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(and where it goes)


Four Simple Financial Principles


Your Credit Report

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EXERCISE YOUR FINANCIAL SAVVY

 

Here's the information you are looking for:

How to have an excellent credit score.

Be savvy about buying a home.

Upside down in your mortgage?

Eliminate Debt

A Strategy for Credit Card Success

Examine your Financial Program

Decoding Your Credit Report Find out what Lenders know about you Leap over an initial hurdle that faces all borrowers by examining and polishing your credit report.  For yourself and your spouse, go to www.AnnualCreditReport.com to order your free once-a-year report from each of the three credit reporting agencies.  Get all three if you have not looked over your credit report before; after updating all, plan to get one report every four months to watch over your credit through the year.  You must pay for your credit SCORE, about $15.00.  Do this about once a year, from Fair Isaac or Experian.  When you check your own credit, it does not ding your score; when a lender or credit card company or finance company or auto dealer checks it, it will affect (reduce) your score for the next two years. GOAL:  Credit Score of 680 up; 750 is even better; 800 up is excellent. Once you have your credit report in hand, the following will help you interpret it. Check for errors:  PERSONAL INFORMATION:  Start with the basics:  Is it your correct name, address, and social security number?  Your address information may be found at the end of the report as well, showing a history of the addresses you gave in the past.                            NEGATIVE ITEMS:  The report will show these first.  Late payments, charge-offs, repossessions, and items sent to collection will be shown here.  If they are more than seven years old, you can ask they be removed.  If the items are incorrect, file a dispute with the credit reporting agency and/or contact the original creditor to prove the item is wrong.  You may also place a statement beside the item to explain the extenuating circumstances that caused the late payment, etc. ACCOUNTS IN GOOD STANDING: This list shows all accounts for the past 10 years, noting when the account was opened, credit limit (or highest amount ever spent), Duration (such as a 60 month car loan), Frequency (monthly/weekly, etc), Activity (should read paid and closed for a paid-off auto loan), Date reported (shows the most recent date that account reported in to the credit bureau), Balance Amount (as of the previous date; this may be different from your current balance as several months may have passed). Other categories that may not be filled in include: Amount past due, Date of last payment, Actual payment amount, Scheduled payment amount, Date of last activity, Date major delinquency 1st reported, Charge-off amount, Deferred pay start date (if you have worked out an arrangement to defer payments, it will be shown here), Balloon pay amount, Ballon pay date, Date Closed. Some credit agencies show Current Status, Type of Account (installment/revolving), Type of loan (auto, mortgage, etc.), Whose account (joint, individual or authorized user).  Make your credit report sparkle:   no late payments have only 4 or 5 credit cards: 2 bank cards such as Visa, Mastercard or Amex, 1 gasoline card, and 2 store cards such as Sears no finance company loans no bank personal loans no foreclosures no unpaid debt judgments no bankruptcy no unpaid taxes no repossessions Home mortgage loan is a bonus to credit if always paid on time. Any of the above negative items can be removed when they are more than 7 years old.  Mortgage lenders give heavier weight to recent negative items (past 2-4 years).  back to top

A Strategy for Credit Card Success

 
Close out all store credit cards from places where you no longer live, and all cards you no  longer use regularly.  Keep your oldest cards, as they demonstrate your long-term credit history.  (Cancelled and closed cards will still appear on your credit history for 7 years.) 

 Aim to pay off all cards completely.

 Use one card regularly (after all are paid off) paying it off each month.  Use the other cards at least 2-3 times a year, paying them off completely when the bill comes.    

 Keep a ratio of less than 20% of total amount owed to total lines of credit.  Example:   $2,000 owed on all 4 credit cards combined, with combined total credit limit of $10,600 = 19% credit-to-debt ratio (in other words, don't max out your credit cards)

A basic credit card strategy is to have access to instant credit through having a good payment reputation, but never use the money as a long-term loan.

