When dealing with your credit, the best approach is to head off problems before they occur.  If you are having problems paying your bills, contact your creditors immediately and try to work out a modified payment plan with them that reduces your payments to a more manageable level.  Don’t wait until your account has been turned over to a debt collector.

If you have already incurred credit problems, here are some tips for resolving those problems:

• Be skeptical of businesses that offer instant solutions to credit problems -- there aren’t any.
• While you have the right to perform many, if not all, of the same approaches to resolving credit issues as credit repair companies, understand that it will take time and diligence to fix credit reporting errors.
• Be sure to keep all your original documents, especially receipts, sales slips, and billing statements.  You will need them if you dispute a credit bill or report.  Send copies only -- never send the original receipt.  It often takes more than one letter to correct a problem.
• In order to dispute a credit report, bill or credit denial, write to the appropriate company and send your letter “Return Receipt Requested”.
• If you are disputing a billing error, include your name, account number, the dollar amount in question, and the reason you believe the bill is wrong.
• If you are in doubt about the validity of a charge, in writing, request written verification of the debt. .

You should try to create a workable budget and stick to it, work out a repayment plan with your creditors, and keep track of mounting bills.  If it’s apparent you can’t handle your bills on your own, consider contacting a credit counseling organization.  Many such organizations are nonprofit and work with you to help resolve your financial problems.  Unfortunately, not all are reputable.  For example, just because an organization claims “nonprofit” status, there’s no guarantee that its services are free, affordable, or even legitimate.  In fact, some credit counseling organizations charge extremely high fees, or hide their fees by pressuring consumers to make “voluntary” contributions that can cause even more debt and credit issues.

Most credit counselors offer services through local offices, the Internet, or on the telephone.  If possible, find an organization that offers in-person counseling.  Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension System (https://www.csrees.usda.gov/financialsecurity.cfm) operate nonprofit credit counseling programs.  Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.

Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops.  Their counselors are certified and trained in the areas of consumer credit, money and debt management, and budgeting.  Counselors discuss your entire financial situation with you, and can help you develop a personalized plan to help resolve your money problems.  An initial counseling session typically lasts an hour, with an offer of follow-up sessions.

Regardless of whether or not you are planning to make a major purchase (home, vehicle, home furnishings, etc.) in the immediate future, it is advisable to keep your credit score as high as possible.  Although there are sometimes ways in which you can obtain your credit score without incurring a charge, in general, obtaining your actual score costs something in the neighborhood of $10.  All consumers are eligible however, to obtain one free credit report (less the credit scores) from each of the nationwide consumer credit reporting companies (Equifax, Experian, and TransUnion) every 12 months.

How to obtain a copy of your credit report
A copy of your credit report may be ordered at https://www.annualcreditreport.com/ or by calling 1-877-FACTACT (1-877-322-8228).  If you prefer to write, a request form is available at https://www.annualcreditreport.com/.

Information included in your credit report

• Your name, current and previous addresses, phone number, Social Security number, date of birth, and current and previous employers. Your spouse’s name may appear on your copy of the credit report, but will not appear on copies provided to others.
• Federal district bankruptcy records and state and county court records of tax liens and monetary judgments.  This information comes from public records.
• Specific information about each account, such as the date opened, credit limit or loan amount, balance, monthly payment and payment pattern during the past several years. This information comes from companies with whom you do business.
• The names, and often the addresses, of anyone who has recently obtained a copy of your credit report.  This information comes from the credit reporting company.
• Statements of dispute, which allow both consumers and creditors to report their version of the factual history of an account. Statements of dispute are added after a consumer officially disputes the status of an account, the account has been reinvestigated, and the consumer and creditor cannot agree about the account status. Both the consumer’s and creditor’s statements of the account status will appear on the credit report.
• Rental payment history from property management companies that report their information to the credit reporting company (or companies) that report rental payment history.

After receiving your credit report, you should review it very carefully, and correct any errors which may adversely affect your score.  You may dispute inaccurate or incomplete information online or call the telephone number on your credit report for assistance.  It is important to be specific by including the account number of any item you feel is in error or incomplete and explaining in detail exactly why you feel it is inaccurate.   Investigations of disputed items can take up to 30 to 45 days, so it is important to ensure that your credit report is always as accurate as possible.

