Ask The Underwriter at 2rHouse.org

Foreclosure is the big word in the news. Maybe sub-prime is in the first spot, but most of you aren’t wondering whether you’re sub-prime or not. You’re wondering what happens if you fall into foreclosure.

The news media is making sure you know that there are plenty of people in the same boat. So maybe you won’t lose sleep wondering how you’ll explain your situation to your friends and family. But you might want to consider what you’ll need when you come out on the “other side”.

One of these days, there will be underwriters who want to approve loans again. Will your home loan of the future be one of them? Will you be able to prove that you were caught in the nightmare that was ForeclosureVille 2007?

In a few years, underwriters will be trying to follow guidelines about approving people who have been in foreclosure in the last 10 years. That might be you. Here’s what that underwriter is going to want to document in that file:

• You got caught by the “big bad wolf” of sub-prime lending and lost your home
• Before that, you were a “good guy” who paid your bills on time
• You understand the importance of paying your bills on time and you just couldn’t keep up with the spiraling payments as your mortgage adjusted upwards
• It could happen to anyone (like you) and it did

How in the heck do you prove that? Memories are not only short, but they are very plastic. Underwriters will be thinking whatever the guidelines tell them to think when the time comes to loan mortgage money again to people with spotty credit and foreclosures in their history.

My advice is to assemble and KEEP all the evidence that will help prove what happened. Yes, I know it’s in all the newspapers today, but in three or four years will you be able to prove you paid your bills on time in 2006? What about 2005? We all know you crashed and burned in 2007, but if you can prove you were stable before then, it will really help, believe me. I’ve looked at those files in the past and was able to plead my case and my reasoning to the powers-that-be. I was able to point to a good credit history prior to the “incident”, which in this case is your upcoming or recent foreclosure.

If possible, pull a credit report on yourself, complete with credit scores if you can. Even if the recent months SUCK, the history of the last two years should be there and you can file it away for future reference in your explanation.

I would start keeping a notebook or a diary – something you can file easily, but make notes about conversations with lenders, increases in your payment, the increasingly large amount of cash required to stop the action and save your house. This documentation will become very valuable in the future when you’re trying to convince a mortgage underwriter that you DO understand the importance of financial responsibility.

It’s possible that your careful records will be just the thing that convinces that conservative underwriter that you deserve another chance.

The questions about judgements on credit reports continue. There seems to be confusion about the difference between a judgement and a lien and also about how to clear it up. I’m going to try to cover several questions at once here, which might help a little.

• A judgement against you is the result of you losing a case in court. Usually, a creditor goes to court to get a judgement against you for the amount of the debt you owe. This is because a judgement can be recorded and enforced. The creditor’s other options would be to write off the debt or send it to collection and lose most of it to fees.
• That judgement, if recorded, becomes a matter of public record. If you have property or buy property, a title search will turn up items of public record.
• If the creditor who won the judgement decides to enforce payment, the next step is to file for Discovery of your assets. The judge can order that your assets be sold to pay the judgement.
• Judgements create a cloud in a real estate transaction because if you buy this house and then you’re ordered to liquidate it to pay this judgement, the mortgage lender may not be in a position to realize full payment of the mortgage. Generally a situation like this adds a heavy layer of risk to the entire deal
• If you have a judgement against you, the mortgage underwriter has to review the whole situation to see if this judgement represents the way you normally handle your credit obligations. Are you bad news? Or was this a fluke that you have under control now?
• If the creditor who has the judgement is receiving payments from you and they are happy and convinced that those payments will continue, they might agree to subordinate their lien position so that the mortgage lender can be in first position in the chain of title. If there is enough value in the house for everybody, you might be able to leave the judgement as is and continue making payments rather than paying it off.
• Judgements can happen for all kinds of reasons. I have seen them for back child support, dental bills, credit card default, car repossession, and everything else you can think of. The underwriter looking at your file has probably seen it all, too. Explain what happened and how you are handling it. Tell the truth and provide the proof.
• Having a judgement against you will lower your FICO score considerably. If you can avoid it by paying your bills on time, do it. If something happens that you couldn’t control, then get it under control and fix it or make arrangements as soon as possible.

