Today we are going to take a look at what comprises your credit score, and break it down in detail.

Payment history - 35%

This takes a look at how you pay your bills.  It is the largest of the credit score factors, and recent payment history is weighted the most.  A recent 30 day late can cost 50 or more points, while a 30 day late from 2 years ago will cost you much less.  Another factor that can cost you 50 or more points is being past due on an account.

Some misconceptions that people have on this payment history part of their credit report is that it is always good to pay off a collection if you are able.  If you pay off a collection that is more than 2 years old, however, this can harm your score!

In addition, derogatory accounts do not always fall off your credit report automatically after 7 years.  More often than not, they must be disputed.

Amounts owed - 30%

This factor takes a look at how you manage your debt.  Taking on new debt will temporarily decrease your score.  In addition, you should keep your balances due below 50% of the total credit line to maintain your credit score.  It is even better if you can keep these balances below 30%.

When trying to improve your score, you should not consolidate your debt into one card, it should be spread out evenly across all of your credit card accounts.  Going over your credit limit will cause a large penalty, which is another good reason to keep your debt below the 50% mark at all times.

The credit card accounts you have you should keep open.  If you close an account, you will no longer reap the benefits of that account.  In addition, if you don’t use a credit card for 3 months, that account will become unrated.  A good rule of thumb is to use your credit cards a little to maintain your credit report, even if you pay them off in full each month.

Length of history - 15%

This section touches on a point made earlier, to maintain your credit score, it is important to keep your credit cards active.  The longer your account has been active and in good standing, the better it is going to reflect in your credit score.  This is true even if the rate is terrible.  Keep the card instead of cancelling when the rate rises, but don’t carry a balance, or carry a small balance.  Use a high rate card once a month, maybe to buy gas, then pay it off in full.  It keeps the card active, and the longer the history you have with an open card, the more it helps your credit score.

Mix of credit - 10%

It used to be you could add users to your credit cards as authorized users and they would get the benefit of that trade line.  No longer is this the case, and being added as an authorized user will not give you the benefit of that trade line.

Having a mix of credit is best for this portion of your credit score.  Three to five revolving credit cards with established history is best.  In addition, the type of credit card does matter. 

Inquiries - 10%

Inquiries can affect a credit score for a full year.  These inquiries can cost between 2 and 30 points, depending on the current credit score.  Remember, pre-approved credit card offers are not really pre-approved, if you sign up for 20 of these pre-approved credit card offers, don’t be surprised if you find your credit has been pulled 20 times.

Just knowing what makes up a credit score can really help many people manage their credit.  The first step in managing your credit is knowing what is on your report.  Order a report today, or get a free report online.  There is a link at the top of the sidebar to the right for one company that can provide help in this matter.  In addition, you can take a look at our post on how to read your credit report to help you find the information you should be looking at.

Once you know what is on your report, verify the data being reported.  Make sure it is accurate.  If you find inaccurate information, dispute it by sending letters of dispute to the credit bureaus.  You can read our article on disputing credit report errors for more information on how to do this.

By taking control of your credit score, you can position yourself well for the future.  Good luck!

Many banks and institutions have tightened up their standards.  The debt coverage ratio required has gone up, and values have dropped as vacancies have increased and rents, in general, have slid.  In addition, the cap rate used to value these properties is climbing.

All of these issues taken together makes small commercial loans more difficult than ever to obtain.  In these financial times, one option that could make sense is working with hard money to secure your small commercial loans. 

There is still capital available through hard money lenders, and although the valueation of the property is essential in the underwriting of small commercial loans, the strict debt coverage ratios that many institutions are imposing on borrowers are not.  Where a bank may require a DCR of 1.25 or better, many hard money lenders will make their small commercial loans with a DCR of 1, sometimes less if there is an exit strategy and the loan is needed only for bridge purposes.

 In addition, working with private investors can allow for greater flexibility and more creative opotions for your small commercial loans.  One example of this is the ability to cross collatarlize other property.  By bringing additional properties to the table, often times borrowers are able to overcome value issues of the subject property.

You can learn more online about commercial loans, or you can contact me directly today.  My name is Chris Goulart, and I can be reached at 877 462 3422.  I am happy to answer any questions you may have regarding small commercial loans, and can talk with you about your options, whether through hard money or institutional lending sources.

If you are going to attempt a loan modification on your own, it is important to document everything as you proceed.  A simple call log sheet can go a long ways if you need to reference something you were told months ago.  It can help keep you organized, and also allows you to reference what you have been told without having to second guess yourself.  In addition, if your home does go to foreclosure, it can document all of your efforts to negotiate with your lender.  You will most likely be talking with a different person every phone call, having a record of what you discuss with who is very important.

You should be talking with someone from the loss mitigation department at least once a week if you are attempting a loan modification.  Each and every time you should document the date and time of the call, who you spoke with, the details of what you discussed and what instructions you were given.

For example, if I called in on December 1 at 3pm and spoke with Cathy, who told me that my file was being reviewed by a negotiator, but I needed to send in updated financials, those are the notes I would make in my call log.  You can make a call log pretty easily.  It does not have to be fancy, feel free to download and use my Sample Call Log. I have uploaded a sample in PDF format that you can download and print out.  Whether you use this form, or simply write the information down on a blank sheet of paper, be sure to keep a call log.