How long does information remain on your credit report?

• Missed payments and most public record items remain on your credit report for up to seven years, with the exception of bankruptcies and unpaid tax liens.
• Chapter 7, 11 and 12 bankruptcies remain for 10 years, and unpaid tax liens remain for up to 10 years.
• Active positive information may remain on your credit report indefinitely.
• Requests for your credit history remain on your credit report for up to two years.

Summary
It is crucial that you understand all of the factors which can affect your credit report and credit score, and exercise continued diligence to keep your credit report accurate, in order to maximize the effect of those factors which are positive influences while minimizing the effect of those factors which are negative influences.

 

Many people have been hurt by the economy over the past few years.  Most have had their credit damaged and many have had to declare bankruptcy, do a short sale of their home, a foreclosure, pre-foreclosure sale, or a deed in lieu of foreclosure.

The FHA realizes that, sometimes, events affecting credit may be beyond your control, and that credit histories don't always reflect a person's true ability or willingness to pay on a mortgage.  If you are one of these people who used to have good credit but perhaps lost a job and/or had health issues which resulted in loss of a home or damaged credit, but have been back on your feet for at least 12 months, the Federal Housing Administration (FHA) "Back To Work" program may allow you to purchase a new home, as early as 12 months after the derogatory event(s).

On August 15, 2013, the Federal Housing Administration moved to relax its guidelines for borrowers who "experienced periods of financial difficulty due to extenuating circumstances".  Termed the "Back To Work - Extenuating Circumstances Program", the FHA has removed the familiar waiting periods that typically followed a derogatory credit event.  Effective for FHA Case Numbers assigned on or after August 15, 2013, borrowers who have recently experienced any of the following financial difficulties as a result of any qualifying extenuating circumstance may be approved for an FHA-insured mortgage:

• Pre-foreclosure sale
• Short sale
• Deed-in-lieu (a deed instrument in which the borrower conveys all interest in a real property to the lender to satisfy a loan that is in default to avoid foreclosure)
• Foreclosure
• Delinquency
• Collection and Judgment
• Chapter 7 Bankruptcy
• Chapter 13 Bankruptcy
• Loan Modification
• Forbearance Agreement (where the lender delays his right to exercise foreclosure if the borrower can catch up to his payment schedule over an agreed time period)

The program follows standard FHA mortgage guidelines.  You still have to at least meet the minimum requirements for credit scores, debt-to-income ratios, and other qualifications for regular FHA loans.  Most lenders require a credit score above 640, and credit scores below 500 are not allowed.  The FHA doesn't change mortgage rates based on credit score.  Also, there is no premium on interest rate, nor are there additional fees to pay at closing under the FHA "Back To Work" program.

In order to be eligible for the program you must be able to document that there was a loss of a job or some other "economic event" that occurred to cause a significant reduction in income due to circumstances outside your control.  You must prove that your household income declined by 20% or more for a period of at least 6 months, which coincided with the above "economic event".  In addition, you must be able to document that you have recovered from that event and are financially ready to purchase a home.  The program can be used by both first-time and repeat home buyers, as well as for FHA 203k construction loans.

In other words, if you ended up having to short sale your home, had your home foreclosed on or even filed bankruptcy and 12 months have now passed and you have a new steady source of income and are making all other payments on time right now, then you may eligible to purchase a new home, using an FHA-insured mortgage.

In addition, there will be a counseling requirement for all new potential homeowners who would like to use this program, adding another layer of support to ensure that someone is truly ready to purchase after a past derogatory financial event.  The counseling session, which typically lasts about one hour, can be taken in-person, over the telephone, or via the internet.

While accurate at the time of this writing, it is advised that the borrower, if considering purchasing or refinancing a home, verify that the information provided herein is still correct by contacting a licensed mortgage professional, in order to discuss this or any other program and to get fully pre-qualified.  The FHA "Back To Work" program ends September 30, 2016.

