9 Myths About Fixing Your Credit

From MSN.com

Building better credit takes patience, discipline and a clear understanding of the strategies that really make a difference. Start by knowing the financial moves that don’t work.

Like child rearing and curing ailments, credit building is chock-full of old wives’ tales. Smart financial moves such as closing accounts or paying off loans early may not be the credit boosters you think they are.

Sadly, there are no real quick fixes despite what some commercials or online credit-repair ads might proclaim. The key to increasing your credit score is good payment behavior along with time and a healthy mix of credit types.

To help you sort the facts from the fiction, Bankrate tackles some long-held but bogus beliefs that won’t help you build better credit.

1. Opting out of credit card offers will help

Many consumers assume if they opt out of credit card offers, there will be fewer credit inquiries on their credit reports, says John Ulzheimer, the president of consumer education at Smart Credit. However, those inquiries are considered “soft” inquiries and don’t affect your credit score, Ulzheimer says. You can keep the offers coming if you’d like, but doing so won’t help you build better credit.

If you want to opt out of offers to reduce your junk mail, call toll-free (888) 5-OPT-OUT/(888) 567-8688, or visit OptOutPrescreen.com to remove your name from the credit-reporting agency lists for unsolicited credit and insurance offers. That will remove your name for five years.

To keep your name off the list, mail in the permanent opt-out election form available on the website. Consumers can also opt in on the website if they’ve already opted out.

2. You can bump hard inquiries off your credit report

A “hard” inquiry is generated when creditors pull your report or score after you apply for a loan or line of credit. Your score falls because it shows you’re interested in taking on more credit and, therefore, more risk. Other inquiries are considered “soft,” such as those triggered by you, your employer or companies sending credit card offers in the mail.

Some consumers believe if they pull their credit report every day to load up on “soft” inquiries, they will bump off the hard ones that weigh on their credit score.

“It’s speculative. There’s no indication there’s a finite amount of space for inquiries,” says Ulzheimer. And it’s only a small part of the score. “There’s better bang for your buck if you do more legitimate things.”

3. Closing old accounts will boost your score

This is a hard-to-kill-off myth. Closing accounts typically won’t help your score and could possibly dent it, says Trey Loughran, the president of personal information solutions at Equifax. The results can shorten your credit history eventually and leave you with a smaller amount of available credit, both of which can harm your efforts to build better credit.

The length of credit history shows how seasoned a borrower you are, so the more positive experience you have, the better. Having more available credit helps to keep your utilization rate low. The utilization rate is how much available credit a borrower uses; the lower the percentage, the better.

“Say you have $100 in debt with $1,000 in allowable credit across multiple accounts and you close a credit card with a limit of $500. Then you doubled your utilization rate from 10% to 20%,” Loughran says.

4. Opening many accounts will improve my credit score

Some consumers with credit problems believe opening many accounts will be proof that they can handle credit. Actually, it has the opposite effect.

“That makes lenders scratch their heads and wonder why you need all that credit,” says Rod Griffin, director of public education at Experian. “It’s a sign of risk.” Your credit score can suffer as a result.

What lenders will see is a boatload of new, hard inquiries on your credit report. Those inquiries will deduct from your credit score, while lenders will worry that you’re in dire financial straits and desperately need access to credit to make ends meet.

5. Paying off delinquencies will restore your credit score

Nope. It will help, but don’t expect a supersized boost, says Ulzheimer. That’s because the delinquency will stay on your report, even if it has a zero balance.

6. Paying off loans early is better than making payments

“It’s a Catch-22,” says Sarah Davies, the senior vice president of analytics, product management and research for VantageScore Solutions, because while it may be good for your personal finances to pay off a loan, it doesn’t do much for your credit score.

Indeed, a closed, paid-off account adds to your score, but an open credit account in good standing boosts it more.That’s because an open account shows you’re consistently handling credit wisely. A closed account only shows good payment behavior in the past and becomes less and less predictive of future habits.

