Here's some Common Terms and Aspects of the Credit Industry:
Loan History -Having a proven track record goes a long way toward qualifying for a new mortgage. In fact, many second mortgage lenders won't make a loan, or they limit the loan amount, for people who haven't had at least a 12-month mortgage rating in the past 12 months. Same thing can happen in cases where the applicant paid his mortgages off several years ago and has no current rating for the past 12 months. First time homebuyers generally have to go through a lot more hoops than someone with current, proven mortgage history.
Derogs -Derogatory credit history can result from several various causes, and it can have different types of results on your credit report:
Late Mortgage Payments - Mortgage payments are the most critical account on your credit history. Less than 12 months history leaves your credit report kind of thin, good history boosts your overall rating, and any 'lates' really hurt your credit rating, even if it's on rental property. So, you can logically conclude that a mortgage lender will be looking at your mortgage rating very closely with regard to mortgages you already have. Mortgage 'lates' stay on your credit report for seven years.
Late Pays - The most common "derog" is related to late payment history. The more late pays you have the worse your report is. Or if you have one or two accounts that show a severe delinquency record, you have some bad credit. Also, the more recent your late pay problems occur, the worse your credit is going to suffer. Late pays on consumer accounts stay on your credit report for five years from the date you catch them up.
Collections - Obviously a serious late pay situation, and ugly on a credit report. When an account goes to collection, it is obviously past 90 days late, and usually indicates you have made no effort to make things right. But sometimes its just because your creditor is a stinker. Nowadays, more lenders will not count a collection against you if it is medically related, but the account will have to be paid off before the loan is closed to get a FNMA loan, or paid out of closing proceeds to get a sub-prime loan. Collections can stay on your credit report as long as the creditor keeps updating the file every seven years, until it is paid. From the time you pay off a collection account, it will stay on your credit report as a "Paid Collection" for seven years.
Charge-offs - When a lender has given up on your default, they may eventually write the debt off for tax or other bookkeeping purposes. But that is ugly on your credit report. Up until about 8 years ago, if you had any charge-offs showing on your credit history, you weren't going to be getting any mortgages. Now, many sub-prime lenders will make the loan, depending on other parts of your credit report, if the charge-off has been over three years old. If it's less than three years old, you are going to have to pay it off to close on a sub-prime loan.
Charge-offs stay on your credit report for seven years from the time the creditor elects to report you as charged off, and 10 years if the credit report is being used for a mortgage application or employment applications. An account can cause you problems for a long time if a creditor sends it out to collection for 12 years before charging it off. The bad history will be on your report for 19 years in that scenario. If you pay off a charged-off account, your credit report will show "Paid Charge-off" for seven years from the time you paid it off. Not pretty on the report, but takes a lot of sting out of the bad credit. In fact, some lenders will upgrade you because they give you a higher character rating if you make good on account that was charged-off.
Repossession - If you show an automobile or mobile home repossession, whether voluntary surrender or not, you are pretty much dead meat for almost any mortgage program for at least five years. There are some exceptions, but less than 3% of repo victims are going to make it through the qualifying gauntlet, until that repo shows over five years old on your credit history. A repossession will show on your credit report for seven years from the date it occurred. However, if the dealer lost money on the resale, or claims you owe more, he can then continue reporting the item as a collection account indefinitely, or until you pay if off. If you pay off a repo account, it will usually show as a "Paid Charge-off" rather than a paid collection, which actually will work a little to your benefit with some lenders. In any event, it will then show for seven years from the date of payoff, or 10 years if you are applying for a mortgage or employment.
Bankruptcy - Even with a bankruptcy, many can still get a loan! However, reestablishing your credit will help you get approved for better loan rates. When reestablished your credit try to show at least four new major credit accounts ($1,500 or higher credit limits helps), with one account showing at least 24 months rating, and the other accounts showing at least 12 months credit rating. You can count a mortgage as one of the accounts if the mortgage was not part of the bankruptcy. You can even qualify for conventional financing if you can prove extremely extenuating circumstances regarding job loss or major medical emergencies caused the bankruptcy, and you qualify otherwise.
