The Problem
When it comes to selling real estate, one of the most difficult and frustrating situations for sellers is when market conditions make it nearly impossible to sell at the desired price point. A high initial listing price might be because the seller simply has an unrealistic idea of how their house stacks up against the competition in the area, or because the owner needs to sell for a set minimum price in order to pay off their loan against the property.
With traditional property sales methods, the only way to prevent the property from sitting on the market indefinitely is to keep dropping the price. Unfortunately, this technique doesn't always work - especially if the seller is unwilling to "discount" their house by much.
In areas flooded with homes for sale, reducing the asking price slightly will not bring the desired result. In fact, it's common that the property will continue to sit on the market without offers, alongside the multitude of other unsold properties with similarly reduced prices.
Anyone experienced in sales understands that making your product stand out from the crowd is a critical technique for success. But if there's too much competition offering the same attributes, the only logical way to attract the attention of serious buyers is to drop the price so that your property is a much better value than the competition.
In cases where the seller is too inflexible with their asking price, this is not a practical solution. Without an alternative strategy, the seller is forced to keep the house on the market for an extended period of time with an unrealistic asking price, hoping for the right buyer to come along. And as you know, that "Mr./Mrs. Right" might NEVER materialize!
The Seller Finance Solution
Property sellers who want to both obtain their desired price and close on the deal quickly should consider seller financing. Seller financing is a powerful tool to remedy real estate situations that otherwise look grim.
Many home sellers (and their real estate agents) do not see seller financing as a viable option. In actuality, seller financing can bring new attention to the listing and invite a different group of potential buyers - thereby opening up a unique, untapped market.
A large percentage of people throughout the country cannot get approved for bank funding to buy real estate because of their credit situation. Many of these people are still in the market to buy a house, however. The "credit-challenged" are often frustrated with the limitations of apartment living or being renters; as a result, many are willing to pay a higher price just for a chance to get seller financing and improve their quality of life.
A savvy property seller who recognizes this opportunity can salvage an unfavorable situation and turn it into a bonafide seller's market. By using this type of creative financing, the seller could actually end up getting more than the original asking price - without resorting to the questionable strategy of patiently waiting for the "right buyer".
Seller finance can enable homeowners to receive a favorable selling price despite bad market conditions. In addition, the real estate agent (if any) gets to close a deal and move on to other sales, while a home buyer with poor credit is able to become a home owner. It's one of those rare situations where everyone at the negotiating table gets what they want.
Paper Tigers
Many home sellers never consider seller financing because they don't understand the benefits. There are also common misconceptions that it's much too complicated to attempt to orchestrate a seller financed deal, or that there are no buyers willing to sign a private note.
Once a property seller takes the time to learn about the basic process, the advantages of offering financing instead of a lower price to sell their property become very clear. Plus, a little education about seller finance will make it apparent that drafting a secured private note is actually a very straightforward process.
The bottom line is seller financing can enable a home owner to "have their cake and eat it too" - i.e., sell at the desired price, close the deal quickly, and even receive additional income from interest payments as well.
Friday, October 31, 2008
Seller Financing to the Rescue
A Rate of Zero Percent From the Fed? Some Analysts Say It Could Be Coming
by Edmund L. AndrewsThursday, October 30, 2008
Zero percent interest rates! It sounds like free money, or maybe a promotional deal from General Motors to get people to buy Hummers. Are zero rates coming to the Federal Reserve?
As it happens, the Fed is surprisingly close to that point already. On Wednesday, the central bank lowered its target for the federal funds rate — the rate that banks charge each other on overnight loans — to 1 percent from 1.5 percent.
But in practice, the actual federal funds rate fluctuates slightly around its target as the Fed carries out its open-market operations in the money markets. And because banks and financial institutions have been so frightened about lending in the last month, the actual Fed funds rate has been below 1 percent for the last two weeks. On Tuesday, it averaged only 0.67 percent.
A growing number of analysts now predict that the economy is so weak that the Fed will have to reduce its official target to zero if it wants to jumpstart the stalled economy.
Japan’s central bank reduced its benchmark interest rate to zero for five years, from 2001 to 2006. It did so mainly to combat a particularly persistent case of deflation, a broad-based decline in consumer prices, and to revive economic growth.
Some analysts see signs that the United States faces a similar threat. Like Japan’s, American banks have become so decimated by losses in real estate that they are either unable or unwilling to resume normal lending. And as prices for oil and many other commodities have crashed during the past two weeks, some analysts now warn that deflation might be a threat here as well.