7. Paying before the due date helps your credit score

Your credit score takes into account how much available credit you’re using. Paying a credit card balance in full 10 days or one day ahead of the due date won’t help your utilization ratio and thereby improve your score. That strategy doesn’t work because the balance of the account has already been reported to the credit agency, says Ulzheimer.

However, if you pay the balance in full before the statement closing date, which appears on your statement, your report will post a zero balance for that account. That will help your utilization rate, or how much credit you are using, along with your credit score, says Ulzheimer.

To get started, you will have to pay one credit card bill earlier than usual and then consider your statement date as your due date, says Ulzheimer. Also, you will need to check your balance online or over the phone to make sure you pay the correct amount.

8. All delinquencies are created equal

If you’re in the unenviable position of having to miss a payment, choose carefully. Missing a mortgage or auto loan payment will ding your credit more than skipping a credit card payment will. “Those are more substantive debts, so they carry more weight in the credit score,” Davies says.

Of course, missing a payment is a last resort. Pay the minimum payment to keep accounts current. To head off a catastrophe, contact a nonprofit credit-counseling service that can help you work with your lenders to come up with a more affordable, temporary payment plan or another solution.

9. I can’t have any negatives on my report

“I’m here to tell you that you can have anything from a 30-day missed payment to a bankruptcy on your report and still have a really good score,” says Barry Paperno, the consumer operations manager at MyFICO.com.

The most recent information on credit reports is weighted more heavily than older data, Paperno says. So if you have a bankruptcy from five years ago but have had good credit performance since, it’s possible to have a 700 FICO score.

To build better credit, Paperno preaches consistent good payment behavior instead of a quick fix. The advice is simple: Pay the minimum payment every month at least, if not the full balance. Diversify your account types, and keep balances low. The result will be a higher credit score.

Alternatives To Bankruptcy

From National Association of Consumer Bankruptcy

Although bankruptcy is often a solution to a debtor’s problems, bankruptcy is not always the best solution. Although bankruptcy is almost always available, it may not always be needed.

Disputed Debts

One alternative is to fight disputed debts. If a creditor sues you for a  payment on a debt you don’t believe is justified, you may be able to defend against the creditor’s action.

There may sometimes be a real dispute about whether a debt is owed. For example, a home improvement contractor may arrange a mortgage loan to pay for the job but then do shoddy work or not complete the job. Similarly, there may be misrepresentations in a transaction to buy a car or to finance some other major purchase.

Fighting Your Debt In Court

In such cases, the solution may be to fight the debt in court. Of course,  unless free legal counsel is available, the costs of such a lawsuit may be considerable. If the debt is large enough, though, it may be worth the investment to obtain a fair settlement. In many cases where a consumer protection statute is violated, the creditor may be required to pay the debtor’s attorney if the debtor ultimately wins the case or obtains a favorable settlement.

Nondisputed debts

If a debt is not disputed, there are some alternatives to bankruptcy. A few of the common alternatives are as follows:

Working Out Informal Payment Agreements With Creditors:

If your debts are relatively small, you may be able to enter into agreements with your creditors and avoid a bankruptcy proceeding. Nonprofit credit counseling agencies can usually assist in working out such arrangements.

Refinancing Debts

A debtor may be able to arrange a debt consolidation loan that will allow him or her to pay bills as they fall due. Although a debt consolidation loan does not eliminate any of your debt, the new loan may have a longer maturity and be at a lower interest rate than the individual debts. However, debtors should be very wary of consolidating unsecured debts such as credit card debts into a  mortgage loan, because in doing so they will usually transform debts that can be eliminated in bankruptcy into debts that cannot be eliminated.

Financial Assistance Under State Law

Often states have programs that will help you with utility or mortgage bills.  Before filing for bankruptcy, you should investigate these programs.

Thinking that Bankruptcy may be a solution?

By Attorney Michael Eramo

You are visiting our website because you likely overwhelmed by debt or have received a Legal Notice from your mortgage company attorney informing you of their intent to foreclose on your home.  DON’T PANIC.  My office helps people who face this problem every day.  This is what we do.

