Kudos to Suzanne Woolley for authoring an article which accurately portrays how one can improve their credit.
Tom Davidson has written and illustrated another great article which I know you will enjoy reading. Here are the first few paragraphs which lead into the link to his wonderful presentation:
“HELOCs (Home Equity Lines of Credit) are widely used. Simply having one makes many people more comfortable. My wife and I had a standby HELOC for many years – ready to use as a convenience or in an emergency. Luckily that emergency never happened, but we felt well prepared knowing we had ready access to a substantial amount of cash that could be used for anything we needed. When I was a financial advisor, a HELOC was on my checklist to discuss with every client – at least those who were prudent with their money.
ReLOC: A Retirees Line of Credit
Is there a better alternative for homeowners over age 62? A ReLOC may be a far better choice for many retirees. ReLOC is a nickname that stands for either Retirees Line of Credit or Reverse Mortgage Line of Credit. While ReLOCs share many features with HELOCs, three unique features make a ReLOC a line of credit designed for retirees:
- The amount you can access grows every month
- You don’t have to make payments until you permanently leave your home
- The loan can’t be canceled, reduced, or frozen as long as you keep up with basic mortgage obligations (property tax, homeowner’s insurance, basic maintenance, and Homeowner’s Association dues).
Here’s the borrowing limits for a ReLOC and a HELOC for a 63-year-old in a $400,000 house who lives to age 99:”
Cancelling infrequently used credit cards may seem like a good strategy, but your credit score may be adversely affected. Adam Carroll, Founder and Chief Education Officer of National Financial Educators, explains: “When you have a long-standing trade line, which is what a credit card is considered on your credit report, and you cancel that card for whatever reason, your score will actually go down as a result because one of the main impacts on your credit score is the length of credit history.” A shorter credit history translates to higher risk in the eyes of lenders.
Sean McQuay, Credit and Banking Expert at NerdWallet, agrees but includes another reason to keep older cards, noting that closing a card account results in “decreasing your overall credit line, which basically signals that a bank trusts you less.”
In addition to decreasing your overall credit line, closing an infrequently used account raises your credit utilization your total credit in use compared to your cumulative credit line. High credit utilization suggests a greater chance of falling behind on payments and/or defaulting on debts.
To avoid these pitfalls, make periodic small purchases on all your open credit cards to keep them active and pay the balances in full at the end of each billing period. By keeping credit spending low, you can still address debts while getting the full benefits of your credit account.
It’s okay to concentrate most of your credit spending in one account to maximize rewards. Just use alternate accounts often enough to keep them from being closed for lack of activity.
The not so Secret Formula
Use your credit cards properly to build an awesome FICO© Score. An awesome score will give you the best advantage for the best rates on insurance, credit cards, vehicle and other installment loans and home loans. As well, having a great score will give you a distinct advantage for certain employment opportunities. Having a great score will also help you to screen potential long-term partners to determine the likelihood of a successful relationship. Let’s face it, having a great score means you keep your commitments.
By way of proper use, let’s explore what it is that is rewarded by the scoring system. Two cardinal rules are never exceed using 30% of your available credit on any card in any month. Ever. Never maximize the usage of your credit limit on any card. Ever. Better is to not exceed using 20% of your credit limit. For example, the credit limit is $1,000.00. Do not exceed $300 in use and better do not exceed $200 in use. This accounts for about a third of your total credit score.
For best results, pay off the balance monthly. In addition to never maximizing the usage of your credit limit, never exceed the limit. Ever. For your best advantage do not ever close a credit card. The aging of your credit profile is essential to having a great score. The longer you have good credit, the better for your credit history and as a result your credit score. This accounts for a little more than a third of your score. In this and the previous paragraph we have discussed that which makes up about sixty-five percent of your total credit score. Such is illustrated in the following pie chart.
At each opportunity you get, or at each opportunity you can make, increase the amount your available credit. Once your credit card issuer sees you are managing your account well, they will offer to increase your credit limits so long as you have the ability to repay. Don’t be shy, after about 6 months, contact your card issuer and ask when you may qualify for an increase.
Keep in mind that a single 30-day late payment will ding your credit score by 90-115 points. Boom! The time it takes to recover from this one 30-day late payment will take from one to three years depending on your score at the time.