With the Fed funds rate already down to 1 percent, and below one percent on many days, the central bank is fast approaching what economists call the “zero bound.”
If the Fed funds rate did drop to zero, it would not mean free money for consumers or businesses. The zero rate would only apply to the reserves that banks are required to maintain and that they lend to one another. Customers would still have to pay some interest, but the rates could be extremely low for some business borrowers.
The real question for policy makers is what to do if they reach a zero rate and still want to rev up the economy. Fed officials have studied the question closely, and the Fed chairman, Ben S. Bernanke, gave a famous speech on the issue when he was a Fed governor in 2002.
In that speech, Mr. Bernanke described a series of options. The simplest option would be for the Fed to start buying Treasury securities with longer maturities. Buying up those longer-term securities would push up their prices and drive down longer-term interest rates. If that didn’t work, the Fed could start buying up privately-issued debt, like corporate bonds.
In effect, the Federal Reserve would be printing more money and injecting it into the economy — a strategy of “quantitative easing,” in Fed jargon.
Too much money would provoke a new round of inflation and perhaps yet another asset bubble. But Japanese inflation never took off. After five years, the Bank of Japan cautiously raised its benchmark rate to .5 percent. This week, published reports have suggested that it might cut the rate in half once again.
Thursday, October 30, 2008
Seller Financing to the Rescue! Call Annette To find out how to sell your home.
How Investors Can Profit from the Emerging Solution to the Real Estate Crisis
By W. Eddie Speed
As a real estate investor, you know all too well that the mortgage industry is suffering from a major meltdown.Too many institutions have been lending money in a blind, reckless way. Lending institutions are folding, foreclosures are reaching record highs, and subprime lending has caused a catastrophe for property sellers, buyers, and lenders alike.
As a result of today’s credit crunch, there’s a limited
pool of qualified buyers and a shrinking supply of
conventional lending sources. In addition, there’s a growing number of would-be buyers who can no longer obtain conventional loans—and an abundance of properties on the market at low prices.
Seller financing is coming to the rescue. It’s filling the
void created by the mortgage crisis, offering an alternative to those hard-to-come-by conventional loans.
But seller financing can do more for the real estate
investor than just move property. For one, it can sell property more quickly and at higher prices. That’s because it offers a much larger pool of potential buyers.
With safe seller financing, you underwrite loans before they are made, and then manage them thereafter. You must learn how to identify and qualify capable buyers who are excluded from traditional mortgages as a result of today’s tightened underwriting standards and the diminishing number of conventional lending institutions.
Seller financing is fast emerging as the solution to the collapse of many lending institutions, and the shrinking supply of financing available from those that survive. For you, the real estate investor, it could very
well be the key to your survival in this business.
Seller Financing Goes Mainstream
After the high-interest rates of the 1980s, seller financing became a specialty niche among real estate transactions. The upheaval in the housing market, however, is now creating an extraordinary demand once again for this alternative funding source.
Consider this: two years ago, seller financing accounted for about 1 in every 400 real estate transactions. Today, it accounts for 1 in every 50 transactions. What’s more, some real estate experts predict that seller financing will soon become the financing vehicle for
one out of every ten real estate transactions. Not since the 1980s, have I seen the extraordinary increase in,
and necessity for, seller financing.
Not since the 1980s, have I seen the extraordinary increase in,
and necessity for, seller financing.
What does this mean to you? Seller financing provides
you the opportunity to sell your properties to quality buyers, at the full retail property values and more quickly, for a substantial and steady income stream. The smart real estate investor will become adept at using this method. Indeed, your level of success will
likely depend on how well you use seller financing.
For Quality, Qualify
Qualifying for a conventional mortgage today is much more difficult than it was just a few years ago. As a result, there are many more quality candidates for seller
As many as 50% of the people who would have qualified for a conventional mortgage just two years ago no longer do.
financing than there were in the past. These are people
who’ve been rejected by conventional lending institutions, in part, because less money is available. More restrictive underwriting criteria are in effect, which disqualify countless candidates who have both a willingness and the ability to meet the requirements of the loans. In addition, many other would-be buyers have had hardships that they’ve since overcome.
