Archive for the 'Credit & Ficos' Category
As real estate values continue to sag, pushing many home owners toward foreclosure, one question surfaces more than any other. Will a short-sale damage your credit less than a foreclosure?
REWIND
I wrote a couple of articles awhile back entitled, Short Sales vs. Foreclosures…Your Credit Will Suck Either Way and Short Sales and Loan Prospector: A Response From Freddie Mac. At the time–nearly a year ago–my preliminary investigation suggested that short sales and foreclosures would have exactly the same effect on credit. But back then, this issue was just reclaiming the spotlight, and no one had really given it much thought. You see, it has been 10 years since we’ve really seen this problem.
Those articles are still garnering comments, and I’ve been getting daily phone calls and emails from all over the country from people facing foreclosure. So recently I reopened the investigation. And although the issue is far from clear, my conviction is the same. As far as your next mortgage is concerned, a short sale won’t leave your credit in better shape than a foreclosure. And it could leave you worse off from a tax standpoint.
NOT EVERYONE AGREES
Now I need to acknowledge the disagreement out there. Speculation is rampant, but a lot of it is groundless. There are people predicting the number of points each type of foreclosure will move your scores, a claim my credit reporting agency called “asinine.” Real estate agents seem more prone to recommending short sales, though most of the agents I know are very cautious about this. One Realtor/lender wrote,
read comments (7)Last June I wrote an article entitled Is This The End of Credit Score Piggybacking? That article discussed the renting or selling of credit scores by good borrowers to fake good credit scores for bad ones. The practice of piggybacking credit has been used by parents to help their kids develop good credit scores. When accompanied by some education in the matter of building and maintaining good credit habits, this promotes the responsible use of credit.
However, the bad guys have been using credit renting to cheat the system and the credit bureaus are about to slam the door shut. Here is a brief summary from of how it works and the changes you can expect to see shortly. This came from someone at the credit reporting agency I use.
Authorized users are individuals that are added to an account without having any responsibility for the account. The most popular use is when an individual with a credit card, makes other members of the family “authorized users” on the card. The authorized users get their own cards (with their names on them) and the accounts show up on their credit reports as authorized user accounts. However, the authorized user has no actual liability for the account; if the account goes into default the creditor can only pursue the main account holder for the funds, not the authorized users. (This is how authorized user accounts differ from joint to co-signer accounts where the additional users also are liable for the account).
Fair Isaac has upgraded their scoring model to account for the fact that people were abusing the authorized user accounts to boost their credit scores. Called “Credit Renting”, individuals with highly rated credit cards were paid to add individuals with bad credit as authorized users their accounts. The authorized users would see credit score increases when these accounts became part of their credit profiles… Read the rest of this entry »
Is This the End of Credit Score Piggybacking?
You may be familiar with the credit improvement trick of piggy-backing on someone else’s good credit to improve low Fico scores. Usually this is done to build scores for a son or daughter with no credit or to rebuild credit for someone who has had problems.
I feel dumb for being even a little surprised that there are on-line businesses encouraging and facilitating the use of this tactic—and worse—between complete strangers to game credit scores and defraud lenders. See the Mortgage Fraud Blog’s post for a good analysis of the problem.
Here’s another article I saw today, apparently one of many that appeared last weekend on this topic. The bottom line is that this tool is about to be shut down because of abuse. Don’t blame the mortgage industry for this one. It’s like drugs. The fundamental problem is demand.
This is the third in a series of posts designed to help prevent fallout when dealing with buyers that bring their own lenders to the deal. Part I discussed down payment, and Part II income documentation.
No one wants to start a new client relationship off with an argument about lenders. But if they arrive with a pre-qual letter from someone you don’t know, don’t automatically put them in the car. These questions will help you determine if that letter is really worth the paper it’s written on.
Remember, if the borrower really is pre-qualified, they’ve been through these questions and should have some very clear answers.
Question #3: What are your Fico scores?
There is no mortgage-related topic that generates more myth and new, old wives’ tales than credit scoring. Most consumers are somewhat aware of the condition of their credit, and some may even be able to tell you their scores. Many people now subscribe to services that keep them updated on their scores. Others recently bought a car, refinanced the old house, or obtained a free on-line credit report. That’s not enough for our purposes.
It is said that “once sub-prime, always sub-prime.” Well…maybe not in those exact words. But you may have heard it argued that people with lousy credit don’t change their habits. If that’s true, the sub prime 2/28 loan is a mortgage death sentence.
In my experience, many people become sub prime borrowers because of illness, injury or divorce. Those people often do return to the ranks of prime borrowers. But then there are those those whose problems seem chronic, whose excuses seem endless, or whose attitude seems cavalier.
In a recent analysis of consumer payment behavior, Experian came to some startling conclusions.
Historically, home owners will protect their homes by prioritizing mortgage payments over consumer debt. This just makes sense. Mortgage debt is tied to a valuable asset. Consumer debt is tied only to the intangible asset of one’s credit.
FHA loans are the forgotten toy in the box. Gathering dust like some old Atari game while we’ve played with our shiny new Xbox, FHA loans years ago lost their appeal. It’s time to reconsider.
Here six reasons every first-time buyer should consider an FHA loan.
100% financing. FHA was the first to offer 100% loans. FHA loans actually require a 3% down payment, but they can be combined with a 2nd loan to cover the down payment and closing costs. If you don’t need that 2nd loan because Aunt Betty wants to help, FHA will allow her to “gift” all of the necessary cash. You don’t have to contribute 5% of your own money to the purchase. While FHA will require you document your income—no “liar loans” allowed—they are often lenient with qualifying ratios, particularly now with the use of Automated Underwriting.
Conflicting Credit Scores Cause Confusion
This excerpt comes directly from an Old Republic Credit Services monthly newsletter. It underscores what I’ve been telling clients. Mortgage credit reports and consumer credit reports use different scoring models to generate credit scores. Consumer credit scores are notreliable when planning for a mortgage.
Conflicting Credit Scores Cause Confusion
There is a lot of confusion in the marketplace today regarding credit scores. Television, magazine and newspaper ads encourage consumers to purchase their credit score. The confusion arises when a consumer buys a credit score online, and then finds out when purchasing a mortgage loan, that it is not the same score the mortgage lender/broker is using. Mortgage brokers and lenders say it happens frequently: A mortgage applicant says that he checked his credit score online. Then the Loan Officer orders the credit report and finds that the score is many points lower than the generic credit score the applicant quoted.
What causes the confusion?
Credit Scores developed by Fair Isaac Corporation (FICO) are the predominant credit measure used by the mortgage industry. FICO scores are used to predict a borrower’s likelihood of future nonpayment, with higher scores indicative of better creditworthiness. The score range is from 300-850.
Other commercial scoring models are widely available to consumers on the Internet. These scoring models use similar criteria to the FICO score but are based on different methodology and scales. While these models may accurately predict credit risk, the scores are developed for consumer use only and can vary from FICO scores.