How much house do I qualify for?

Good question. Here’s how to Pre-Qualify yourself.

***Important Note: This is here to figure out how much you qualify for ON PAPER, not necessarily what you would feel comfortable with. Don’t take on a monthly mortgage payment that is beyond your means!***

Step 1:

What do you pay now in rent (or mortgage), and what could you go up to?

Keep these numbers in mind. Remember, DON’T GO BEYOND YOUR ABILITIES!

Step 2:

Add up both borrower’s income. Ideally, any borrower’s income needs to be full-time work, unless a part-time job has been consistent for a couple years. This is TOTAL GROSS INCOME (ie: your annual salary divided by 12) and NOT what you bring home after taxes.

Step 3:

Add up both borrower’s long-term debts. These are your monthly minimum payments on debts such as: Cars, credit cards, bank loans, student loans, child support with 6 or more months of payments remaining at closing.

Step 4:

Now we calculate the MONTHLY PAYMENT that you qualify for. The “Rule of Thumb” states that you can qualify for the lesser of EITHER 33% of your gross monthly income OR 45% of your gross monthly income minus your monthly debts.

This is an estimate of the maximum monthly mortgage payment that you qualify for. If your debts are very low, you will likely be able to use the 45% calculation above.

Step 5: (RULE OF THUMB)

This is where it gets a little tougher to determine a total loan amount and purchase price. Unless you can make a pretty fancy Excel spreadsheet, the best method at this point is to use this Rule of Thumb. Take your maximum monthly payment that we just calculated and add 2 to the second digit in your monthly payment. For example, if the payment was 1,300/mo, use 1500. Write it down. Now add two zeros to the end of that number. For example, that 1500 is now 150000 or $150,000. This is a very conservative estimate and you can start looking in the $150’s range.

Step 5: (GUESS & CHECK – COMPLICATED)

The other route is complicated and requires subtracting your monthly property taxes and insurance which gives you just your monthly “principle and interest”. That part would be simple if you already knew the value of the property but that’s what we are trying to figure out!

To get around this “circular argument”, use the rule of thumb above and use that number as a property value. Then, you could adjust from there. You can assume that your taxes and insurance will total about 3% to 3.5% of your property value per year. So to use the example above:

Now we use the monthly principle and interest and divide it by the “mortgage factor” which is just a fancy number used in place of an interest rate. It is based off the table below:

Many times people unknowingly make the mistake of borrowing against an entire revolving line of credit. Has anyone ever transferred a balance to a lower interest rate credit card? How about a home equity line of credit? When we borrow the entire limit against a new line of credit we lower our credit scores. If we borrow against multiple new lines of credit we can drop our scores more than a 100 points!

One of the biggest impacts on our scores is opening new accounts. The biggest negative affect we can have on our scores is opening multiple accounts with high debt ratios. You could have two accounts with high debt ratios, one of them could be a new account and the other could be an account that is ten years old. The newer account would drop your credit score more, simply because it is a “new” account with a high debt ratio.

One of the biggest problems is that we usually open a new revolving account only when we need it. For example: we go to purchase furniture and we want to finance the purchase. Typically the creditor will approve us for the full amount of the purchase. The problem is now we have just created a new account with a terrible debt ratio of 100%! Another common mistake is to find a low interest credit card and transfer all your balances to this credit card. Once again, creating the same problem; a new account with a high balance.

The solution to this problem is simple. We must plan ahead. We should always carry more credit than we will ever need. That way once we need to make one of those new purchases we will already have the credit available to purchase the item(s).

Another way to plan would be to use a second mortgage when purchasing a home instead of using a line of credit. Instead of using a credit line, we can use a second mortgage installment loan which has less impact on our scores.

Opening revolving lines of credit and borrowing the entire or most of the amount, is a common mistake done by consumers. The best thing to do if you are going to open a new revolving account is to have little or no balance until the account has matured for one year. If we have to borrow against a new account we must make sure the debt ratio stays below 50%.