Financial Health Strategy:  Determine to pay down all credit cards and secure a savings stash to rely on instead of credit cards.  Gradually put aside enough to cover car repair ($600+), appliance repair/purchase ($500+), medical emergencies ($1000+), and job loss buffer (enough to cover three months of bare necessities. Total financial health savings = $8,000 up. Don't touch this money unless a major disaster strikes (don't use for Christmas, vacations or to shop sales!)

Target date: To have your stash built up in 2-4 years, divide total desired amount by 24 to find amount to put aside each month to save in 2 years ($334 per month = $8,000 in two years)  Set up an automatic withdrawal from the bank account where your paycheck is deposited to a savings account to make this happen.  If you don't have to make the decision again every month, there is less chance you will fail.

You can have a terrific credit report now that you know the secret:  examine and correct it, then pay down your debt and prepare your cash reserves.  You'll be in a great place to get a home loan. back to top

Upside Down in Your Mortgage? 
Here's what you can do...

Homeowners who bought real estate in the '05-'06 boom, especially those who took out mortgages of near 100%, find themselves upside down with nowhere to turn.  With a mortgage of $400,000 and a current market value of $320,000, many are frantic to sell and get the load off their back.  But is selling the best answer for your situation?  Find your scenario and assess your options:

SCENARIO 1:  We are staying to raise our family/retire here.

If this is your situation, and your monthly payments are affordable for you, sitting tight may be the answer.  Values will climb upward again as time goes by, and when you eventually sell, you will probably have equity.  This may require a 2-5 year horizon, but if you love your community and have no financial or life pressures forcing you to move, it works for you.

SCENARIO 2: Our mortgage will re-set next month to a higher interest rate.

In this situation, you need to be doing some serious number-crunching.  How much will your monthly payment increase?  Do you have the income to maintain that new payment long-term?  In some cases, you may be able to negotiate with your lender to keep that re-set from happening, but work it out before it's scheduled or before you miss a payment.  If the lender won't negotiate, selling may be the answer.  Selling for less than your mortgage payoff amount will require a short sale and the Lender's approval.  

SCENARIO 3:  We are already behind on our payments and we can't catch up.

Your situation is already desperate.  Call a Realtor to discuss selling your home ASAP.  This will be a short sale and you will need to give evidence to the Lender of the financial hardship which has caused you to fall behind.  You may also try negotiations with the Lender's Loss Mitigation department to keep the house, but do it now - don't wait another day. 

SCENARIO 4:  We have received a Notice of Default from the bank.

Your homeownership is hanging by a thread.  Waste no time - contact a Realtor who can explain the options of forbearance and short sale.  Time is crucial and every minute counts to prevent the pain of foreclosure.  The Notice of Default officially launches the foreclosure timetable, 90 days to auction/eviction in Arizona.  Act now to spare your family this tragedy.

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Eliminate Debt before Buying Your Home

When buying a home, you want to have your finances in a strong position.  This means demonstrating a capacity to save and to pay off debt.  Your credit report shows both your current standing on the indebtedness scale, as well as your past history of debt repayment.  Lenders consider the credit report their most important tool for evaluating your financial reliability.  To unlock the secrets about you found in your credit report, see Decoding your Credit Report.   

Eliminating debt will increase your credit score and qualify you for better interest rates when buying a home.  Your debt will be eliminated when you:  Focus your spending, assign a time frame, and envision the payback.

Focus your spending.  We all have money; we are just too relaxed and unfocused about the way we spend it.  Being decisive and even extreme in this area gets results fast.  First, calculate your monthly income.  Now list your required expenses:           

REQUIRED EXPENSES:  taxes, rent or house payment, food, gasoline, medical insurance, house insurance &  taxes, phone, debt (minimum payments or typical payments), retirement savings, emergency savings. 