What Options do I have?  Will I benefit by filing for Bankruptcy?  What is Bankruptcy?

Bankruptcy is not a “bad” word. It is a Federal Law that protects…”Honest people” “Overwhelmed by debt” seeking “help” or commonly referred to as a “Fresh Start”….It is our Government’s way of protecting good people, like yourself, to regain control of their financial and in many cases their personal lives. There are many reasons why people find themselves facing a foreclosure or overwhelming debt. Divorce, loss of a job, addiction, illness, and so on…. If you are honest, and just overwhelmed financially,you need to call and speak with a qualified bankruptcy attorney.  You have options.

You may learn that filing for a Bankruptcy is the right decision. People usually file for a chapter 7 or chapter 13.  A chapter 7 liquidates your debts if you qualify. A chapter 13 may allow you 36-60 to pay back your arrears on your mortgage while you stay in the home. It may allow you time to market and sell your property without the bank foreclosing.  It may allow you time to refinance yourself out of bankruptcy. Every situation is different.  A qualified bankruptcy attorney can guide you through the options and strategies available.

My Office can help you make Informed Decisions. My office staff is exceptionally well trained to guide people through this very difficult time with compassion and a high degree of skill and commitment. The Federal Bankruptcy laws recently were changed by sweeping reforms.  My office knows the laws and how to best protect your interest.

How To Choose The Right Bankruptcy Lawyer

Which lawyer should I go to? This is an extremely important question.

The fact is that “NOT ALL BANKRUPTCY ATTORNEYS ARE CREATED EQUAL”. The truth is that there are some terrible bankruptcy attorneys…even some of the ones who supposedly do nothing but bankruptcy.

What’s hard is that…to the public…we bankruptcy attorneys sort of all look the same. And to make things worse, the cost of the attorney is not necessarily a good indicator of who’s good and who’s not. A cheap bankruptcy attorney could be someone who’s not going to give you good service and an expensive bankruptcy attorney could be someone who needs to charge more because he or she is not organized enough to provide you services in an efficient manner.

Filing bankruptcy will have a significant impact on your life for years to come…..and to makes things much worse, bankruptcy law is very complex, with many twists and turns, and traps for the unwary. In fact, it’s so complex and complicated that non-bankruptcy attorneys tend to avoid it like the plague.

The really sad truth is that the results to be achieved under the bankruptcy laws can vary tremendously depending upon whether you fall into the hands of a good versus bad bankruptcy attorney. I see the harm brought to good people brought about by bad attorneys every day.  Don’t let it happen to you.

If you need to file bankruptcy…choosing the right lawyer is critical.

In many cases, the simple truth is that the more experienced attorney will do a better job, which means getting you the most benefit from filing and avoiding the mistakes that someone less experienced is bound to make. And…the more experience…the better.

An attorney who is just starting out in the practice of bankruptcy law, for example, is doing just that, “practicing”. Guaranteed, you do not want that attorney practicing on you. So…

Don’t take chances. Here are some of the questions to ask in order to find the best available bankruptcy lawyer:

  1. Do you practice bankruptcy law full-time?
  2. How many years have you done bankruptcy full-time?
  3. How many bankruptcy cases have you filed?
  4. How many Chapter 13 bankruptcy cases have you filed?
  5. Do you attend all the Federal, State and local bankruptcy seminars?
  6. Are you a member of the National Association of Consumer Bankruptcy Attorneys (NACBA)?
  7. How good is the lawyer’s reputation?

Applying For Credit Cards After Bankruptcy

By Michael Estrin • Bankrate.com

Bankruptcy might ravage your personal finances, but that doesn’t mean you still can’t apply for new credit cards.

In fact, issuers are likely to send you a slew of offers after your case closes. Before you take them up on their offers, however, you’ll want to put yourself on a path to financial stability. Here’s what you need to know about applying for credit cards after bankruptcy.

Consider a Secured Card

Rather than going for traditional credit cards, many consumers recovering from bankruptcy opt for secured cards as a way to improve their credit scores without the risk of getting in over their heads. A secured card requires a cash collateral deposit that becomes the credit line for that account. Cardholders can spend up to the limit, but if they fail to pay off the balance at the end of the month, the deposit is used to cover the bill. Make sure the issuer reports the card to all three reporting agencies so you can build your credit score.