Cliff Pape
Home Buddies

A very common quote on a credit report is “Too many recent inquiries in the last 12 months”. But as you look through your report you only see a few inquiries listed. So how and why in the world is your credit report telling you that you have too many inquiries, and how is this really affecting your credit score?

It means that for consumers who have a similar credit profile as yours, that there is a maximum number of inquiries that you can have and still get the maximum points for the factor that looks at the number of inquiries on your credit report. That number will vary according to the different credit profiles that people have. If you exceed that pre-determined maximum number of inquiries for your designated profile, then you receive less than the most points possible for this particular scoring factor, and the explanation will indicate that you have “too many” inquiries.

If you are searching for new credit, then FICO can see this as a greater credit risk. This is why your credit score will count the number of inquiries. Inquiries are requests that a lender makes for your credit report or score when you apply for credit. FICO scores consider inquiries very carefully because some inquiries are not related to credit risk.

Usually, one additional credit inquiry will take less than five points off of your credit score. Six inquiries or more on your credit report can be perceived as the fact that you are eight times more likely to declare bankruptcy than people with no inquiries on their report.

Your FICO score regarding inquiries takes into account the following:

FICO scores know that people shop around more these days for credit, so they do take that into consideration and will distinguish between a search for many new credit accounts and rate shopping for one new account. FICO scores usually will distinguish between a search for a single loan and a search that you do for many new credit lines, in part by the length of time over which inquiries occur. When you need an auto or home loan, you can avoid lowering your FICO score by doing your rate shopping within a short period of time, such as 14 days. But be careful, because some research shows that opening too many credit accounts in a short period of time can increase your risk of hurting your score- especially if you don’t already have some well established accounts that provide great length of history.

Your FICO score looks at how many new accounts you have by the type of account (for example, how many newly opened credit cards you have). It also may look at how many of your accounts are new accounts. And how long since you’ve even opened any new accounts.

Inquiries remain on your credit report for two years, although FICO scores only consider inquiries from the last 12 months. It wants to know how many very recent requests that you have made for credit. FICO scores have been carefully designed to count only those inquiries that truly impact credit risk.

Many kinds of inquires are ignored completely. Your FICO score does not count an inquiry when you order your credit report and score from a credit reporting agency. It also does not count inquiries that a lender has made for your credit report or score in order to make you a “pre-approved” credit offer, or to review your account with them, even though you may see these inquiries on your credit report. Inquiries that are marked as coming from employers are not counted against you either.

Good Luck.

Barbara Partaka
Home Buddies

The following is an example dispute letter for you to use when you have a collection account on your credit report, and you are willing and able to make payment on that account. You should always try to negotiate for “pay for delete” on these types of accounts that are showing on your credit report. This “pay for delete” needs to be done with the original creditor. You may negotiate a pay for delete with the collection company, but it’s best to get it accomplished with the original creditor if you can.

For example, if the collection account on your credit report is from the “VWX” company, you need to read who the original creditor was. Maybe it was originally a debt you owed with “Ma Bell”. You would then need to be negotiating with “Ma Bell” directly and not with “VWX”.

Your credit report will list the names and addresses of all the companies listed on your credit accounts.

Never just pay the collection account without getting an agreement in writing that they will remove all credit entries related to that collection account. If you just pay the collection account without this agreement, then the collection account can/will remain on your credit report. Always get the agreement in writing before you ever pay.

When you attempt this negotiation process on your collection account, you can always suggest/offer to pay a portion of the total amount owed. If the debt is still fairly new (within a few years) be prepared to offer about 60-70% of what is owed. If the debt is older, then offer 30-40% of what is owed. There is no magical number to offer to make them accept your agreement.

Please remember that each state has its own statute of limitations on someone being able to still try to collect on a debt. If your debt has surpassed your state’s SOL on debt collection, then there is a different dispute letter for that issue. In the state of Texas, the SOL on debt collection is 4 years.

Use the sample dispute letter below as a guide for your negotiation in a “pay for delete” on your collection account. Try not to make your letter look like a form letter. Handwriting your letter is acceptable as well. Just be straight to the point, and straight forward about the amount you are willing to pay on the collection account. Be specific in your letter if you need a payment plan to pay the amount you are offering.