Check back in, I will be posting more forms to use and information to help those seeking a loan modification.

Sample Hardship Letter

Loan Number:

Name:

Property Address:

Phone Number:

To Whom It May Concern:

We are writing this letter to address the reasons that caused us to fall behind on our mortgage and ask you to work with us on a loan modification.  We do not want to lose our home, but unfortunately circumstances outside of our control have put us in a position where we cannot make ends meet.

The reason we have become delinquent on our loan is (briefly outline the reason, keep it to a single paragraph if possible.  If you lost a job, had a drop in income or some other hardship, this is where you put it on the table. Talk about when the hardship occurred and if it is permanent or temporary).

We have resolved this situation by (reason here – lost my job, was out of work for 3 months, took a new job, etc.) and we feel that a loan modification would benefit us both. We would appreciate if you can work with us so that we may remain in our home.  We are requesting (ask for your preferred solution, rate reduction, fixed rate for 30 years, principal reduction, delinquent balance added to the loan amount, short sale, deed in lieu of, etc.).

We look forward to working with you and appreciate your time and consideration.

Sincerely,

Borrower’s Signature

Date

Co-Borrower’s Signature

Date

The focus of this post, and a few more to follow, is how you can do your own loan modification.  There are some instances when you might need the help of one of these loan modification companies, but in my opinion, most times you can accomplish the same results by working with your lender directly.  The first thing you should do is get the contact information for the loss mitigation department of your lender.  Typically you should be able to call the customer service number on your mortgage statement and ask for the phone number.  This is the department you will be talking with.

Once you have contact information for the loss mitigation department, you should gather up some pertinent information and paperwork.  You will need income information.  Your most recent paystubs if you are W-2, an up to date, signed and dated profit and loss statement if you are self employed.  You will also need a financial worksheet.  This is where you outline all your expenses for each month.  Credit card payments, mortgage, utilities, clothing, food, medical, etc.  It can be helpful to gather all of your bills so you are accurate and do not miss anything.  The final thing you want to have is a hardship letter.  This is going to be the face of your request.  In this letter you need to outline why you are asking for a loan modification, and what solution you are requesting.

This letter is important, so take a little time in putting it together.   Your lender is going to look to see if you can afford the existing loan.  If you cannot, they are going to look to see if you can afford a modified loan.  If you lost your job, have no income and are asking for a loan modification, it could be tough.  But if you lost your job and got a new one that pays less, that shows that you have income coming in, and if your loan were to be adjusted, you have the ability to make payments on the new loan.  They do not want to modify your loan, only to have you back in the same situation 6 months from now.

The second part of this letter is outlining what you are asking for.  Do you have an option arm or neg-am loan that is adjusting and just want a 30 year fixed loan?  Is your interest rate high, and would a lower rate allow you to make payments?  Do you want to short sell your home to get out from under it with no foreclosure ding?  Would you like to give your lender a deed in lieu of?  Decide what you want and ask for it.

In general, I believe you can take the bull by the horns and work with your lender on a loan modification directly.  With the proper tools and a little information, you can be successful in modifying your loan.  Take a look at this group, they have a loan modification package that gives you the information you need to do this yourself, saving thousands of dollars upfront.  In addition, they have been around for a while, and have been doing modifications for their clients even before this current downturn.  Many of the loan modification companies you might hear about have just sprung up to take advantage of the market.  You can also take a look at this posting for a bit more infromation on a  do it yourself loan modification.  Finally, check back in here as I will be writing more posts on loan modifications as time permits.  I will also be putting together some forms that can help you and some contact information for various loss mitigation departments of banks.

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Mortgage reduction loan modification attorneys can also help consumers reduce their mortgage rates and save their homes.  If you have been having trouble doing it yourself, it may be beneficial to look into some of the services available on the market.

The answer to that is a resounding no.  In the crazy lending world leading up to our current situation, there were so many liberal programs available that FHA loans became much less common, especially in the high cost housing markets such as California.  100% financing, stated income loans, 80/20 loans not requiring mortgage insurance and greatly expanded credit requirements trumped what the FHA loans could offer.  That loose lending is now in the past, and FHA loans are once again some of the best options available.

Some of the advantages that FHA loans offer have to do with down payment requirements and allowable seller contributions.  Most conforming loans today are requiring 10% down.  FHA loans can require as little as 3% down, with legislation in the works that can potentially reduce that to 1.5% down (HR 1852, I’ll be keeping tabs on that bill).  Additionally, FHA loans allow up to 6% seller contributions to closing costs.  Most conventional loans cap out at 3% these days. 

Another big plus is gift down payments.  Conventional loans typically are not going to allow 100% of the down payment to be gift funds (unless you are putting at least 20% down).  FHA loans, on the other hand, do allow gift money to be used as the full down payment.  Another upside to FHA loans is that they are offering the maximum financing by guidelines even in distressed markets.  Most conventional loans are reducing the maximum financing allowed by 5% in distressed markets these days.