Credit Challenges

Just because someone has a past, doesn't mean they don't deserve a future! Credit challenges hit all of us at one time or another, it definitely does not mean you are destined to never own a home! We have flexible guidelines, options, and guidance for all things credit!!

Transcript

SPEAKER_00 0:00

Hello and welcome. This is Bed Bath and Banter, Arizona Real Estate Edition. I'm your host, Amy Batten, with Waterstone Mortgage.

SPEAKER_01 0:06

And I'm Ryan Batten with West USA Realty and the Batten Home Group.

SPEAKER_00 0:10

Alright, Ryan, let's talk all things credit. Now I get a bazillion questions a week on different aspects of credit, and I'm just gonna touch on a few during this segment.

SPEAKER_01 0:21

Okay.

SPEAKER_00 0:22

Okay. So first off, um, from my radio show, I had a gentleman ask me, you know, Amy, why don't you ever talk about options for people with poor credit? And he's right. We don't really get into, we just talked about the credit score, but we don't really talk about credit content or your options if, you know, you haven't been stellar with your credit. So I'm gonna get into it right now. So poor credit is a subjective term. Um obviously everyone's opinion of poor credit, what that means, is something different. Um we understand that everybody has lives. Everybody has a past, everybody has a future, everybody has, you know, runs into tough spots every now and then. Um, so there's a lot of loan programs that, you know, just because you might have had a blip in your past, we can work with it. Um the issues come into play when you are you've never been financially responsible and you've never paid anything on time.

SPEAKER_01 1:18

Um I find those kind of people that and they not only do they do that, but they also go ostrich mode.

SPEAKER_00 1:24

Yeah, like it's just so overwhelming. They bury their head in the sands that they don't know how to fix it, so they choose not to fix it. Um I appreciate that mindset, but that is not the way to ever have anything. You don't have to be held hostage by your credit your whole life. You just don't. Um, you know, you you have your mistakes and you know, kind of just let's wipe the slate clean and move forward. But the point is needing to take responsibility for it, take your head out of the sand and start addressing the issues. Um I'm gonna start with, you know, credit score is an arbitrary number, so it doesn't really matter. Like most of our programs, uh, they go down to 580 for a credit score. But that doesn't mean anything to the normal consumer. They don't know what that what that equates to.

SPEAKER_01 2:08

Let me ask this real quick. So when when you're qualifying for a mortgage, you guys do what's called a tri-merge. Correct. All right, so you pull all three credit bureaus. What's uh uh an example that you see in terms of the dispersion of the scores?

SPEAKER_00 2:23

Oh goodness, it can really vary. Um usually they're pretty tight. So when we pull a tri-merge credit report, it's all three scores. We literally just use the middle of the three scores. We don't take an average, we don't find the mean. We literally, let's say if your score is 600, 620, 640, your qualifying score is 620. That the mid-score is what we use for qualifying you out of all three bureaus. Um, there can be a range because some things report on some bureaus and not on the others. So there's three different bureaus: there's Experian, TransUnion, and Equifax. Okay. Most most accounts report on all three bureaus, but sometimes it costs them money to report to all three bureaus. So, like let's say collection accounts sometimes will only report to one or two. When that happens, you could have a discrepancy of a hundred points between your credit scores.

SPEAKER_01 3:17

Okay.

SPEAKER_00 3:18

So it it that's just such an open-ended question that it's not really easy to answer.

SPEAKER_01 3:22

But it's my point in that is that it can vary widely from credit bureau to credit bureau.

SPEAKER_00 3:26

If things are reporting differently on each bureau, yes. If all if everything is reporting on all three bureaus and it's consistent, then they're pretty similar. Yes. Yeah.

SPEAKER_01 3:37

Right. Um now what do you you see as the biggest hurdle for individuals who know that hey, their credit isn't where it needs to be, there are some blemishes on it. What's their biggest hurdle in getting it corrected?

