Credit Repair and Building!

Lee’s notes: I get several emails a day about different things. This one is from my real estate investing mentor, so i figured I would repost it. Good info, albeit it may take a couple of readings to fully understand what is being said. I know it did for me.. hehe

Credit Repair and Building

Let’s face it:  the current model of credit scoring in America sucks.  But there isn’t anything you or I can do about it.  So, if you can’t beat ‘em, join ‘em.  If you want to know the insider secrets to credit scores, repair and starting from scratch, read on.  I’ve got the golden ticket…

Most folks know there are three major credit bureaus; Experian, Equifax and Trans Union.  Welcome the fourth: Innovis.  Every time we turn around, someone else is gathering information about us.  It seems there isn’t much we can do about it.  In order to determine if we should loan something of value to someone, there does need to be a mechanism whereby we can check up on someone.  Maybe get testimonials from someone else they’ve done business with.  Like it or not, that’s what we’ve got with the credit bureaus.  The problem is they don’t seem really interested in the impact that their business model has on the average Joe.  I’m here to help you change that.

As a Real Estate Investor, credit scores affect you on all sides.  Dealing with your own credit score allows you to leverage your good credit to buy properties with none of your own money.  In essence this allows you an infinite ROI, or Return on Investment.  Dealing with your Buyer’s credit, whether on retail sale after a rehab, or perhaps you got a free house subject to and are cashing out a Tenant/Buyer, is one of the best time investments you can make.  It is common to make $10,000 or $20,000 or more when the deal closes.  Who wants a few numbers on a credit score to stand between them and a big payday?

The Quick and Dirty on Credit Scores

The Credit Crunch and Mortgage Crisis have really affected credit scores and mortgages.  The sub prime loan market has pretty much ceased to exist.  Currently, even FHA loans really want a minimum credit score of 620, although there are a limited number of lenders who will underwrite your loan manually and take credit scores as low as 550.  Conventional mortgages still want your scores above 660 or 680.  There are still no down payment and small down payment loans.  The USDA has loans for areas considered rural that finance 100% of the purchase price.  FHA will still do 97% loans and conventional programs with 5% down are still out there.  The lenders are mitigating their risk with PMI, or Private Mortgage Insurance.  If you only put 5% down, expect to pay a significantly higher PMI premium if your credit score is lower.  You will be rewarded for your high credit scores with lower PMI requirements.

Bad news on investment property is that even with perfect credit, lenders are looking for 20% down or more on mortgages for investment properties.  Private money is more important now than ever.  Another major change in July 2008 was the reduction of the number of loans a person could have in their name and still be eligible for Fannie Mae and Freddie Mac loans.  Previously, an individual could have up to 10 loans on properties; you could own more than 10 but only 10 could be financed.  It was reduced to 4 financed properties in July 2008.  Portfolio lenders, such as small banks that hold their own paper and some credit unions, were not affected by this rule.  Their own internal guidelines will apply.  It is only when loans are sold off to Fannie and Freddie, which most are, that this comes into play.  Explore the use of “Credit Partners” to overcome this obstacle.

So, how do you move up the credit ladder and make money along the way?  With some education, your score will go up and stay up, unlike most people whose scores move up and down like the tides.  First, know what the Credit Bureaus must do.  They must pay attention to you, the consumer, because Congress said so.  Go to the Federal Trade Commission website to download the full text of the Fair Credit Reporting Act, The Fair Debt Collections Practices Act and the Credit Repair Organizations Act.  Let’s cover each briefly.

The Fair Credit Reporting Act is your biggest friend when it comes to credit repair.  It governs  CRAs, or Consumer Reporting Agencies as well as OCs, or Original Creditors.  Pay attention!  That distinction is important, because other Consumer Reporting Agencies include the MIB.  The Medical Information Bureau gathers information on lots of people, but is outside the scope of this article, other than to mention that it is a CRA and therefore covered by the FCRA.  Most people are aware that the FCRA exists and forces the CRAs to make sure that the information they are selling is accurate.  Most don’t know how to use that information to their advantage.

Common knowledge says that you can write the CRAs a letter and dispute information, which is then “investigated” within 30 days.  The problem is that the investigation is inadequate, often leading to a simple form letter where the CRA responds to your dispute with a simple message: your information has been updated.  I am often able to confirm that an investigation could not possibly have occurred, because I have hard evidence that the truth is exactly the opposite of the “update.”