The most common question people ask before, during and maybe even after a loan application interview is “How bad is my credit?”

It’s not that hard of a question, but since every credit profile is different, the answers may not mean that much to you. I personally think the most important thing for you is to know where you stand today and then work to improve. There’s no speedy trip to Heaven as a prize, just better interest rates and better terms when you need to make financial decisions. Many insurance companies use your FICO score to decide whether or not you are a good risk, even for auto insurance. You need to get a handle on your own profile fast.

Your FICO score has become the number one way to determine how “creditworthy” you are. This number varies from lender to lender and you should never just take information like this and run with it unless you talk to various lenders about your own personal situation. I can only tell you what I know from my own experience. Do not let anyone play on your emotion or your insecurities. Know your profile and then ask specific questions about their programs before you agree to seriously begin the application.

You will probably be considered “A quality credit” if you have a FICO score of 620 or above. You should have a credit report with no lates or very few lates and NO mortgage lates. Lenders hate mortgage lates. If your score is >700, you probably qualify for the best rates and terms, unless that score is based on a credit report with very little information. Your credit report needs to reflect a history of at least 4 accounts, one currently open, to show the lender how you take care of credit obligations.

If you have a mortgage late or two, but only 30 days late, not sixty, then you’re probably a “B credit” borrower. No recent or unpaid collections or chargeoffs are on your report and your score hovers around 600. If it weren’t for the mortgage lates, you would be a model citizen. Never forget that lenders hate to see mortgage lates. If you’re not worried about your housing expense, how can they expect you to care about anything else.

When you hit the “C level credit” category, you’ll start to see drastic increases in the rates you’re offered. This is risky territory for the lender, since they can see that you are often late on your mortgage, sometimes even 60 days late. The credit report shows that you let things go to collection and sometimes accounts have even been charged off as bad debt. There is a good chance that you’ll be slow to pay this loan, too.

If you’ve had a recent bankruptcy or foreclosure, then you’re looking at “D credit” loan programs to help you re-establish yourself as a worthy borrower. A Subprime lender can help you get a loan to prove you know how to take care of your obligations, but that is the only program you’re going to quality for. These loans are usually structured with a higher rate and a short repayment term. The rate is less than a credit card, but much higher than A and B borrowers pay.

The idea is that you’ll make perfect payments for 6-12 months and then refinance into a better rate and term. This is no time to mess up again. You can quickly re-establish yourself after a “life event” by paying on time and being able to prove it.

If you don’t know where you fall, then get a copy of your credit report and see what’s on there. There might be something there that’s lowering your score and isn’t even correct information. Dispute and correct whatever you can legitimately before you need a loan. Be sure you order the package that includes report and FICO, since most plans are one or the other. My advice is get it from MY FICO, but the choice is yours. The one free annual report you can get does not include your FICO score, so the only real advantage is that you have the report details to see what needs to be corrected. I try to keep a link in the right hand column to MY FICO.

I’ve seen a rash of search terms that tell me new readers are looking for information about bad credit and FICO scores that are too low to get a loan.

I’m afraid I don’t have any magic cure for past problems. I’ve been in the situation where “life events” pile up and suddenly you can’t seem to make any headway no matter what. Working yourself out of that hole is VERY possible, but it does take some concentrated effort and you can’t give up and get stupid in the middle.

Here are some suggestions, depending on your situation:

• If you need to refinance NOW to get out of an adjustable mortgage and you have bad credit, look on this site for the page with a list of lenders. Get hooked up with a few of them and you should have 5 or 6 different loan officers calling to try and help you. Tell each one that you are working with several people to try and solve your problem and you want them to take a look at your credit before you commit to any one of them.
• If you don’t know your credit score, it really is time you found out. This will save you time and money if you’re spinning your wheels now trying to find a lender to work with you. There is no point in calling A paper lenders all day if your score puts you in the D- category. You also can’t expect to get the lowest rate if you’re not A paper quality, but you shouldn’t settle for a D- rate if you’re B+, either.
• I haven’t had time to verify this, but I was told that if you ordered your report and FICO score from My FICO, it wouldn’t count against you as an inquiry. I provide links to MY FICO on this site, but be sure you order a package that gives you the FICO score as well as the credit report. Some packages have one or the other, but not both. You probably don’t need monitoring services or any other specialized services right now, and you can come back to them later if you want to. The free credit report you are entitled to annually DOES NOT include a FICO score.
• If your score is under 620, then you are statistically a very high risk borrower. The lower the score, the more chance there is that you will default. How does the lender know that? Your past experiences with credit provide the lender with a pretty good idea of how you handle your finances. If you’ve defaulted on loans in the past, chances are you’ll do it again. If you’ve experienced a one-time traumatic “life event” that put you under, be ready to explain what happened and how you are recovering, including what you’ve learned about preventing it from happening again.
• If you’re over your head in debt and just have to find a way to continue living indoors and feeding the kids, then you probably need some serious professional help. The options at this time seem to be declaring bankruptcy or finding a legitimate credit counselor to help you dig out. Neither one of these scenarios are pretty and should be the last, rather than the first thing you try.
• If you’re determined to dig yourself out of the hole, try an supportive group like the one I wrote about on this site. The book is called One Paycheck at a Time, and there’s online support available at an additional cost, like $5 a week or something. Working your way out of debt is difficult and you’ll have to be determined, but I’m proof that it’s possible.
• If you’re in pretty good shape except for an adjustable rate mortgage and some increasing credit card debt, then one last refinance might be the right move. I don’t really believe that you should use your home like a credit card, financing crap you didn’t need in the first place, but your home is one solid investment you can count on in a pinch. I think rates and values may change quickly in the near future, so this might be just the right time to get your financial picture in order and get ready for the ride.

I continue to get questions about judgements on credit reports and how to pay them off to get a mortgage. The flood of credit cleaning scams in the past decade have led some people to think that anything bad can be erased from your record if you just find the right place to ask.

A judgement happens when someone wins a case against you and there are monetary damages awarded to the other side. In most of the cases we are talking about here, a past due debt went to collection and when it still was not paid, the collection agency took it to court and got a judgement in the amount owed, plus interest and legal fees.

What’s the difference between a collection and a judgement? A collection is when someone you owe money to stopped waiting and turned your account over to a third party to try and collect the money for a percentage. There are laws about how those collectors can conduct business, but usually having an outstanding collection means you’ll be getting harsh letters in the mail and demanding phone calls trying to get you to respond with a payment.

A judgement usually happens when the amount owed is over $500. This is not necessary, but since there are filing fees and attorney fees involved, the amount usually has to be worth collecting. Some creditors routinely turn everything over to collection and then file a judgement, just on principle.

The creditor presents the evidence of the debt to the judge. If you attend the hearing, you might be given an opportunity to debate the validity of the debt, but you should have really handled the dispute long ago, before it even went to collection. If you DID dispute the amount for some reason, now is the time to have all that proof at hand to show the judge your situation.

The fact that you owe money and just don’t have money to pay it back is not a good excuse and will not help you when it comes to collections or judgements either one.

If the creditor wins the judgement then public record will reflect the date, the creditor and the amount. This public record will show up on most credit reports and will create a lien on any real property that you own. Winning a judgement does not automatically produce funds; it just gives the creditor more standing in their efforts to collect the money.

The next step in collecting the money is to pursue your assets and lay claim to them if you do not pay. Many times this step never happens, but if the creditor has knowledge that you own something of value, they may file a petition to discover assets and you will have to explain to the judge how you intend to pay the judgement to avoid selling your property for funds.

This asset discovery process and the fact that judgements are a lien against real property is the reason that mortgage lenders do not want to loan money on a home with outstanding judgements. The lenders mortgage lien needs to be in first position.

If you have a judgement against you it might not preclude you from buying a home. If you have a payment arrangement in place and a history of making those payments, the lender could make an exception and not require you to pay it off. Payment arrangements that were set up just after you were rejected by a prevous lender aren’t going to cut it, though.

Keep in mind that the whole purpose of credit underwriting is to determine whether you understand the ramifications of borrowing money and paying it back on time. Every underwriter has seen situations where “life events” caused major blemishes on a credit history. The borrowers who prevail in that situation are the ones who have done their best to pay off and keep current on their debts so that the underwriter can see that they take their financial obligations seriously.