SPEAKER_00 3:56

Just knowing what to do, where to go, who to ask, you know, just knowing what to do. Um typically, so when I do a pre-qualification and I see that people have, you know, some issues that they need help with, I will immediately go into my rescore mode, which means I am going to give you instructions on what to do to maximize your credit score in a short period of time. If it's easy and inexpensive, okay. Um, and if you need it. Uh, your credit score is a really big factor in pricing your loan with regards to your interest rate. So obviously we want to maximize it. If we can't get you above 580, then that's just what you're stuck with. And that's, you know, we can still do a loan at 580, so that's not a problem. But typically the higher your credit score, the cheaper your borrowing costs are. So we try to, you know, especially if it's something easy and we have a couple of months, I really try to focus on that. Um, if it's not going to matter and doesn't hurt anything, then I really don't give anybody any grief in order to try to fix things on their credit. But it's really just knowing where to start.

SPEAKER_01 5:01

And it breaks out in 20-point tiers, correct?

SPEAKER_00 5:04

With regards to pricing, improves in pricing. So it's like 580, 600, 620, 640, 660, 680, and so on and so forth. Yes. But sometimes there's, you know, a big difference. Like you have to go up a lot in credit score in order for pricing to have any impact. Okay. So it's it's not a one-size-fits-all. Um, each loan program is different in what they require. Uh, so that's why it's important to have someone who knows all your programs, who's been in the business a while, who really like didn't just jump in and start selling products they didn't know. Um, it's really important to know all of the offerings that a mortgage company has because there's a lot more than just the three we talk about. There's conventional FHA and VA. We probably have, you know, 600 other products. So there's a lot of options. There is a lot, yeah. So it's really important to work with someone who knows what's best for your situation because you might be missing the boat on another potential product. Um, but so knowing where to start and knowing what to do. I always tell people when it comes to credit, do not pay off anything until you speak with a lender if your goal is to buy a house. Do not do anything because where you put your money may not have the most impact. Let us tell you where to put your money, what to pay off, what to correct, what credit card balance to bring down in order to maximize your credit score. If you won the lottery or you got an inheritance and you're just gonna pay everything off, fantastic. Don't pay off collections before talking to somebody.

SPEAKER_01 6:30

And we want we want to maybe get to know each other, be friends if that's the case, if you've won that.

SPEAKER_00 6:34

We don't mind lottery winners.

SPEAKER_01 6:35

So I hear you all the time, Amy, talk about uh medical debt. Happens to a lot of folks. Do you want to speak to that a little bit?

SPEAKER_00 6:42

Sure. So medical debt um for mortgage processing, we do not care about medical debt. We don't look at it. It does not have an impact in your approval, but it can impact your credit score. So, and they put in a bunch of rules a couple years ago on how medical debt can be reported. Um, so we're seeing a lot less medical collections, um, especially under $500, because they're not allowed to report those anymore before like I think 12 months. Um, and I apologize, I wasn't prepared for that question, but um, but they changed all the reporting. So you actually we see a lot less medical collections, especially small ones, because there used to be, you know, if you missed a copay for $27, they would send you to collections. That's not reporting anymore. So they don't hurt us in with regards to your ability to purchase, but they can impact your credit card.

SPEAKER_01 7:29

So they don't consider it part of the debt.

SPEAKER_00 7:30

No, not at all.

SPEAKER_01 7:31

Okay.

SPEAKER_00 7:32

Nope.

SPEAKER_01 7:33

Um, and then I know we talked about this in a different podcast, a little bit we touched on it, but uh some of the short-term lending things and how that kind of impacts could be potentially it doesn't on credit because they don't report to credit.

SPEAKER_00 7:46

Um the only times I've seen accounts like a firm report to credit is if they're over 12 months. Okay. Okay, so under 12 months is short-term loan. Um, they do not report to credit in most of the cases, so that doesn't impact your credit at all either.

SPEAKER_01 8:00

Okay.

SPEAKER_00 8:01

I mean, if you don't pay, they'll report, but yes.