Do not sign your letter and do not openly admit that the debt is yours.

Good Luck.
Barbara Partaka
Home Buddies

Pay for Delete Sample Letter

(Insert Date)

(Insert Collection Company name)
(Insert Collection Company address)

Re: Account Number: (Insert Account # here)
This letter is to inform you that:
In the spirit of compromise, I am willing to pay (***INSERT THE AMOUNT/PAYMENT PLAN YOU ARE WILLING TO MAKE***) to settle this account if, and only if, you agree to immediate deletion of this account from any and all credit reporting agencies, including, but not limited to, Equifax, Experian and TransUnion. The purpose of this settlement is merely to have this item removed from my credit files. It is not to be construed as an acknowledgment of liability for this debt in any form.
If you agree to the terms and accept this agreement, certified funds for the settlement amount (***INSERT THE AMOUNT/PAYMENT PLAN YOU ARE WILLING TO MAKE***) in exchange for full deletion of ALL references regarding this account from my credit files and full satisfaction of the debt. As certified funds will be used for payment, there shall be no waiting period regarding the deletion of this account from the credit reporting agencies.
Acceptance of this agreement constitutes a legally binding, contractual agreement to delete ALL information regarding this account from the credit reporting agencies WITHIN TEN CALENDAR (10) DAYS following receipt of payment as specified above and will not discuss the terms of this settlement with anyone, except as minimally necessary to comply with the terms and conditions of this agreement. If contacted by any third party, including credit-reporting agencies, you will not acknowledge that any settlement offer was made, accepted or executed and will, in fact, deny knowledge of any such account.
If you agree to the above terms, please prepare a letter on your company letterhead explicitly agreeing to the same terms as the above settlement offer and have it signed by an authorized representative of your company. It will be implied that this letter shall constitute a legally binding contract, enforceable under the laws of the State of Texas.
Your response must be postmarked no later than 15 days from your receipt of this settlement offer or this offer will be withdrawn and I will request full validation of this alleged debt, as provided for by the Fair Debt Collection Practices Act.
Please address all correspondence regarding this account to:

(TYPE IN YOUR NAME – DO NOT SIGN!!)
(TYPE IN THE ADDRESS OF WHERE YOU WANT THEM TO RESPOND TO)

(The Revolving Account)

Many times people pay off their credit cards and close the account because they do not use it. Although this move seems to make good sense many times it will lower your credit score. We must always maintain at least one open revolving line (i.e. credit card) to maintain and/or increase our credit score.

With the Classic credit scoring model you will have “lack of recent revolving account information” if you fail to have an open revolving trade line. If you have not had an open revolving line in the past six months this will greatly raise your credit risk which will lower your score. This is because when there is no open revolving in your credit file the score model has no way to evaluate your ability to manage this type of credit.

The key with revolving is that it shows the credit scoring system our ability to manage credit. There are several ways to obtain a revolving account home; equity loan, credit card, merchant or department store account and a personal line of credit. When we maintain balances on these types of accounts it can provide depth to our credit report and raise our score because we demonstrate that we have the ability to manage credit.

So to make sure that you are not risking your credit score you should have at least one open revolving account. In addition, you should periodically use this account and pay it off over time to show the credit scoring system that you understand how to manage credit. If you do only have one open revolving account you should make sure that the card reports to all three credit bureaus so that you are sure you are building all three credit scores with the account.

Cliff Pape
Home-Buddies

About 90% of the lenders all over the world use credit scores from one organization. That company is Fair Isaac Corporation or better known as FICO.

It’s a good idea for you to get your credit scores from the FICO website, because your FICO scores are the ones that most lenders will use to base their acceptance of your credit application. You need to get a true picture of what is going on with your credit scores and what is causing your credit score to be as it is.