If you wish to take the time, the author of this article captured the reality of building a perfect score.
With all things, including credit cards, TANSTAFFL applies. TANSTAFFL was a term coined by Robert Heinlein in his 1961 novel Stranger in a Strange Land. There Ain’t No Such Thing As A Free Lunch.
Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.
It is my pleasure to specialize in the origination of Home Equity Conversion Mortgages (HECM) for the benefit of our clients. These are best known as Reverse Mortgages. The type of Reverse Mortgage we offer, and the most utilized product available in Colorado, is the one insured by the Federal Housing Administration (FHA) of the US Department of Housing and Urban Development (HUD) as further discussed by the Federal Deposit Insurance Corporation (FDIC) and as discussed by the Consumer Financial Protection Bureau (CFPB).
- The minimum age for a borrower is 62.
- A non-borrowing spouse under age 62 gets to be on the deed.
- Reverse mortgages are extremely well protected. Guaranteed by HUD; Insured by FHA.
- One of the protections is the requirement that borrowers receive counseling from a third-party HUD Certified Housing Counselor – often at no cost to the prospective borrower.
- No monthly out-of-pocket mortgage payments required.
- The reverse mortgage is due once the home is no longer the primary residence of the borrower(s) or the non-borrowing spouse.
- Out of pocket expenses are limited to property taxes, insurance and HOA fees (when applicable).
- The property is to be kept in good condition.
- The interest rate is not determined by income or credit score.
- The interest rate is based on the program chosen (FRM, Monthly/Annual ARM, and Low-cost Annual).
- Flexibility on how funds are received (traditional):
- In an interest bearing line of credit and/or;
- As monthly payments and/or;
- In a lump sum payment and/or;
- In any combination of the above methods.
- There are no restrictions on how the funds may be used.
- The title remains in the borrower’s name. The bank does not own your home. You may sell at any time.
- There is no equity sharing. Your equity is your equity.
- Credit review – The credit review is minimal providing there have been no serious derogatory credit issues, such as bankruptcy or unpaid credit obligations, in the past two years.
- There is no minimum credit score requirement.
- Financial Assessment (FA) – The financial underwriting is minimal. The lender must be assured the borrower has the income and will to pay real estate taxes and property insurance.
- Under FA, a full or partial set aside account may be required to pay taxes and insurance.
- Closing costs are comparable to other FHA insured home loans.
- There are no mark-up or “junk” fees allowed.
- One may still receive Social Security and Medicare benifits with a reverse mortgage.
- The reverse mortgage is a loan so the proceeds are not treated as income.
- There is no prepayment penalty; the borrower may pay-off the reverse mortgage at any time with no penalty.
- Reverse mortgages are non-recoursable; if more is owed than the value of the property, the lender may not collect the deficient amount from either the borrower or the estate.
- Heirs may sell the property and pay off the mortgage. In the event more is owed on the property than the value of the property, the heirs may purchase the property for 95% of the market value as opposed to paying the full amount of the mortgage.
- Reverses Mortgages are also used for Purchase Money. Click here to learn more.
- Security is provided for the under age 62 spouse. Click here for more information.
DISCLAIMER: This publication does not represent that any of the information provided is approved by HUD or FHA or any US Government Agency.
DISCLOSURE: The information provided herein is not intended to be an indication of loan approval or a commitment to lend. Additional program guidelines may apply. Information is subject to change without notice.
Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct for your situation. This information is not legal advice and is for guidance only. You may reproduce this information in whole and not in part, providing you give full attribution to James Spray.
This post is written both for those contemplating a Chapter 13 (repayment plan) bankruptcy as well as for those currently in a Chapter 13 Plan. A Mortgage refinance or a home purchase, while still in a Chapter 13 bankruptcy, is possible; it is also a complicated financial and, legal transaction. To do this requires a highly specialized mortgage professional experienced with both FHA lending rules and Chapter 13 bankruptcy as well as local court rules. Such an individual must know how the Chapter 13 Trustee in your Federal Bankruptcy District deals with this process. It is helpful if your attorney respects the reputation of your mortgage professional.