SPEAKER_01 8:03

Yeah, and so now I know you have this, but talk a little bit about what you can do for a potential home buyer versus maybe somebody talking to uh like one of the credit repair companies that are out there.

SPEAKER_00 8:17

Um yeah, I am not a credit repair fan.

SPEAKER_01 8:20

Okay.

SPEAKER_00 8:20

Uh like uh consumer credit counseling or credit repair, whatever they call themselves. I personally am not a fan of those. Um for free. I can give you the same information uh in most cases to help you. Now, I have had many clients who utilized uh consumer credit counseling or credit repair debt relief, um, and they have noticed benefits. They have seen collections deleted from their credit report. Fantastic. Um, I'm just not personally a fan of it, um, just because it's a monthly subscription and you know they they want to drag it out, in my opinion, as long as they can because you're paying monthly. So um I'm I'm personally just not a fan for it. It's not a one size fits all. Sometimes if you just need a little bit of, I don't know how to get my credit score up and I have a couple collections, I can help you for absolutely free. If it's a I have $25,000 in collections and I don't know what to do and I need someone else to fight them for me, that's a different thing.

SPEAKER_01 9:16

It might be a better fit in that scenario. Yeah. Um so Amy has a software that she utilizes and she can put in different uh variables, different scenarios. Um if I pay this down this much or I pay that down that much, how does that impact what score would I likely receive from the credit bureaus, right?

SPEAKER_00 9:35

Yeah, so we have a really nice credit simulation software that's free of charge, and I utilize it on the majority of my clients. Uh, it can especially if they like, well, what if I do this? What would this do to my score? I can literally print an a report and send it to them. It's a really fantastic tool. That's an amazing tool. Well, and most mortgage lenders do have this tool. So I'm hoping that everybody's utilizing it that way. Um, but I love it because sometimes, you know, what if we don't what you know, what if we want to get up to the 720 credit score and you're at 718, and I just need to get you up those two points to qualify you for, you know, a better interest rate. Yeah. You know, it's a really wonderful tool to have. It's necessary in my business.

SPEAKER_01 10:16

Okay. Um let me think of another question. Uh what do you find most frequently has the most significant impact in repairing credit?

SPEAKER_00 10:28

Uh bringing down credit card balance. It's almost never paying off a collection. Never.

SPEAKER_01 10:32

Really?

SPEAKER_00 10:33

Yes. Do not pay off collections without speaking to somebody.

SPEAKER_01 10:35

Speak a little bit to the collection side. So how you how have you seen that sabotage situation?

SPEAKER_00 10:39

So when a collection goes on your credit, the significance of that derogatory debt has happened. Okay, so paying it off doesn't make it go away. It actually brings the active date from, let's say, five years ago to today. So now it looks like an active paid derogatory account, which can drop your score. So typically you can work backwards. Correct. Typically, it either has um a negative benefit to your credit or it has no benefit. Um, it almost never has a positive benefit. So don't pay off collections. Again, if your goal is to buy a house, don't pay off collections until you speak with a lender and they can see what that will do to your overall qualifying. Sometimes you need to pay them off. It depends on the content of your credit. But in my experience, it's almost never beneficial to pay off collections.

SPEAKER_01 11:28

Okay, so now I know a lot of our clients that find themselves in this situation where they do have some blemishes they need to address on the credit. Um, oftentimes, look at the possibility of bringing on a cosigner as well. You you take a spend a little time chatting about that and kind of some of the pitfalls.