Always be careful of the scam sites, anything with conflicting information, and the credit bureaus offering their own version of the credit score. There are many different credit scoring systems. There are numerous websites that offer your report, be sure that they also offer your true FICO scores for all three credit bureaus. At myFICO.com, you can purchase just one score or all three scores. This might end up being more than you want to pay, but it is the “truest” way of figuring out your true, accurate credit score.

The major bureaus also have their own version of credit scores. Let’s look at those now.

Experian and their affiliates (FreeCreditReport.com) may sometimes use a PLUS score or the FICO version 2 scoring system.

Equifax actually uses FICO scores most of the time or the BEACON. If you order a credit report through Equifax, like their 3-in-1 report, you’re less likely to notice large variations elsewhere because they use the FICO score.

TransUnion usually uses the FICO classic scoring system. There seem to be a few variations and some are closer to FICO scores than others.

AnnualCreditReport.com gives you a VantageScore which is different from the PLUS and the FICO score. The PLUS score is pretty similar to your FICO score. The VantageScore can be around 100 points off. The reason for this is because of the ranges and the formulas used to find your place in that range. VantageScores go from 501 to 990 where a FICO or PLUS score goes from 300 to 850.

And so there it is. Now you know some of the credit bureau secrets about your credit scores. You should always try to continue to keep yourself educated about your credit score and about the credit system.

Good luck.
Barbara Partaka
Home Buddies

Did you know that that about 80% of credit reports have some type of errors in them? Different types of errors can have a huge impact on lowering your score. Not to mention that those errors can be making you pay more for the loans you are getting.

Some of these errors are as serious as some accounts not even belonging to you, or even false delinquencies.

Here are some common errors on credit reports:

41% of credit reports have the wrong personal demographic information which includes it being outdated, or misspelled.

20% of credit reports ARE MISSING MAJOR MORTGAGE LOAN INFORMATION. Also other loan information that proves you are credit worthy.

26% of credit reports have accounts that are listed incorrectly as open or “closed by credit grantor.” If your credit report shows an account that says “closed by grantor” it looks like you are the one who did something wrong, so it can lower your score.

Wow, so what are you supposed to do now? Get a copy of your credit report! Start looking through it completely. Yes, this means look at the identifying information like your name, address, date of birth, social security number, etc.

Be sure that you look at each and every one of the accounts that are listed from beginning to end. Make sure that all the information is reported correctly for the account. Especially the credit limits, current balances, date it was opened, date of the last activity, etc.

Don’t forget to pay attention to the inquiries section and see which companies have been looking at your credit report. If there are companies that you don’t remember applying for credit with you will need to contact those companies as soon as possible to make sure you have not become a victim of identity theft.

After you have completely reviewed your credit report, if you have found any errors at all, you do have a few options on how to correct those errors. You can remove them yourself with dispute letters to the appropriate creditors or credit bureaus, or hire a company to guide you with this, or you may even hire an attorney.

Next week I’ll tell you the third credit secret of the credit bureaus.

Barbara Partaka
Home Buddies

Many people mistakenly allow themselves to fall into the trap of having a joint account. Usually this occurs because a couple believes that they can qualify more easily if they apply for a car, home etc. jointly, as opposed to applying separately. Although this may be the case, it is always better to first attempt to apply for a loan in one person’s name because jointly applying also doubles the liability to both of you.

Keep Accounts Separate

It is essential to keep accounts separate in order to protect your credit score. For example, if only you and not your significant other is on the car note and you miss a payment then only one of you will have your credit score affected. This ensures that if you fall on hard times that one of you will still have good credit to make necessary purchases.

When to have Joint Accounts

The only time you should both be on any type of liability is if one of you cannot qualify individually. For example, in buying a home, mortgage companies will require a sufficient amount of income to cover the future mortgage. Many times it will require the household income to cover the mortgage and in such a case they likely would require that both you and your significant other be on the loan.

So don’t fall into the trap of risking too much credit for any loan. Always apply first as an individual. If you cannot qualify, then and only then, should you bring in your significant other’s credit to secure the loan and vice versa.

