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Every
day prospective buyers are making ill-informed credit decisions that
affect their FICO scores.
With
the down economy it seems every radio and TV show is hosting credit
gurus with “obvious” methods of boosting credit scores (i.e. “pay
your bills on time”…duh). It’s the misinformation they are
dispensing which is damaging buyer’s/borrower's FICO scores.
Based
on my 25-plus years in the mortgage and real estate business I’ve
become well versed in many “trial and error” methods that the
gurus simply are unaware of.
For
the sake of brevity, I’ll simply list bullet points that illustrate
the most common misconceptions.
1)
“Free” credit report scores are accurate and reflect mortgage
report scores. No. For the purposes of obtaining a mortgage; free
credit reports are literally worthless.
2)
A loan modification is viewed the same as a foreclosure/short sale.
Not any more! If a borrower is granted a loan mod they can go onto
purchase or refi 24 months from the date of the mod!
3)
Every derogatory item hurts your credit score. No. Most items more
than 4 years old do not affect your score. California law deems debts
over 4 years old are not collectible / enforceable.
Collection
accounts are often “sold and resold” (creating a “rolling”
effect) initially affecting credit scores long after the original
debt has long since expired.
However
disputing debt over 7 years old with the 3 credit bureaus will cause
the bureaus to remove the item(s) and bar collection agencies from
re-reporting the debt.
4)
Every collection account needs to be paid off to obtain a loan. No.
Do not pay off collection accounts (or any old derogatory accounts)
before the close of escrow!!!!!!!!!!!!!!!!! Old derogatory accounts
paid before close of escrow will result in lower credit scores!
I
know that’s counter intuitive but that’s the way the system is
rigged. You see, by paying off an old derogatory account, you're
creating new activity on an old but STILL derogatory account.
The
account now has a 'zero' balance (which is good), but it's still a
derogatory account. So any 'new' activity (paying it off) is picked
up by the credit bureaus and dings your fico score.
Whether
the item needs to paid at close of escrow, is at an underwriter’s
discretion when the loan is approved. It will depend on the amount
and how old the item is.
5)
A divorce decree legally discharges a spouse from the
responsibility for a debt that was incurred by both parties. Wrong!!
A divorce court can’t absolve either spouse form a joint debt.
6)
Co signing for a loan / credit report will be counted against the
debt to income ratios when qualifying for a new mortgage. The answer
is mixed.
If
the “CO SIGNEE” (“child”) makes 12 loan payments directly
FROM THEIR OWN PERSONAL ACCOUNTS… directly TO THE CREDITOR…the
debt will (usually) not count against CO SIGNER (parent).
If
a consignee is paying the cosigner directly with cash (or by check) ,
the payment WILL count against the co-signers DTI.
7)
Credit scores can be improved quickly if the loan applicant is added
to another person’s account(s) with a superior credit score. TRUE.
However
if a co signee misses a payment or goes on a shopping binge at
Nordstrom’s, both borrowers credit scores will suffer.
8)
Court judgments are only reported for 7 years. The answer is
mixed.
Judgments
are reported for 7 years BUT are valid for 10 years.
Judgments
can be renewed for another 10 years by refiling the judgment by the
prevailing party (winner).
Typically
after 7 years the judgment drops off the buyer’s credit report BUT
the judgment has “morphed” into an “abstract” judgment and
attaches to their home after the grant deed is recorded at the county
courthouse.
Often
the homeowner will not discover the “abstract” until they sell
(or refi) the home (years later) and the abstract appears on the
(preliminary) title report.
9)
Closing credit lines and accounts will raise credit scores. Wrong!
Wrong! Wrong! It’s just another misconception that’s killing
transactions. Don’t close any accounts with a positive payment
history PERIOD!!!!!!!!!!!!
10)
Past debts (not listed) on a credit report, do not have to be paid
before the close of escrow. Wrong.
If
your borrower HAS EVER defaulted on a government debt
(state/federal/county),it will come back to bite them at the very
last moment just before loan docs are drawn.
Including:
child support, student loans, unpaid county hospital bills etc.
11)
You can have "too much credit". No. Just keep your balances
as low as possible. Older "open" credit lines (even if not
being used) contribute to higher FICO scores.
Never
close a credit line that has a good payment history!
12)
If you pay off an old collection account, it will then fall off
your credit report. NO. Collection accounts will remain on your
credit report for seven years. It will simply show a zero balance
but will remain on your credit report for seven years.
I
hope you find this information helpful!
Ken
Hall
951-760-3833
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