SPEAKER_00 11:45

Oh my goodness. Okay, so this is a twofold thing that I want to discuss. Cosigners. When you are agreeing to co-sign on a debt, whether it's a car, whether it's a house, I don't care what it is, what you're saying is you agree to pay that debt if the main person does not. I think everybody outside of a lot of parents, I don't think people take that seriously. No. So, like, I'll pull someone's credit and I'm like, oh, you have this car loan and repossession. Oh, I bought that for my son, he didn't pay for it, so I just let it get repo'. That is not the way to handle co-signed obligations, okay? You are agreeing to pay the debt in the event that they don't. So use that very carefully. I've had people who have been completely sabotaged credit-wise because they've done stuff for their siblings or their kids or their parents, and those people have not paid the debt. That is a very scary situation because, again, you don't feel any obligation to pay it. It was just your credit used. Well, now it stopped you from being able to do a lot of things because your credit now is is, you know, negative. So uh definitely really Soul Search. You know, does if you have to co-sign, does your kid really need that car? Does your, you know, brother really need that car? Cars are a big thing. That's why I keep saying car. Now, when we have a situation where I need a co-signer for income purposes on a house, I will require a I need to talk to the parents or whoever's co-signing. Yeah. I say parents because that's the most common uh avenue, but I will talk to the person and say, this is what you're agreeing to, this is why we need you on it, and here is our exit strategy. Yeah. You know, we have a plan to get you off of this in, you know, 12, 24, 36 months, whatever the case may be. But you are agreeing to pay this in the event that they don't. Please make sure you understand that before you agree to do this.

SPEAKER_01 13:34

So I like what you mentioned there, in that you have an exit strategy for the co-signer. Because I gotta be honest, a I I hear a lot of like a person's been a co-signer for five, ten, fifteen years on a loan, and they're subject to the whims, right? Of who they co-sign for and what they do or don't do. Uh, but that's that's great that you do have an exit strategy in place.

SPEAKER_00 13:56

Whether or not it comes to fruition, people's lives are fluid, so we'll see, you know, whatever whatever happens, happens. Um, but I at least have that conversation with them is hey, we're using your credit. This will report negatively if this person is late on this or if they stop making payments altogether. That is when you are legally responsible for paying this debt. So um I've never had anybody say, no, I'm not cosigning after having that conversation. Okay. Most of them know what it means and what it entails, but you know, I just see other debts, specifically car loans, be completely disregarded because, you know, oh, I agreed to co-sign and uh but I didn't agree to pay for it. That is what co-signing is. It's not something that should be taken lightly. And stop letting people use your credit. You know, if they need something that badly, I'm sure there's a way they can figure it out, especially with cars. They will give cars to anybody, really. I mean, it depends on the interest rate and whatnot.

SPEAKER_01 14:50

Yeah, I don't know.

SPEAKER_00 14:51

I mean, I don't know, I'm sure. Like there's a lot of opportunities for people to be able to buy a car. So maybe they don't need a $700 payment.

SPEAKER_01 14:58

Now, my understanding, too, and and you correct me if I'm wrong, and it might take a little time, say three to six months, but generally speaking, with people who are kind of on the edge credit-wise, um, and they end up qualifying for and buying a home in the next three to six months, they actually see an a uptick in their credit score. Oh, absolutely.

SPEAKER_00 15:17

Because you have a new, like a new liability that reports on your credit, but a mortgage is an asset as well. You know, it's an asset, a liability tied to an asset. So that actually improves your credit score when you have a mortgage. When you have credit depth, so you have a mortgage, auto loan, credit cards, they want to see variation. And that tends to improve your credit score.

SPEAKER_01 15:37

It's always been kind of explained to me with regards to that, that uh essentially other creditors now view you as like, hey, you're a solid risk as this other company said yes, we'll lend you the money. Um they trusted that you're gonna re you know, you're gonna make the payments. Um, and and that's part of at least the reason why you see that uptick in your credit score.

SPEAKER_00 15:57

Um, I would agree with that, yes. Yeah. And it's just having that depth of uh different credit accounts on your credit.

SPEAKER_01 16:03

Okay.