The next step in your arsenal is Method of Verification.  See, if the CRA has really investigated your dispute, they would have records of how the investigation proceeded and the person or entity with whom the information was verified.  They must provide this information upon demand within 15 days.  Therefore, when they come back with their bogus update, you demand the method they used to verify and force them to prove where the information came from.  Always specifically ask for the name of the person they verified with, including address and telephone so that you can follow up yourself.  Often, this gets information deleted immediately.

Another big way that your credit is hurt is by the DLA, or Date of Last Activity.  Imagine your Tenant/Buyer is ready to qualify for a mortgage, with you being the happy recipient of a $20,000 check.  In preparation for the loan, the idiot mortgage broker encourages your borrower to pay off every collection and send the receipts for those collections into the three bureaus.  Now, before, they had 5 collections ranging in age (according to the DLA) from 13 to 63 months.  Presto!  Now they have 5 collections that are a month old, their score has dropped 72 points and your check is just a figment of your imagination.  Why?

The scoring model is based on many factors, including what I call width and depth.  Width is the number of accounts, depth is how old they are.  So, if you suddenly have 5 new collections (which is how they are read, since they are now 30 days old instead of 63 months old)  the score tanks.  The better option is to pay the collections off only if required by the underwriter, or at least wait to update the paid status with the bureaus until after closing.  In addition, if you aren’t under the gun timewise, negotiate a PFD.  Translated Pay For Delete, this is when the creditor agrees to delete the item from your file in exchange for payment. Tip: Always get this in writing, creditors often renege on these agreement.  Another tip: if your account is being paid by a third party (Bank of Mom?) whose contingency requires deletion to front the money, you can blame the need to delete on someone else.  Defer to a Higher Authority.  I use it in my REI negotiations all the time.

What you don’t say is often more important than what you do say, so be careful when drafting letters to avoid “telling” on yourself.  This brings us to the Fair Debt Collections Practices Act, or FDCPA.  This Act deals with third party collectors.  In contrast, the FCRA is for original creditors.  The FDCPA is great; you can really use it to hammer on CAs, or Collection Agencies.  There is a really great technique we use called Debt Validation.  This is a technique for requesting validation from a CA, not just them verifying that you owe the debt.  Two completely different animals.

It works best when executed within the first thirty days of your first contact from the CA.  You may have seen their “mini-miranda”- you must dispute this debt within 30 days, etc… found on most collection notices.  What you didn’t know, is that if you request validation (I have a system for doing so) and the collection agencies don’t respond at all or don’t respond properly, you get to hit them with penalties under the FDCPA.  Each time they mess up, it’s $1,000 per violation.  They could literally owe you more in penalties than you owed on the account.  Take that, you sinister CAs!

This innovative technique, which we will profile in a future issue, allows for even more penalties depending upon your home state.  In some states, Texas, for example, ignoring the validation letter you send within 30 days has grave consequences. A $1,000 fine just for failing to respond to your letter can be levied when you know your rights.  In other states, Indiana is one of them, the state laws merely mirror the federal, giving you no extra rights or protection. Therefore, a creditor can simply ignore your letter with only federal penalties applied.

Finally, you should be familiar with the CROA, or Credit Repair Organizations Act.  As an investor, you may come across companies that GUARANTEE to remove negative items from someone’s credit report.  Run! It is actually against the law, the CROA, to guarantee that you can remove negative items.  Negative items must go through the dispute process and the deletion of those items rests with the CRAs.  However, a credit repair organization, having more experience, may have a better chance of getting a deletion than the average consumer who has not taken the time to educate themselves.

The bottom line is this:  credit scores are here to stay.  Keep educating yourself so that when the bureaus zig, you can zag.  Creative Real Estate Investors are always on the cutting edge, so I will leave you with some resources for your journey.

Resources:   www.ftc.gov www.moneytogo.net

www.myfico.com www.creditcoachinabox.com

Lucy Brenton has been a mortgage broker since 1996.  She is the author of Credit Coach in a Box_ and is a featured speaker at many REI events.  Lucy and her husband, Dorn, are active real estate investors engaged in the never ending adventure that accompanies their eight children.  You may contact Lucy through her website at www.moneytogo.net