For most 2nd mortgages, you are out of bounds until the bankruptcy is a few years old. Bankruptcies drop off seven years from the date of the actual discharge, not the filing date; and will show for 10 years on credit reports for mortgage applications and employment applications.
Forbearance/Modification/Pre foreclosure - These entries on your credit report have a negative impact somewhere between bankruptcy and foreclosure ratings. If you have had clean credit for at least 24 months since the date of the entry, you will generally be okay with most sub-prime mortgage lenders. You will need to show extenuating circumstances to have any chance for conventional loan programs. These types of entries will generally stay on your credit report for 7 years from the date of final resolution.
Foreclosure - This is a tough one. Most likely you are out of luck for a while. Although, extenuating circumstances might squeak you through on a sub-prime or possibly even a conventional loan, but you better have strong documentation. Otherwise, you will need to show a deep equity in the property you are borrowing against, you'll be capped out at 65%, and you are looking at a 2 year interest only hard money loan at 10 to 15 points. And that's to refinance. You will find it next to impossible to find purchase money. Foreclosure is on your credit report for 7 years, 10 years for mortgage or employment applications.
Settled Account - If you ever felt pretty smart about getting a creditor to settle for less than full payoff on a delinquent account, you can go ahead and start feeling pretty dang stupid again, the next time you go looking for a mortgage. Fortunately, they come off your report 7 years from the date you settled the account, but you're going to have a pretty tough time until then. Lenders treat this like you are taking advantage of another creditor, and they feel like you will do the same thing to them, so they may not bother dealing with you.
CCCS - If you ever want to get a mortgage again in the next 7 years, avoid turning your debts over to Consumer Credit Counseling Services or any other debt management service. There used to be a time when this program really made sense, and it still ought to - but now most lenders prefer not to touch you until the CCCS is off of your credit report.
Judgements/tax liens/general liens - These are usually at the end of your account histories, and while they don't always necessarily damage your credit rating, they can really impair your ability to borrow money. Why? Because many liens and/or judgements may have priority over a new mortgage - most title companies won't take the chance of insuring the title against that, and most lenders won't take the chance even if the title company will insure title. Just not worth the risk and effort from a lender standpoint. To get a loan, you are going to have to pay off any liens or judgements showing on your credit report, or prove you have paid them, or otherwise prove that you have been released from liability.
Civil judgements and alimony and child support liens are examples of liens that may not affect your credit score too badly, depending on the circumstances. Mechanics liens, tax liens, and creditor judgements or liens will hit your score just like collection accounts. Judgements can ride on your credit report for 10 years, and if the creditor refiles the judgement, he can keep renewing it every 10 years until you pay the bill. Most of these accounts will stay on your report for up to 7 years from the time you obtain a lien release.
Hard to believe but according to the research, the average American has a 700 credit score! But it doesn't matter to lenders as much, because they have figured out how to still make a profit even to higher credit risk borrowers.
So where do you fit in? It all depends on the loan program. Conventional loans offer the lowest rates for residential properties, but you will pay almost 1% more for mortgage insurance (PMI) if you borrow more than 80% of the property value. This is to protect the lender from the risk of a low down payment.
Sub-prime loans are available for people whose credit profile won't qualify for conventional loans, or who have special needs with regard to income qualifying, or debt ratio, or similar issues. Sub-prime loans typically run about 2% higher to 8% higher than conventional loans, depending on the credit issues in your file, and the LTV you are looking to borrow. They typically run about 1 to 3 points higher in loan origination fees as well.
Hard money loans are typically available for severely impaired credit situations, or homes where the property needs rehabbing. This is the one area in real estate lending where lenders don't care too much if they get the property back. They usually charge a stiff fee to grant the loan (10 to 15 points), the rates typically run 16% to 18% interest only for 2 to 5 years, and the LTV is generally going to run about 60% to 65%, so these lenders make sure they have a lot of protection from a default situation.
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