SPEAKER_00 16:04

Yeah. All right. So we talked about cosigned. Um please don't let people use your credit like oh, don't let I mean I come from a very large family where you know half of us have really poor credit and half of us have very good credit. And there has been a lot of times where we have been asked, and when I was younger, I did co-sign, I did buy my parents a home, I did, and I ended up having to pay for every single thing I put my name on, I ended up paying for. So I won't do it anymore. I mean, outside for my children, um, because I feel like they're good credit risk risks, we'll see. Um, they're still young, so we'll see how they do. But um, I now will no longer allow that because it caused me a lot of grief and cost me a lot of money when I was trying to help someone else out and they weren't trying to help themselves out. Sure. So that's just um, and again, that's not the case for mortgages. Um sometimes kids just need that that extra income to help push them over the edge to qualify. I would do that. I would do it as it's if it's tied to an asset, I will do it. Okay. Um, but not, you know, on a limited way.

SPEAKER_01 17:01

A method of protection could be potentially to to maybe to go untitled in.

SPEAKER_00 17:04

Oh, a hundred percent, yes.

SPEAKER_01 17:05

Yeah.

SPEAKER_00 17:05

So that's a different conversation.

SPEAKER_01 17:07

So let's let's spend uh uh the last couple of minutes here. Let let's start talking about uh folks who have uh gotten themselves into a financial situation that they really just weren't able to dig out of, right? And so maybe they ended up, they owned a home and they ended up in the foreclosure. Um, or they ended up in a short sale, or maybe they had to file bankruptcy. Let's talk a little bit about that.

SPEAKER_00 17:30

Okay, so just because again, you've had a past doesn't mean you're not deserving of a future, a financial future of being a homeowner. Um all of our products are really um flexible when it comes to waiting periods for foreclosures, short sales, and bankruptcies. So we'll start with bankruptcy. There are two types of bankruptcies. There's a chapter seven, which is it completely wipes off all your debt. When you file and discharge a chapter seven bankruptcy, you are eligible to purchase a home in two years, 24 months from the date of the discharge. You do need to have some re-established credit. So it's really important that you open a credit card, pay on it perfectly, use it for gas, pay it off, whatever you need to do. But um, you definitely want to have re-established credit. The worst thing you can do is completely stay away from your credit after you have a bankruptcy. You need to have one or two open accounts. Um, don't get yourself in trouble. Don't open a $20,000 credit card, but a $300 credit card will do the trick. Um, and as long as you manage it perfectly, your credit score could completely recover, honestly, within six months. Like it happens very quickly because it's like a everything is wiped out. Um chapter 13 is a repayment, it's a reorganization of debt. And with that chapter, with chapter 13, you're actually eligible to purchase a home 12 months after starting the program, as long as the bankruptcy trustee gives you approval. So you can actually purchase a home while you're actively in bankruptcy.

SPEAKER_01 18:59

That's interesting.

SPEAKER_00 19:00

Yeah.

SPEAKER_01 19:00

Yeah, okay.

SPEAKER_00 19:01

Yeah, because you're making it's a it's a repayment plan. So you're making monthly payments to the bankruptcy trustee. We have to document that uh at least 12 payments were made on time, and they have to give you an approval letter to go buy a home.

SPEAKER_01 19:14

Okay.

SPEAKER_00 19:14

Yeah. So you mean that that one doesn't even have to be discharged? Oh, 100%. I do it all the time. Yes. Yeah. So two years for a traditional bankruptcy, 12 months into a chapter 13, and then there's uh one year after it's discharged if you wait until after you're done with that program.

SPEAKER_01 19:29

Okay, so let's let's talk a little bit then about uh our potential borrowers who didn't file bankruptcy, but they did foreclose on their own.

SPEAKER_00 19:39

So foreclosures and short sales. So foreclosures where you just completely walk away, the bank takes back the house, and you did nothing. You didn't try to sell it, you didn't try to work anything out. That's a foreclosure. You are actually eligible three years after a foreclosure. Three years.

SPEAKER_01 19:55

That's so wild.

SPEAKER_00 19:56

I know, I know. Well, because most foreclosures are not because of financial mismanagement. It's because of what's going on in the world, it's because of job loss, you know, uh medical issues, divorce. But usually it's not because someone just decided not to pay their bills.