Although FHA loan originations have recently declined, HUD issued Mortgagee Letter 2013-24 on August 15, tightening (with the stated purpose of clarifying and amending previous guidance) FHA borrower restrictions effective with all case numbers assigned on or after October 15, 2013.  This guidance applies to all FHA programs with the exception of non-credit qualifying streamline refinances and the Home Equity Conversion Mortgage.

FHA raised upfront and monthly mortgage insurance premiums (and made monthly MIP effective for the life of the loan) earlier this year, leaving FHA loans far less desirable for many buyers.  These new guidelines will likely most affect buyers with credit issues, i.e., those least likely to qualify for loans outside the FHA program.

FHA has declared that collections and judgments may indicate a borrower’s disregard for credit obligations and must be considered in the creditworthiness analysis. The guidance below applies to loans with collection accounts and all judgments. Medical collections and charge off accounts are excluded from this guidance and do not require resolution.

Applicable to Loans Run Through TOTAL Mortgage Scorecard: 

TOTAL Mortgage Scorecard "Accept/Approve"

There are no documentation or letter of explanation requirements for loans with collection accounts or judgments run through TOTAL Mortgage Scorecard receiving an “Accept/Approve”, despite the presence of collection accounts or judgments. These accounts have been already taken into consideration in the borrower’s credit score. If TOTAL Mortgage Scorecard generates a “Refer,” the lender must manually underwrite the loan in accordance with the guidance applicable to manually underwritten loans with collection accounts and judgments.

Collections

FHA does not necessarily require collection accounts to be paid off in full as a condition of mortgage approval; however, FHA does recognize that collection efforts by the creditor for unpaid collections could affect the borrower’s ability to repay the mortgage. To mitigate this risk, FHA is requiring a "Capacity Analysis", as detailed below, for loan applicants having collection accounts with a cumulative balance equal to or greater than $2,000, as described below.

Unless excluded under state law, collection accounts of a non-purchasing spouse in a community property state are included in the cumulative balance.

"Capacity Analysis" includes any of the following actions:

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• At the time of or prior to closing, payment in full of the collection account (verification of acceptable source of funds required).

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• The borrower makes payment arrangements with the creditor. If the borrower has entered into a payment arrangement with the creditor, a credit report or letter from the creditor verifying the monthly payment is required. The monthly payment must be included in the borrower’s debt-to-income ratio, which could potentially prevent some borrowers from qualifying for the loan.

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• If evidence of a payment arrangement is not available, the lender must calculate the monthly payment using 5% of the outstanding balance of each collection, and include the monthly payment in the borrower’s debt-to-income ratio, which could potentially prevent some borrowers from qualifying for the loan.

Regardless of the Accept/Approve/Refer recommendation by TOTAL Mortgage Scorecard, the lender must include the payment amount in the calculation of the borrower’s debt-to-income ratio.

Judgments

FHA requires judgments to be paid off before the mortgage loan is eligible for FHA insurance.  An exception to the payoff of a court ordered judgment may be made if the borrower has an agreement with the creditor to make regular and timely payments. The borrower must provide a copy of the agreement and evidence that payments were made on time in accordance with the agreement, and a minimum of three months of scheduled payments have been made prior to credit approval.

Borrowers are not allowed to prepay scheduled payments in order to meet the required minimum of three months of payments. Furthermore, lenders are instructed to include the payment amount in the agreement in the calculation of the borrower’s debt-to-income ratio.

FHA requires judgments of a non-purchasing spouse in a community property state to be paid in full, or meet the exception guidance for judgments above, unless excluded by state law.

Applicable to Manually Underwritten Loans:

Guidelines for loans underwritten manually are even more stringent, requiring the lender to document reasons for approving a mortgage when the borrower has collection accounts or judgments.  The borrower must provide a letter of explanation with supporting documentation for each outstanding collection account and judgment. The explanation and supporting documentation must be consistent with other credit information in the file.

Regardless of the amount of outstanding collection accounts or judgments, the lender must determine if each collection account or judgment was as a result of:

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• The borrower’s disregard for financial obligations;

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• The borrower’s inability to manage debt; or

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• Extenuating circumstances.