Together, these factors contribute to a startling fact: As many as 50% of the people who would have quali
fied for a conventional mortgage just two years ago no
longer do. True, there had been much reckless lendingto risky borrowers in recent years. But since the shakeout in the lending industry, many good candidates are now being denied the opportunity to borrow money.
Seller financing is the ideal solution for these people
and investors alike. To avoid the same pitfalls that brought down many lending institutions, however, the investor must weigh the risk of each loan and proceedonly with those that present a high likelihood of success. That means being meticulous about qualifying the buyers and lending only to those of the highest caliber.
From This Day Forward . . .
Most people enter into seller financing contracts with
the same enthusiasm with which they enter into marriage. They’re as happy at closing as newlyweds at the altar. Everybody’s eating the cake and tossing the rice. But if the commitment is based solely on blind faith, the relationship may dissolve faster than ice in the punchbowl.
No investor finances his property for a buyer with the
belief that the arrangement will turn sour. At most, it’s considered a remote possibility with tolerable consequences. If the buyer defaults on the loan, the investor assumes that he can simply annul the deal, repossess the property, and avoid any loss.
But this assumption is flawed. The buyer has occupied
the property for months, perhaps years. What condition is it in now? Have the taxes been paid? Are the insurance premiums up to date? Has the buyer kept up with the routine maintenance and repairs? Or, as in the case of some foreclosures, has the buyer trashed
the place and fled? With falling prices in the housing
market, even the equity might be reduced. The seller/lender gets stuck with unpaid bills and costly repairs. The honeymoon is over.
Like fiancés, borrowers are emotionally involved with
the transaction and might not view their situation objectively. Even well-meaning buyers might believe they can afford to commit to a long-term loan without realizing all the responsibilities and expenses they will incur, nor their ability to meet those obligations. Equally excited about closing the deal, the seller mightbe blind to the potential risks in doing business with a particular buyer.
Other investors recognize the risks but believe they can sidestep a foreclosure action by having the buyer pre-sign a deed back to them at closing. That would be an invalid deed because the buyer cannot waive his future rights. But there is no protection for the seller
in case the arrangement goes sour. Seller financing
doesn’t come with a pre-nup.
Clearly, the smart approach is to learn all you can before you’re heavily invested in the relationship.
A Safe Bet
How risky is seller financing? Much lower than it used
to be. In the past, would-be borrowers paying on sell
er-finance mortgages were, as a group, much riskier
than they are today. That’s because it was easy, too easy, to obtain a conventional loan. People who failedto qualify for traditional mortgages were, by definition, the riskiest borrowers.
Lending institutions have since tightened their criteria, making it far more difficult for would-be buyers to borrow money.As a result, more people are now purchasing property with seller financing. Squeezed out of conventional lending, formerly qualified applicants are increasing in number and anxious to buy property. This raises
the quality of the typical seller-finance candidate.
Many are “just missed” borrowers who now fall nar
rowly outside the newly tightened criteria of lending institutions. These are reliable, low-risk prospects who show every intention of meeting the terms of their loans, and they have the ability to do so. They would
have easily qualified for conventional mortgages in
the past but no longer “measure up” on paper.
What the savvy investor must do is differentiate between those deserving buyers and the obviously risky ones. Your success will depend on the thoroughness by which you investigate each prospect and then use sound judg
ment when deciding whether to offer seller financing.
I Do Diligence
Returning to our marriage analogy, approving your
seller-finance candidate is a lot like choosing your life
partner.
Few people enter marriage without having first gathered considerable information about their mate. It starts with that first encounter, when your date presents himself or herself in the best possible light. He appears honest; she seems responsible. As you get to know each other, you like what you see and you want this to work. You make plans.
Smart couples approach the altar having already discovered and judged their fiancés’ background, character, values, strengths, and weaknesses. They conduct their own due diligence before their “I do’s.” Many singles even hire a private investigator to do an independent background check on their potential mate before proceeding with the romance. It’s smart with dating; it’s smart with lending.
Likewise, real estate sellers should evaluate their sell
er-finance candidates with this same level of scrutiny.
Yet too often, they fail to conduct due diligence. This careless approach results in countless defaults and
creates the impression that seller financing is riskier
than it should be.
The savvy investor will ensure good underwriting, not only to achieve a smooth and successful transaction but also to maximize the cash value of the note. Most note holders don’t realize that the number one variable that affects the cash value of their note is the buyer’s credit. So not only does disciplined underwriting mean a more trouble-free loan, you also create a more salable loan in
With due diligence, good judgment, and some common sense, you can become very successful
with seller financing. And the timing couldn’t be better.
the future, and one that’s worth more.