The Chapter 13 Payment
One of the most important things to understand is how important on-time Chapter 13 Payments are to the mortgage underwriting process. I strongly encourage you to read this: The Chapter 13 Payment. Your Chapter 13 Trustee payment is given the exact consideration as your mortgage payment by the rules of mortgage underwriting. From the underwriting perspective, one thirty-day late payment of either the mortgage or Chapter 13 Trustee payment will sink your prospects of getting mortgage loan approval. Mail your payment early or set your on-line bill pay or direct payment to the Trustee so that you always know your payment has had time to get to the Trustee’s office and be posted by the staff at that office. Too many times, on review of the Chapter 13 Payment history, we find a payment was posted on the 2nd day of the month. One day counts as a late payment. Your experienced mortgage lender can help you check your Chapter 13 payment history in real time.
Mortgage Choices for Chapter 13 Debtors (purchase or refinance)
The only mortgages available, either for refinance or purchase, for those in a Chapter 13 Plan are those which are insured or guaranteed by the Federal government. These mortgages are either: insured by FHA or guaranteed by VA or, the USDA.
While there are distinct differences within these three programs, they are alike in their Chapter 13 Bankruptcy underwriting guidelines*. A significant factor is that the only choice is a 30-year fixed rate mortgage priced at the current market rate. To be clear, there are no conventional mortgages available for potential borrowers. One should understand sub-prime mortgages have not been available in the US since 2008. For additional information regarding adverse credit events timelines and mortgage timeout rules click here.
There are now non-Qualified Residential Mortgages (QRM) which may allow a borrower to purchase or refinance once the Chapter 13 case has been Closed following the Discharge. The rate in this type of loan is higher than any other mortgage product available. The costs are also higher.
How does a bankruptcy affect a borrower’s eligibility for an FHA mortgage? A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA mortgage provided the lender documents that one year of the payout period under the bankruptcy has elapsed and the borrower’s payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive permission from the court to enter into the mortgage transaction. The exception is that most underwriters will consider the Chapter 13 Trustee’s approval as acceptable permission from the court.
What are some of the factors that will keep you from getting approved?
If there are still balances showing as unpaid on your credit report, even if the debts are listed in your bankruptcy, the debt will need to be paid OR the underwriter will need proof that the base of your Plan will be paid off with the refinance. If there are balances showing and you are unable to pay-off the base of your Plan, you may be unable to refinance until after you receive your Discharge and the case has been closed.
If a second mortgage is being stripped or crammed down in your Plan, the Chapter 13 must be Discharged and the deed removed from the property or the mortgage servicer must agree to a subordination. If there are judgment liens against the property which are being stripped from the property, your bankruptcy must be Discharged. Depending on how the Plan is written this can be simultaneous if the Title Insurance company legal department understands Chapter 13 with a Strip on Discharge.
The Application to Incur New Debt
To get underwriting approval for a Chapter 13 Debtor to refinance, the Chapter 13 Trustee (Colorado) or Court must approve your application to incur new debt. Talk with your attorney to determine how and when to best proceed, or not. This is a process which you can only do with the assistance of your attorney. Your attorney must prepare the financial statements to submit to the Trustee in order for authority to be granted for a lender to offer new credit. Your mortgage loan originator should be able to assist your attorney in completing the Application to Incur New Debt. If your mortgage loan originator does not know how to prepare such, you should find someone with more experience to help minimize your legal costs.
This is a Great Time to Refinance
Now is, without a doubt, continues to the best time in over sixty years to purchase a home or, refinance a home loan. As this is written fixed rate 30 year FHA mortgages are still at historic lows. For those with an Adjustable Rate, Option ARM or a Balloon Mortgage this is an excellent time to refinance. This process typically will take planning and action prior to refinancing. This is not a run of the mill refinance and not every mortgage lender is qualified to do this complex transaction.
Mortgage Refinance After Chapter 13 Discharge?
Yes, one may refinance after the bankruptcy case has been Discharged the Court and then Closed by the Trustee. However, because of the new rules for virtually all mortgage financing in the USA, once the Chapter 13 Plan has been successfully completed and Discharged, getting a mortgage refinance can be difficult. This is because a manual underwrite is mandated* and few lenders are willing to take the risk of not having the safe harbor provided by the Qualified Residential Mortgage rules. Begin reestablishing good credit while your case is still open so by the time your Discharge enters, you have solidly reestablished good credit. There are numerous posts in my blog on rebuilding credit, even while in Chapter 13.
