made on the first debt and adding it to the next debt - As each debt is paid, transfer the savings to the next debt in line. Invest in personal finance software to accurately track your spending and identify problematic habits
Lead generation opportunity •
Today’s credit challenged client is tomorrow’s credit repaired buyer! - Provide tips and direction - Work with a lender who will guide and advise on credit recovery - Maintain a database and stay in contact
What is it? â€˘
According to the FTC, identity theft occurs when someone uses your personally identifying information, like your name, Social Security number, or credit card number, without your permission, to commit fraud or other crimes. - The FTC estimates as many as 9 million Americans have their identities stolen each year. - The crime takes many forms. o o o
Obtain credit cards Rent an apartment Establish various accounts in the victims name
Identity theft is serious - Some victims may lose job opportunities - Some victims may be denied loans because of negative information on their credit reports. - In rare cases, victims may even be arrested for crimes they didnâ€™t commit
How can you prevent it? â€˘
Prevent the criminals from stealing it in the first place - Secure your mail o
Both incoming and outgoing
- Secure your personal identifying information o
The more people that have access to your personal information, the higher the likelihood of identity theft
- Secure the tools you use for making payments o
Credit cards, checks and account information should not be easily accessible
- Secure your computer o
A small percentage of identity theft occurs online, but you should take reasonable measures to protect yourself
What if you become an identity theft victim? â€˘
According to the FTC there are four steps to take as soon as possible - Place a fraud alert on all three credit reports, and review all three reports o
Fraud alerts can help prevent an identity thief from opening any more accounts. An initial fraud alert stays on your credit report for at least 90 days An extended fraud alert stays on your credit report for seven years.
- Close the accounts that you know have been tampered with o
Call and speak with someone in the security or fraud department of each company you have concerns about
- File a complaint with the FTC o
The FTC can share your complaint with other law enforcement officials across the nation
- File a report with your local police or the police in the community
where the identity theft to place
Identity Theft Contacts • • • • •
www.AnnualCreditReport.com 877-322-8228 FTC’s Identity Theft Hotline 877-ID-THEFT TransUnion: 1-800-680-7289 www.transunion.com Equifax: 1-800-525-6285 www.equifax.com Experian: 1-888-397-3742 www.experian.com