To help ensure a profitable relationship with your
borrower, then, you must perform due diligence. The independent investigation will assess the accuracy of your buyer’s statements regarding assets, income, employment, debt, and so forth. Due diligence allows you to make sound decisions based on solid facts, not subjective impressions. It allows you to distinguish the quality borrower from the risky one. And you can then create a more valuable loan.
Ronald Reagan said it best with his signature phrase, “Trust but verify.”
You Can Bank on It!
Using another analogy, imagine that you’re considering buying stock in a bank. Despite the bank’s history of solid performance, let’s say it now decides to relax its due diligence procedures. This saves both the time and expense of verifying the loan applicants’ statements and examining other sources of pertinent information. With less stringent requirements, the bank is now able to qualify more borrowers and process more loans. Risky loans. Now here’s the question: Would you want to own stock in that bank?
Unfortunately, many property owners enter into sell
er-finance contracts with that same, careless approach.
They don’t pull a credit report, verify income statements, examine the employment history, or investigate the buyer’s liabilities. It’s like eloping on that
first date.
When you seller finance, you’re buying stock in your
own bank. Make sure you can bank on your decisions. You can be extremely successful in this business, if you use a methodical approach that calculates the risk
and weighs the benefit. (Trust me, I know.) In addition, it’s much more profitable than sitting on an unsold property. But seller financing does require that
you understand some fundamental principles—and that leads us to our next analogy.
Playing Your Cards Right
Let’s take this concept to Las Vegas. You certainly
wouldn’t play Blackjack without first understanding
the rules of the game. With that knowledge, for example, you wouldn’t take a hit if you have 18 and the dealer shows a 4. Otherwise, what stays in Vegas is your money.
Yet a lot of people who offer seller financing are gambling with their own assets. That’s because they don’t understand the basic principles involved. Rather than analyze the risk and then judge wisely, they unwittingly close deals with high-risk buyers.
Smart seller-financing is profitable. There are plenty
of aces in the huge and growing pool of potential buy
ers. All you need to do is find them.
The Basis Basics
During my 28 years in seller financing, the question
I’m most frequently asked by property sellers is this: At what point should you make a very aggressive underwriting decision?
The answer depends entirely on how much you’ve invested in the asset. If it’s worth $100,000 and you’ve invested only $25,000, you have a “low basis.” With a low basis in a property, you can better tolerate a default risk.
In a way, you’re like a pawn shop owner. You’ve takenas collateral an item whose value is far greater than the money you’ve loaned. If the transaction proceeds as planned, your customer repays the loan with interest,
and you make a profit on your loan to him. If your customer defaults, you take possession of the collateral. Having invested only a fraction of its retail value, you
can then sell it to someone else for a healthy profit.
That’s why the higher the percentage of your invest
ment in the property (your basis), the less risk you can
afford to take. Let’s say you’ve invested $75,000 in that $100,000 property. You’re now at a greater risk of losing more, if delinquency and default occur.
With a low basis you can lower your underwriting standards. I’ve known and even consulted with real estate investors who maintained a fairly liberal underwriting practice. These transactions succeeded because the investors had a low basis in their properties.With an inordinately low investment in the property, say 20 or 30%, you can tolerate the additional risk. This strategy, however, is riskier and more challenging. It demands greater attention to detail, and requires more time and resources to service the portfolio. But if you have a low basis, you can apply lenient qualifyingcriteria and still be successful.
Seller Financing: It’s a Good Thing
Having purchased more than 30,000 seller-financed
notes, I’ve seen a pattern of success and failures. These aren’t just theoretical concepts. They’re the result of actual experiences involving a range of variables. With due diligence, good judgment, and some common sense, you can become very successful with
seller financing. And the timing couldn’t be better.
Today there are plenty of quality people who deserve the opportunity to own their own homes. They can afford to buy your property, and they will make their payments on time. In addition to your own success in this business, you can provide a much-needed service that will help others.
Are you ready to say “I do”?
of NoteSchool®,
Eddie Speed,Founder
has purchased more seller-financed notes than anyone else in the business. With a lifetime volume of seller-financed notes topping half a billion dollars, Eddie has seen just about every scenario. He is also an acclaimed instructor, mentor, and recipient of the industry’s most prestigious award.