Cliff Pape
Home Buddies

National Credit Cards and Bank Credit Cards

National credit cards and Bank credit cards are treated as respectable credit cards by the credit scoring system. These types of companies only lend to high credit worthy individuals. These national credit card companies include credit cards such as Discover and American Express. Another quality credit card would be a credit card issued by a national bank such as Bank of America or Wells Fargo. National credit cards and national bank credit cards are the best cards for your credit file/report. These types of credit cards are the ones you want to establish and keep open forever! The reason why you want to never close these types of accounts is because once they have been open for over seven years they become one of the key factors that help you achieve an 800 credit score.

Financial and Finance Company Credit Cards

There are other types of credit card companies that are called “easy lenders”. These types of lenders will lend to riskier customers. You can identify these types of credit cards because they have the name finance or financial at the end of their name. The credit scoring system will penalize a person with a 700 plus credit score if they were to add one of these types of credit cards to their credit file. Therefore, these cards should only be used under very specific circumstances. For example, if you have recently filed a bankruptcy or have bad credit and can’t qualify for a national credit card then it would be necessary to start out with a financial company credit card to establish some new credit. However, once you have improved your credit score as to where you can qualify for a national and/or national bank credit card you should do so. In addition, you should close your old financial or finance company accounts. By doing this, you will put yourself on the highway toward achieving and 800 credit score!

Cliff Pape
Home Buddies

Do you understand what the credit bureaus are for? A credit bureau, also known as a Credit Reporting Agency or Consumer Reporting Agency, is mainly a central warehouse of credit and collection records, payment history and certain legal information about you the consumer and also has all this information on businesses. Equifax is the one bureau that is a publicly traded company. Experian and TransUnion are just privately held companies.

These records are sold (emphasis on sold) to credit grantors and lenders whenever a consumer or business tries to apply for credit. The three major U.S. credit bureaus are Equifax, Experian and TransUnion. Even Dun and Bradstreet Corp is considered a credit bureau that is known for reporting business credit information exclusively. And don’t ever forget about the up-and-coming Innovis.

The credit bureaus store over 1 billion consumer and business records. About 2 billion individual credit transactions are entered into those records every month. That’s a lot of information to manage correctly don’t you think?

As the credit bureaus are trying to manage all this activity, there is always a chance that a credit record will probably have errors. Remember, it has been shown that about 80% of all reports contain errors.

That’s why the U.S. Government passed the Fair Credit Reporting Act (FCRA) and the Fair and Accurate Credit Transactions Act of 2003 (FACTA). These acts set out the requirements for credit bureaus to maintain fair and accurate records, provide a way for consumers to view those records, and tell them how to respond to consumer complaints of inaccuracies.

The credit bureaus DO NOT make their money by researching your disputes. Researching your disputes costs them time, money, and resources to investigate them. Remember, they make most of their money by selling information to lenders, insurance companies, utility companies, credit card issuing banks, and even employers.

Here is the first credit secret of the credit bureaus:

The Credit Bureau Reports – 92 Scores

You can have up to 92 different scores at any given time. Reports and scores are created “on the fly” whenever they are requested by you, a creditor, or a lender. There can be up to 23 different scores for each of the credit bureaus. Yes, this does include Innovis.

Your credit score will vary depending on who pulls the report and which profile has been applied to you. And usually the score you see if you request it from a major reporting bureau or an on-line service WILL be different – and usually higher than the score you get from a mortgage broker.

The reason for this is that when you pull a report from an online service for example, there are usually about 18 elements of identification that have to match exactly. You are more likely to get accurate information if the majority of information matches up.

When the credit bureaus pull a report for a lender, only about 9 elements have to match. So, more errors and erroneous information will appear on your score – which can lower your credit score.

It has been speculated that the credit bureaus provide these different and lower scores because if they are reporting lower scores to lenders, then they feel that they would be less likely to be sued by lenders if the borrower defaults on the loan.

Wow. So are they protecting you? Or just protecting themselves?

Watch next week for the second credit secret of the credit bureaus.

Barbara Partaka
Home Buddies