Minimum payments must still be added to debt ratios, whether the charge offs/collections total $2000 or not.

As a result of these continued guideline changes by HUD, many FHA borrowers, particularly those with lower credit scores and higher debt ratios, will have more difficulty in qualifying for a loan.  Some will seek alternative means of financing, such as Fannie Mae's program requiring a minimum down payment of 5%.  It is suggested that borrowers examine their credit reports carefully and do whatever is necessary to remove any derogatory information that is in error; in addition, borrowers should obtain pre-approval letters as soon as possible to avoid potential delays during the loan process.

While accurate at the time of this writing, it is advised that the borrower, if considering purchasing or refinancing a home, verify that the information provided herein is still current by contacting a licensed mortgage professional, in order to discuss this or any other program, and to get fully pre-qualified.

There are potential positives in disputing accounts. For example disputing a credit account that is incorrectly reporting negative information and successfully removing that from your credit account will typically boost FICO scores. However the dispute must work through the process in order to remove the negative information and this could potentially delay the loan process.

Another key consideration is to fully understand how the dispute process impacts your FICO scores while the account(s) in question is in dispute. The Fair Credit Reporting Act requires the reporting agencies to show disputed accounts as being “in dispute.” The agencies do this by attaching a special code to the disputed item(s) which triggers the FICO scoring mechanism to disregard both the debt related measurement and payment history.

Why is this so important? Let’s say you have disputed a situation in which a credit card account is near the maximum credit line and has previous late payments. The FICO score would normally decrease for both the high proportion of credit used and the derogatory aspect of the credit. By ignoring these factors a person’s FICO score would likely report higher than if that dispute was removed.

The reality is a lot of people will dispute accounts that are reporting correctly in hopes the creditor removes or changes the account history. Lenders understand this and will typically require borrowers to address the dispute(s) in an attempt to ascertain a correct FICO score. As FICO scores are included in many loan approval facets such as approvability, interest rate determination, mortgage insurance costs, etc., it is critical for the lender to work with a correct FICO score.

It is also critical to understand that if you have disputed items on your credit report your credit score is likely to be impacted and it could very well be lower than it otherwise would have been without the dispute once disputes have been removed or resolved. It is critical to work with your loan originator to handle potential dispute issues as early as possible in the loan process.

Following are examples of verbiage concerning underwriting guidelines:

Fannie Mae*

When Desktop Underwriting (DU) issues a message stating that DU identified a disputed trade line(s) and that trade line(s) was not included in the credit risk assessment, the lender must confirm the accuracy of disputed trade line(s) reported on the borrower's credit report.  If it is determined that the disputed trade line information is accurate, lenders must ensure the disputed trade line(s) are considered in the credit risk assessment by either obtaining a new credit report with the trade line(s) no longer reported as disputed and resubmitting the loan case file to DU, or manually underwriting the loan.

If DU does not issue the disputed trade line message, the lender is not required to further investigate the disputed trade line(s) on the credit report, obtain an updated credit report (with the undisputed trade line information), or manually underwrite the loan.

However, the lender is required to ensure that the payment for the trade line(s), if any, is included in the total expense ratio if the account does belong to the borrower.

https://www.fanniemae.com/content/guide/selling/b3/5.3/09.html

FHA*

The existence of potentially inaccurate information on a borrower’s credit report resulting in a dispute must be reviewed by an underwriter. Accounts that appear as disputed on the borrower’s credit report are not considered in the credit score utilized by TOTAL Mortgage Scorecard in rating the application. Therefore, FHA requires the lender to consider them in the underwriting analysis as described below.

With this Mortgagee Letter (ML), FHA is revising policy on manual downgrades for applications with disputed accounts to reflect the risk associated with derogatory and non-derogatory disputed accounts for factors such as age and size of outstanding balance.

https://portal.hud.gov/hudportal/documents/huddoc?id=13-24ml.pdf

Federal Trade Commission: Consumer Information – Disputing Errors on Credit Reports

https://www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports

*Guideline information can be found at the links above. Information was added to aid in understanding, e.g. Desktop Underwriter instead of DU. Guideline information is always subject to change.