Tuesday, September 9, 2008
What rescue means for mortgage rates
Bailout of mortgage giants should result in lower mortgage costs and make credit more available. But lending standards will stay tight and risky borrowers will still pay extra fees.
NEW YORK (CNNMoney.com) -- Mortgage applicants rejoice!
Sunday's federal takeover of Fannie Mae and Freddie Mac will likely translate into lower mortgage rates and greater availability of credit, experts said. Rates could drop by 1 percentage point from the stubbornly-high 6.39% for a 30-year fixed rate mortgage.
"This could be good for would-be homeowners," said Tom LaMalfa, managing director, Wholesale Access, a research and consulting firm. "It would reduce the cost of financing at the new and improved Fannie and Freddie."
The government bailout is aimed at making mortgages easier to obtain and afford. By shoring up the mortgage financing giants, they can continue buying mortgages from lenders and injecting much-needed cash into the system.
"Fannie Mae and Freddie Mac are crucial to turning the corner on housing," said Treasury Henry Paulson. "Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance. Our economy and our markets will not recover until the bulk of this housing correction is behind us."
But the news isn't all good. With Friday's report that foreclosures and delinquencies are at all-time highs, Fannie and Freddie are expected to maintain - if not ratchet up - tighter lending standards. And the fees they have introduced for borrowers with weaker credit histories won't go away anytime soon.
High borrowing costs
Mortgage rates borrowers pay are dependent on the yields that investors demand when buying mortgage-backed securities from Fannie and Freddie.
Investors' doubts about the companies' viability have sent interest rates on those securities soaring. Despite regulators' July promise that they would step in to save the mortgage companies, investors are still demanding rates of 2.25% to 2.45% above Treasuries, LaMalfa said. Historically, the spread has been 1.25%.
With the government now taking over the companies and minimizing the risk associated with their debt, investors may be willing to ease off their need for higher rates.
High borrowing costs have led, in part, to a decline in mortgage borrowing. Applications are down 27% from a year ago, according to the Mortgage Bankers Association.
Also Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) will likely reverse their recent pullback from the mortgage markets. In early August, when they reported just over $3 billion in combined second-quarter losses, both said they would scale back their purchases of mortgage securities to preserve their capital.
Tight standards and fees will remain
Borrowers, however, shouldn't expect the ever-tightening lending standards to ease. With defaults and delinquencies multiplying and home prices falling, Fannie and Freddie will likely keep a close eye on underwriting practices. Lenders are demanding credit scores above 700 these days, up from 620 in the past, and downpayments of 20%, up from zero in some cases, experts said.
The mortgage titans have also increased their fees in hopes of shoring up their finances. Just last month, Fannie Mae announced higher surcharges for loans to weaker borrowers. For instance, applicants with credit scores between 640 and 659 who are putting down 15% to 20% will pay an additional 2.25% charge.
The same borrower would pay 1.7 percentage points more because of higher fees and rates for the same loan today as he or she would have paid 18 months ago, LaMalfa said.
If the market continues to worsen, standards could further tighten and fees could rise more, he said.
"We may have more stringent standards over the next few weeks because of the continued deterioration," he said. "We don't know where the bottom is yet. It's a falling knife."
Also, while investors have initially cheered regulators' moves in the past, their confidence has been short-lived. It remains to be seen whether and for how long Sunday's action will placate them, said Kurt Eggert, law professor at the Chapman University School of Law. And if investors' spook again, rates will rise.
"If I were an investor, I'm not sure this would be enough to make me want to jump in with a lot of money," Eggert said.
Wednesday, July 23, 2008
5 Big Credit Mistakes - Learn how to manage credit cards
It's surprising how many consumers make the same credit scoring mistakes over and over again. In an effort to educate consumers on credit and credit scoring, we've compiled 5 common credit scoring mistakes into a list that defines each mistake and explains why they are bad and how to avoid them:
Credit Mistake #1: Closing Credit Cards Accounts
This is probably THE biggest credit mistake that consumers make. What you may find surprising is that closing credit card accounts can hurt your credit score almost as badly as missing a payment.
Not only is this the number one on the top five credit scoring mistakes, it's also number one on the list of credit myths.
Ironically, most consumers make this mistake based on poor advice from a mortgage lender as a strategy for improving their credit scores. A word of advice people, when you're dealing with something as sensitive as your credit and credit scores, make sure you do your homework before trusting some of these so called 'industry experts' before following through with their advice.
