I'm dealing with 2 clients currently with almost identical situations with thier credit.

Both have good incomes, one can put 10% or 20% down on a home. Thier middle credit score is around 500 or so (500-520).

In both situations, they have around $10,000 that are due collection agencies. Does anyone have either a recomendation of a lender, or some sort of counseling company i can set them up with to repair their credit?

Thanks!

Brandon:
I have a flyer on my desk from a company called Sub 500 Mortgage, Inc. I have never done business with them, but you may want to try and run your client's scenario by them and to find out if they are licensed in your state. The flyer came from jwillis@sub500mortgage.com. Phone contact info is 866 500 3388 x 6820.

The scenario would be doable if the property were in Cali, but I think the problem they'll run into is the amt of open collections; most subprime lenders will have a maximum amt the borrowers can have in open collections.

Personally I don't recommend credit counseling companies, there is not a danged thing those companies can do that the consumer can't do themselves for free.

What they need to watch out for is the age of the collection accts paying the wrong ones can actually lower their scores.

Best bet would be to find them a *reputable* mortgage broker in their area who will work w/them on fixing their credit.

Yeah, Brandon. I agree wholeheartedly with Loan Diva's posting regarding the credit counseling companies. They are virtually useless and will only train the client in how to write letters, which they can do themselves. Your client can also try and negotiate for a discount on the collection accounts payoff amount by confirming that they have the CASH to pay off right now with wired funds. This affirmative "can do right now" action can earn them deep payoff discounts. All it takes is persistency, determination, and written payoff confirmation from the collectors to improve their credit rating.

But they do need to be careful about paying off older accts, the risk is bringing them back to recent activity. The longer a derogatory sits on the report, the less significant it becomes. So sometimes it's best to pay some accts after escrow closes.

This is why a good mortgage broker can be so much help, she can sit down w/the clients and figure out what can be easily cleaned up, esp considering something like 79% of all credit reports have errors on them.

There is also a process called Rapid Rescoring in which if the derogs are cleaned up, the client can get a quick rescore w/o waiting the 30 or so days it takes for new info to hit the bureaus.

It's not very commonly done b/c the potential score increase isn't usually large enough to justify the xpense, but it's an option the broker can consider.

And I wish consumers understood that there is NO legal way to remove accurate derogatories. But more often than not, the consumer will find outdated and/or incorrect info that can be removed.

It's gotten so simple, the consumer can go online to each of the 3 bureaus and start the dispute process there.

Btw, if any part of the open collections represent medical bills, that will be less of a problem. Lenders are well aware that meds can be reported multiple times and often will show up as late pays long after insurance pays them.

As the subprime market collapses, I would hope that more of us lenders will develop xpertise in the area of credit counseling to help our clients. It may take a few mos in some cases to get the client's scores up but IMO it's time well spent.

Also, do advise them not to open or close any accts until they get some expert advice on their credit situation. As a general rule it's best not to open/close anything until after escrow closes.

So why oh why is it all FTHB's buy new cars in the middle of escrow?

As mentioned earlier... have the borrower payoff some of those collection debts. Most lenders will allow $5,000 max on owed collection accounts. You need a Loan Officer that knows about the credit system and a solid idea of the scoring model. At the least, your LO should advise your client to payoff the more recent collection accounts and work backwards.

When paying down their collection accounts, it should lower their Debt-To-Income ratio. After this is accomplished, immediately do a Rapid Rescore because you normally will have 30 days from the date that credit was ran to qualify for a rescore.

P.S. Regardig medical collection accounts... it's common that there may be duplicates but the lender will want to see proof or a Supplement to show that indeed they are duplicates. My understanding is that most lenders will not allow more than $500 of medical collections.

Here's an approximate breakdown of a credit score. Hope this helps...

35% of the score is based on PAYMENT HISTORY
How recent- this the most important
How late the payment is. Negative weight is given (in this order:
30, 60 and 90 day lates)

30% of the score is based on BALANCES OF CREDIT
These are heavily weighted on revolving cards
If you have more than 50% of your limit, there is a hit
If you have more than 75% of your limit, there is a harder hit.
You earn more with smaller balances than with a zero balance

15% is based on your CREDIT HISTORY
The older the trade line, the positive weight
Ideally, they are looking for 3 – 5 trade lines
Ideally, 30 years is the perfect length of time to have a credit card
They divide the number of cards by the length of time
(Every time you open a card, it drops your score)

10% is based on the TYPE OF CREDIT
They are counting the number of trade lines in each category
A mix is best
They are keeping track of all accounts: open, closed & frequency
Installments through finance companies can hurt your credit
(This is something you have in common with late payers)

10% is based on the NUMBER OF INQUIRIES
There are parameters: it only goes back 12 months
Negative weight is given to: what kind, how often
The weaker your credit ability, the more negative impact per pull
Pulls of the same category count as one for 30 days.

Awesome post, Promised!

I do have some lenders that will overlook a lot of open collections and meds w/LOE as long as the borrower can go full doc.

I think what isn't clear to consumers is the range of options some lenders have. For ex, walk into your local bank and if the borrower doesn't fit into their guidelines, you're done.

Some brokers have relationships w/only a handful of lenders, there is a lender here in my town who can't do anything below 620, no ifs ands nor buts.

Otoh, some of us have access to literally hundreds of programs via our relationships w/various lenders.

So the quick answer is there is never a quick answer to questions about whether a borrower can qualify for something!

Promised broke FICO down perfectly.

And to make it more confusing, FICO is only part of what a lender has to loook at, ie debt to incpme ratio; number of active tradelines; mortgage or rental history, and on it goes!

Again this is why a good mortgage broker can be so valuable.

Check if New Century will do it. They are great on collections, they don't care basically. I have a deal being submitted with them now and there is all kinds of collections and a 502 mid and with cash out @85% LTV, I am getting a 8.90 40/30 Not bad. Good luck.

A borrower's debt-to-income ratio is a percentage of the applicant's monthly recurring debts divided by income. Collections are not a monthly recurring debt but a lump sum outstanding payment. Paying off collections will have no impact on the debt-to-income.



Fannie Mae guidelines allow for up to $5,000 in unpaid total collections medical or otherwise.

Here's what I'm surprised no one has suggested...why isn't the loan officer considering an FHA loan? FHA loans have no FICO score requirement. Instead it is based on "telling the story" to the underwriter. If the collection accounts went to collection over 2 years ago they are no longer considered nor required to be repaid on an FHA loan.

If this applicant were meeting with me, that's where I would start.

good luck.

Good post Ken and "Welcome"! Those requirements and guidelines that I had posted are based off of the changes that some of us are currently seeing with Subprime; especially in California. I am sure that there is a loan for this scenario somewhere but guidelines are getting tougher... even Fannie and Freddie a few days ago announced that they will tighten lending on Subprime.

I believe the reason that none of us mentioned FHA to begin with is that we aren't presented with the loan amount. As you probably know, FHA has set loan limits according to state. Either case, FHA is a good option for this client to inquire about.

The original poster was from Ohio so I figured it was more likely he was talking about deals within the FHA loan limit. Not all of us can cover the coasts
Ken

There are a lot of different lenders out there so just have to be creative. I don't recommend any credit repair counseling service because a lot of lenders won't let you buy a house while in credit counseling. i would talk to a loan officer and see how to try and get the score up. I am a loan officer and many companies will do a credit rescore with the proper documentation.

hope this helps.

Laurie
Licensed Loan Originator
1-866-375-9953

Nevermind, they just closed their doors... DAMN YOU BEAR STEARNS!!! DAMN YOU!!!

email me, i may be able to help.