Preliminary Requirements for Purchase or Refinance While in Chapter 13
- Twenty-four months of current housing payments with no 30-day late payments and, the likelihood of the income continuing for at least three years.
- Two years IRS Returns showing your income is sufficient to pay the mortgage as well as your Chapter 13 payment and any debt not included in the bankruptcy payment.
- Minimum middle FICO Score of 680 . Most will need to practice what I’ve previously posted as FICO 101a, 101b and 101c for several months prior to making a successful application for mortgage credit.
- For anyone with a fear of having credit make time to read both Credit: Use It to Build It (Part 1) and Credit: Use It to Build It (Part 2).
- Begin rebuilding your credit as soon as your Chapter 13 Plan is Confirmed/Court Approved; this is when your property has been revested to you.
- The maximum no-cash out loan to value on an FHA appraisal is presently 95% – Refinance.
- The minimum down payment is 3.5% of the purchase contract or appraised value whichever is less. – Purchase
- The maximum Debt to Income Ratio is 42.99% and this is pushing the envelope to the extreme.While in Chapter 13, it is mandatory to have Court approval (in Colorado, generally the Trustee approval suffices) to obtain a mortgage, go to this URL FHA Handbook 4000.1 II.A. 5.a.iii (H)(2)(3).
- There is more detail to this process but this is the essence of purchasing or refinancing while in Chapter 13.
There is more detail to this process than can reasonably be discussed herein but this is the essence of purchasing or refinancing while in Chapter 13.Bankruptcy Seal image attribution Model T image attribution Financially Speaking™ James Spray, RMLO, CNE, FICO Pro CO LMO 100008715 | NMLS 257365 | November 1, 2010 – Revised May 20, 2017 Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.
As discussed in Credit: Use It To Build It -Part 1, it is essential to qualify for and properly use credit in order to have credit. A thin credit file does little good to help one build or rebuild credit. Thin credit is described as a file lacking in length and depth of credit history. Thin is not a good thing in the credit sense.
The length of a credit history is a matter of time. A short credit history may have accounts that have been open for a matter of months or one or two years. A long credit history may span decades because open, active accounts remain indefinitely.
The depth of a credit report is an issue of the number and types of accounts you have. A credit history with only one or two accounts will likely be considered thin, even if it spans many years. A “thick” file would have several accounts of different types. For example a credit history could include credit cards, installment loans and a mortgage.
Let’s start with the basics, understand the mechanics of the FICO Pie Chart as well as the art and science of Rebuilding Your Scores. Credit scores are not a big mystery; they are simply a measure of the information reported to the credit reporting agencies by your creditors. Learn about your credit reports control that which you can as to what is reported and your credit scores will follow.
Credit Score Facts
On credit scores, how do they work? What you can do to raise your scores is discussed in this blog. It is necessary to understand there is a difference in the credit scores one may obtain for free via the Internet. These are not the scores used by lenders. They may not even be close to those used by lenders. In this blog we discuss the difference between what we call FICO or FAKO Scores?
Join a Credit Union
Not just any credit union will do. Some credit unions are so large they act more like a bank than a credit union. To learn a little more about credit unions and to find one you can join, read our blog titled: Credit Union Power. This is a key step to reestablishing your credit. Once you’ve become a member, ask for help to set up a $500 secured installment loan. Next, utilizing some of your savings, as much as possible, set up a secured credit card account and use it properly.
Beginning Anew or New?
Whether beginning from scratch as a young person with no credit or whether starting again, the tasks are quite similar. Read through both Part 1 and Part 2 of these blogs to learn more of what to do and not do as you begin this new journey. If you have a family member with excellent credit, read and share this blog on this which we call inherited credit. You have the opportunity to learn about how it works and how it doesn’t work.
Anyone who uses credit cards could have high utilization, particularly those which pay off their balances in full each month. This is because balances are often reported to the credit bureaus mid-billing cycle. So if you have a $5,000 limit and you charge $4,000 in a month, you could be reportedly utilizing 80% of your available credit. The result is most often dramatically reduced FICO™ Scores.
We wish you success!Financially Speaking™ James Spray, MLO, CNE, FICO Pro CO LMO 100008715 | NMLS 257365 | September 21, 2014 Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.