There are two important reasons why you should not close credit card accounts:
1. Eventually, the accounts will fall off of your credit reports - The information in your credit reports are subject to certain rules in regards to how long it can remain in the report. In most cases, credit information will remain in your credit reports for seven years from the account's DLA or date of last activity.
When an account is open, the DLA will continue to update each month and the open account will never reach that seven-year mark.
If you close the account, the DLA will stop updating and the clock will start ticking. Eventually the account will be completely removed from your credit reports.
Why would this be a bad thing?
It's simple - you never want to get rid of old, positive information in your credit reports. This information actually helps your credit scores.
Credit scores want to see this positive account information. They want to see your long, perfect history of making your payments on time because this information significantly helps your credit scores.
This information significantly helps your credit scores so why would you ever want that history to disappear? You wouldn't! Here's an analogy for you: let's say you made straight A's in high school. What if the record of that perfect scholastic accomplishment were permanently deleted seven years after you graduated? Would you ever want that history deleted? Of course you wouldn't. The same is true for the credit reporting environment.
So, what should you do with old credit cards that you don't use any longer?
What you don't want to do is to let the account become inactive. When this happens, the credit card companies aren't generating any revenue for your account.
Eventually they'll close the unused account because you're more of a liability than an asset. You can prevent this from happening by using the card every few months for low dollar purchases like dinner or a tank of gas.
When the bill comes in, just pay it in full. If you do this, it will ensure that the account will never be closed and you'll always get credit for your good payment history.
2. You could cause a spike in your revolving utilization and tank your scores - The percentage of your available credit in comparison to the debt you owe is a very important factor in calculating your credit scores.
This is often called "revolving utilization," or your debt-to-limit ratio.
For example, if you have an open credit card with a $1,000 credit limit and a $500 balance then you are using 50% of your available credit. This means that you are 50% utilized on this particular credit card.
Now lets add a second credit card to the mix.
Let's say you have another open, but unused credit card account with a $1,000 limit and a $0 balance. This would put your total revolving utilization at 25% because you have $2,000 in available credit limits and $500 in total balances.
If you divide your total balances by your total credit limits, you'll get your total aggregate revolving utilization: $500 divided by $2000 equals .25 or 25%.
So how will closing unused credit cards hurt your credit score? When you close an account, the amount of available credit decreases, which could result in a higher revolving utilization and lower your score.
Let's use the example from above and close the second unused credit card account. When you close the account, you remove it from any utilization calculation and now you're stuck with one open credit card account with a $1,000 limit and a $500 balance.
This caused your utilization to go from 25% to 50%.
Remember, you divide the total balance by the total available limit so $500 divided by $1,000 is .50 or 50%. As this percentage increases, your credit score decreases.
When you're talking about several unused credit cards with high limits, you can just imagine what closing credit card accounts could do. I've seen consumers go from a 10% utilization to almost 100% utilization because they closed all of their credit card accounts except the one they were currently using.
Big mistake.
Credit Mistake #2: Missing Payments
It doesn't take a credit scoring expert to tell you that missing payments is a bad thing. The only reason I made missing payments second to Closing Credit Card Accounts is because this one is a no brainer.
It shouldn't take a credit expert to tell you that missing payments is bad. Common sense should tell you that missing payments is bad. Credit scores are designed to predict how likely you are to miss payments in the future.
This means that they look at your credit history to view how you've managed all of your credit obligations.
Missed payments is the most powerful predictor of future late payments. The FICO score evaluates previous late payments in three different layers:
How Severe - How severe is the late payment? It doesn't take a statistician to tell you that a 30-day late isn't as bad as a 90-day late. The more severe the late payment, the more damaging it is going to be to your credit scores.
Consumers who have missed payments by a few weeks and then bring their accounts current score much better than consumers that have gone 90+ days past due. In fact, a 90-day past due is the threshold that will wreak havoc on your scores.
If you are unable to avoid a late payment, the next best option is to get those accounts current as quickly as you can.
How Recent - How long ago did the late payment occur?
If you've read some of my previous articles on credit scoring, you'll know that the last 24 months of your credit history are critical because the FICO score places more emphasis on your recent credit patterns.
This means that a late payment 6 months ago is going to carry much more weight than a late payment from 4 years ago. To recover from late payments it's important that you get current and stay current.