SPEAKER_01 20:09

So I will say on my end, for my part, uh, and I think that a lot of folks don't realize this, but let's say for whatever reason you ran to a rough patch, uh, you're you're behind on payments, you're headed towards for foreclosure, you've been getting notices in the mail, um, you've been uh made aware of a trustee sale where they're gonna auction off your property at a future date down the road, uh, you're in no way locked into that. Okay, so a lot of folks that have bought over the last 10 years, eight years, even go back to six years, uh they find themselves in a situation they likely have a fair amount of equity in their home. You can always sell your home and anybody worth their salt would talk you into doing that because why on God's green earth would you hand over the equity that you have in that home to a bank who's gonna take it from you when you could sell it, pocket that money, and then write your financial ship.

SPEAKER_00 21:04

Absolutely. Just get advice before you just walk away. I know it's overwhelming and it's scary and it's embarrassing and it's sad, but get get advice before you walk away. Like unfortunately, I did have a situation recently where I did tell someone just to walk away. They were upside down, they purchased like two years ago, they didn't have any equity, um, they divorced, and the person who stayed in the house didn't make a payment for a year. There was no saving anything.

SPEAKER_01 21:27

That was just gonna be that just was.

SPEAKER_00 21:29

And their mother co-signed for them. So, and I didn't do the initial loan. She was a friend that I knew uh outside of my mortgage life. Um, so my advice was just uh just let it go. There's nothing you can do. That that's gonna be the easiest path for you. Don't even try to short sale it. Um now, short sale is where you work with the bank to negotiate an offer to take less than what's owed on the property in order to sell it. That has a two-year waiting period.

SPEAKER_01 21:54

Okay.

SPEAKER_00 21:54

Because you worked through details, you worked with the bank for an active member or active participant in trying to sell your home. So uh yeah, so I mean, I mean, two to three years after a major event you can purchase a home, that's incredible.

SPEAKER_01 22:08

Yeah, I don't think most people would realize that. Right? So that's so even when the sky is dark, yeah, you know, the rain is falling, that there is light at the end of that tunnel, the sun is gonna come up, um, and it's it's not a a life sentence.

SPEAKER_00 22:24

No, and these are all the products I'm talking about are all minimal down programs. Um if you have 20% to put down and your your credit score isn't completely tanked, we could do a loan for one year out of a bankruptcy, or one day out of a bankruptcy. Wow. Like there are so many different programs. It is not a one size fits all. So that's why it's important for you to have that initial consultation to say, here's my situation, here's what I'm trying to accomplish, what are my options? And it might be waiting two years. It might be putting a larger down payment, but it doesn't mean you can never be a homeowner again. And I think people are afraid of that.

SPEAKER_01 22:58

Yeah. Yeah. Well, and honestly, I think it's natural, they kind of may be a little embarrassed by it, too. Oh, absolutely. So they don't want to actually pick at the scab or have that conversation, if you will. Uh but but really truly we're in this country. We're just a forgiving country, right? If you come, if you're contrite and you come forth and you say, hey, look, so I messed up, but I want to make it right, we forgive. And I think that's evidenced by the fact that most of these waiting periods are two to three years.

SPEAKER_00 23:24

I know. I know, I love it. You know, it used to be seven years for a lot of these uh issues way back in the day. So yeah, they just they understand. Like, unfortunately, we give there's too much ax, easy access to credit. So they have to be forgiving when you can't manage it all. That's just my opinion. Um, anyways, but if you have a unique situation that you would like some information on just for yourself, reach out to me anytime. Again, our website is Keeping It Real Estate with Amy B. Um, you can also text the word closed at C-L-O-S E to 620620, and you'll get an automated text back with all of my contact information, and I would love to have that conversation with you and see if it's something that we can help you with. Thank you so much for joining us today, and hope you have a wonderful rest of your day.

SPEAKER_01 24:08

Bye, everybody.