You noticed some things are missing from the list, right?  Now list your non-required expenses:

NON-REQUIRED EXPENSES:  cable, internet, spa/gym membership, personal allowances, purchases other than food or gasoline, activities, restaurants; all those extras we once considered special that have now become a habit. 

The area of non-required expenses is the leading edge of possibility when it comes to debt elimination. These are the things we can live without in the short term in order to reach our goal in the long term of being debt-free in order to buy a home, or to move up to a larger home.

Focus all spending on debt reduction, channeling all resources (other than required expenses) into paying off the smallest debt.  When that is eliminated, eradicate the next smallest, then the next.  With crystal-clear focus, you can tell your money where to go, rather than wondering where it went.

Assign a timeframe:  To do an extreme financial makeover, eliminate all spending from the areas of non-required expenses for six months.  The money made available will be used to reduce the credit card debt, pay off the cars, pay off all financing, and then, when all is paid down, get aggressive about saving for the down payment on your home.  Don't use credit at all during this time; just focus on eliminating what you have already borrowed.

A serious six-month commitment to reducing debt as outlined above will take most prospective homebuyers to a qualifying level for a mortgage.  For those who want Olympic Gold clout with the lender, plan a longer timeframe of one to two years.  Longer lead time enables greater down payments and more sophisticated knowledge of the mortgage industry to avoid undesirable mortgages.  Reserving the funds for a 20% or larger down payment will enable you to avoid mortgage insurance, a required add-on expense of about $100 per month for every $100,000 of mortgage loan. 

Envision the results:  Your focused spending toward debt reduction may cause short-term pain.  Reducing our lifestyle for the life-altering purpose of home ownership is always a good thing; we just need ways to make it feel good in the short term. 

Visit a few open house events held by Realtors in the area you want to live in as you begin your debt elimination focus.  Get photos of the homes available, and place a few of these photos in strategic areas around the home; i.e. on the refrigerator, the TV, the bathroom mirror, the desk where you pay your bills.  Store all credit cards in an envelope with one of these photos attached to remind you why you are focusing all spending toward debt elimination (and to avoid using the cards when you are out and about). Attach a favorite home photo to the file folder where you keep your bills, to inspire you as you pay those buggers off. 

Speak with a lender about your income amount and your current credit score to get an indication of what size loan and interest rate you may qualify for.  Then ask, "If I had no debt and my credit score was 100 points higher, what rate would I qualify for?"  Use a mortgage calculation feature (MS Excel has one) to see the total amount of interest you will pay at the two interest rates.  The difference will be in the tens of thousands. 

Think twice, no, ten times about a no down payment loan.  By putting 20% down you have a smaller loan to begin with, and you escape the Mortgage Insurance Premium, which can be several hundreds each month, depending on the size of the loan.  Take a look at these figures on a 30 year fixed-rate mortgage at 6.50% interest for a $300,000 home:

            NO Down payment                                       20% Down Payment
            $300,000   home price                                     $300,000   home price
                         0   down                                                  60,000   down payment 20% 
            $300,000   loan                                                $240,000   loan
                  1,896   monthly payment                                  1,516   monthly payment
                     300   mortgage insurance premium                    00    no mortgage insurance
               $2,196   monthly payment                             $1,516   monthly payment

            Short-term ease = long-term struggle              short-term struggle = long-term ease

            That's a $680 per month difference with a 20% down payment.

Interest paid:  $76,527 more is paid in the "no down payment" scenario compared to the "20% down" scenario over the 30 year life of the fixed-rate loan.

Taking six months to get in top financial condition for home buying will not only enable you to get a better mortgage rate due to debt elimination, you will also have time to become more financially savvy and run the numbers on a few mortgage possibilities before being asked to sign the stack of papers with mystifying mortgage terms.

Resolve to experience all benefits of knowledge plus action.  Be a person of character who does what it takes in the short term to reach long-term success.  Focus your spending, assign a timeframe, and envision the results.  Bookmark this and email me to tell me about your success six months from now.

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