How Frequent - How often have the late payments occurred? Consumers that miss payments frequently are penalized much more severely than those that have missed a payment here or there in their past.
If you have a tendency to make late payments your credit scores will reflect your bad habits. Make your payments on time and you'll never have to worry about losing points in this category.
Credit Mistake #3: Settling Accounts
One of the most common mistakes consumers make is assuming that 'settling' with a lender is a great way to save a little cash.
Unfortunately, they don't realize what that a 'settled' indicator in their credit reports is actually derogatory.
"Settling" is a term used in the consumer credit industry that means accepting less than the amount you owe on an account. For example, if you owe a credit card company $5,000 but you can't pay them the full amount then they will likely make you a deal for less than that full amount. They have "settled" for less than the full amount, which is likely much less than you contractually owe them.
This may seem like a good idea because you save quite a bit of money but as far as the credit scoring models are concerned, this is just as negative as other severe late payments.
The only way to avoid the damage to your credit scores is to arrange a deal with the lender to report the account as 'paid in full' as opposed to 'settled'. If they don't agree then it's in your best interest to figure out how to pay them in full or else be prepared to suffer the damage to your credit for the next 7 years.
It's also important to understand that if the account has already made it to the collection phase, the damage is already severe and settling won't really make a difference. Settling is only an option if the account has already made it to a severe delinquency state.Â
Credit Mistake #4: High Revolving Utilization on Your Credit Cards
Most consumers believe that making your payments on time is all it takes to have good credit and earn great credit scores.
What they don't realize is that almost a third of your score is determined by how much you owe on your credit card accounts. If you have high balances on your credit card accounts, you're credit scores could be severely impacted by your revolving utilization.
In order to score the most possible points in this category, I advise keeping your revolving utilization at 10% or less.
Don't be fooled when you hear some of these celebrity experts telling you that 50%, 30% or even 25% is best.
While 30% is considerably better than 50%, 10% or less is ideal. The lower the utilization percentage, the better your score will be. (*To read more about revolving utilization and how it's calculated, please read the revolving utilization bullet in Mistake #1.)
Credit Mistake #5: Excessively Applying for Credit
Whenever you apply for credit your application gives the lender permission to access your credit reports. When they pull your credit reports, it automatically posts an inquiry in your credit record. This inquiry is a record of who pulled your credit report and the date it occurred.Â
Credit scoring models use inquires to determine if and when you shop for credit. Statistics show that consumers who have more inquiries are higher credit risks than those with fewer inquiries.
It is for this reason that the more inquiries you have, the more points you lose in the credit score calculation.
The exact point value of inquiries is a much argued topic and is impossible to give an exact point value because it really depends on all of the other information included in your individual credit file.
The best strategy would be to only apply for credit when you absolutely need to.
This means that you should avoid those in store offers of "10% off" in exchange for applying for a store credit card. This may sound like a great idea but the reality is that while you may save a few bucks on your purchase, those inquiries could end up costing you a lower credit score which could result in higher interest rates on auto or mortgage loans in the future.
There you have it. Now that you know the top 5 credit mistakes, you can avoid making the same mistakes that so many other consumers make.
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Friday, July 18, 2008
100% financing is still available!
If you are thinking about buying in rural areas and some metropolitan areas, you may be eligible for 100% financing through the USDA's Guaranteed Rural Housing program.
The entire area of Valencia County is eligible as is much of Sandoval County, parts of southern Bernalillo county, Santa Fe County, Torrance County and much of the rest of the state of NM.
Borrowers must meet the income guidelines and be purchasing a home in an eligible area. These are 30 year, 100% loans. There is a 2% funding fee that can be rolled into the loan, but there is no monthly PMI.
The buyers ratios must be 29/41. The home must be owner-occupied and meet the inspection requirements. The seller can assist with closing costs.
More information including a map can be found here: http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?NavKey=home@1
When Building Green Harms The Environment
Gay Browne and her husband Tony have set out to build the greenest house in Montecito, Calif., in a small gated community near the ocean. They'll find the task much simpler than when they pursued the same green goal, in 1994, in Pacific Palisades, outside of Los Angeles.
Back then, builders had no idea about which materials were truly sustainable or were start-to-finish green, as opposed to being "greenwashed"--materials and appliances that might purport environmental friendliness through advertising or a fancy seal, but are environmentally detrimental. When Gay needed counter tops, she took a Geiger counter to a rock quarry to find the stones with the lowest radiation levels; she even found the one insulation maker in the country that used cotton batting instead of environmentally harmful fiberglass. In other words, she had to do everything herself.
In Depth: Harmful Home-Building Materials
Today, Browne, as the founder of greenopia.com, a site that helps consumers distinguish between those products that are highly efficient and have a low footprint from those that are masquerading as environmentally conscious (likely to take advantage of the growing green-materials market), has a much better idea as to what home-building materials and procedures are the greenest. The site is now a go-to resource for truly green construction, as buying greenwashed materials isn't just the slightly less environmentally friendly alternative; these products can increase your carbon footprint significantly.
Enthusiasm Despite The Downturn The remodeling market has slid with the housing market. Starting at the end of 2005, activity in remodeling has been decreasing steadily, according to the National Association of Homebuilders' Remodeling Market Index. David Seiders, the NAHB's chief economist, estimates that the market will further weaken through 2008. However, research from the NAHB and the American Institute of Architects indicate that green building is a growing component of the overall sector, and that green contractors have longer backlogs.
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As a result, an increasing number of products are being positioned as green to take advantage of one of the few growing segments of housing. The most common false claim involves hidden trade-offs, according to research from TerraChoice Environmental Marketing, an Ottawa-based firm that, in November 2007, tested 1,000 household products making green claims. A good example of a hidden trade-off is concrete, which seems green once you own it, but is environmentally harmful to produce.
"Concrete is very durable, all natural and technically recyclable," says Eric Corey Freed, the principal of organicARCHITECT, a green architecture firm in San Francisco. "But its chief ingredient is Portland cement, which is heated to 5,000 degrees during manufacturing and lets off high carbon emissions."
How a product uses energy over its life makes a big difference as well. Carpets, for instance, might be made from sustainable fibers or recycled soda bottles. Assuming it's not backed with vinyl, which some are, think about the idea of the carpet itself. It requires cleaning, vacuuming and collects dust and pollen more than hardwood does. You need to amortize every extra watt it will require--and sneeze it will cause--over its life.
Supply-Chain Uncertainties Another problem stems from how global supply chains work. Very few green operations are completely vertically integrated, meaning that it's rare for a company to own and operate every phase of the manufacturing process. From the time a piece of bamboo is harvested in China to the time it's installed as flooring in an Omaha living room, it's often gone through the hands of multiple companies--some green, some not so much.
While the flooring company in Omaha can truthfully say that it's using sustainably harvested wood (though bamboo is technically a grass), the shipping and trucking companies used to get the materials from China might not be green-oriented, and the factory where the bamboo is pressed might bond it with formaldehyde, or use a toxic finishing product.
"Consumers are looking for easy answers, and when I shop I prefer to see a logo on something and just buy it," says Scot Case, vice president of TerraChoice. "But the biggest piece of advice I have is don't buy a product because it has some green dot on it unless you understand exactly what that green dot means."
If a company doesn't chart all the materials used, makes claims on only one component of its sustainability, or makes no mention of manufacturing techniques, it's important for consumers to call companies and demand a material safety data sheet, which details every material used in the product, its disposal instructions, what sorts of gasses it emits, its level of toxicity and disposal instructions.
But another important tactic is conservation. For example, PaperStone and Richlite make high-end, recycled countertops that will more than likely outlive you, but so will your current granite countertops. Another good example is linoleum floors, which don't off-gas anything harmful, are easy to clean, aren't toxic and will last 25 to 50 years. Neither granite nor linoleum is as green as post-consumer compressed paper countertops or bamboo floors, but if you throw away the old floor and counter top in a landfill just for the sake of switching to a greener material, you're not doing a lot to reduce your footprint.
Have you made green upgrades to your home? What planning and research did you do on the materials you chose? Talk about it all in the Reader Comments section below.
When a remodel is absolutely necessary, however, take the phone book out from under the short leg of the table, and look up salvage yards. In many cases, older is greener.
"Salvage companies are inherently green," says Freed. "We have clients who buy a new house and want to remodel it, and will throw away a perfectly good toilet and bathtub because it's the wrong color. If we can't change their mind, we try to salvage it."
Though if you've got a flair for design and carpentry, you might want to refashion what wood or metals you're throwing away. As anyone who's ever been to an artisanal furniture store can attest, old barn doors and rafters are converted into high-cost furniture.
"I really like the antique look of reclaimed stuff," says Browne. "But they really do mark it up."