Unsecured Credit Cards

After a bankruptcy, you still can apply for conventional credit cards that are unsecured. But with these cards, it’s important to check upfront fees. Similar to a secured card, you’ll want the credit agencies to be updated. After bankruptcy, you credit is important. Building credit and staying on top of your payments will make all the difference when it comes to your credit score. Think of applying for a credit card and staying on top of your payments as an initial way to start regaining financial stability.

Buy Only What You Can Afford With Your Credit Card

Most consumers can be approved for credit cards after bankruptcy, however, the real challenge is learning to live within your means.

Budget Accordingly to Regain Financial Stability

Experts advise that you set and stick to a reasonable monthly budget. That means making sacrifices, but it also means smart spending. Don’t buy something on your credit card that you wouldn’t normally buy. A credit card is not a reason to make a large purchase that you don’t need. Keep yourself on a frugal budget and spend graciously.

Consumers should use their new plastic to rebuild their credit scores, not to finance purchases they can’t afford. When you apply for a credit card after a bankruptcy, make a commitment to use your new card to charge and pay off regular expenses such as utilities and groceries.

Massachusetts Homestead Laws have changed. Understand how it affects a bankruptcy filing.

Chapter 395 of the Acts of 2010, an Act Relative to the Estate of Homestead, revises and replaces the provisions of the Massachusetts homestead protection law, General Laws Chapter 188. An overview of the new Homestead reform legislation, effective on March 16, 2011, is provided in Secretary’s Galvin’s Homestead Act Questions and Answers pamphlet.

If you filed a homestead declaration prior to March 16, 2011, your $500,000 protection will continue to apply. There is no need to re-file your homestead protections due to these statutory changes. The new law creates an automatic $125,000 protection on homes that do not have a homestead declaration filed at the Registry of Deeds in order to safeguard deposits and situations where a declaration may be incorrectly filed. Homestead protections now extend to pre-existing debts and the proceeds of a sale or insurance coverage.

Trusts are now eligible for homestead protections. For those individuals over the age of 62 (elderly) or legally disabled, the new law now expressly states that a homestead may be filed on each individual’s behalf and the aggregate protection increases to $1 million. Homestead declarations filed on manufactured homes must now be filed at the local Registry of Deeds, not the town offices.

If you are purchasing your new principal residence, your closing attorney must provide you, as a mortgagor, with notice of your right to declare a homestead protection. At that time, you will be asked to acknowledge receipt of this notice in writing.

If you have any further questions or concerns about how the Registry of Deeds can assist you in filing a declaration of Homestead, please do not hesitate to contact the Registry of Deeds office directly. We are here to serve you.

This information is not designed to provide any legal advice or address the practical effect of a claim of Homestead. As in all areas of the law, to fully understand what your rights are you should consult an attorney of your choice.

Be sure to speak with a qualified bankruptcy attorney to understand how the new homestead law may affect your bankruptcy filing.

Check out the many Massachusetts Registry of Deeds for Homestead information.

Demystifying your credit scores

From MSN.com, 8/10/2011 1:44 PM ET
|By CardRatings.com

Understanding how your scores are determined can help you find the credit card that best suits your needs. Consider these 8 possibilities.

Credit card issuers make fast decisions, bolstered by credit scores that boil down the last decade of your financial history into a three-digit number. A difference of a few points can upgrade your credit card rewards program or eliminate a balance transfer fee. However, few of us take the time to understand where our credit scores come from and how they affect our selection of credit card offers.

Who Determines Your Credit Scores?

Until recently, only FICO issued authentic credit scores. When you apply for a loan or a line of credit, your potential lender collects information on your credit history from one or more of the three major credit-reporting agencies (TransUnion, Experian and Equifax) and plugs it into FICO’s proprietary algorithms, or a variation sponsored by the lender’s preferred credit bureau.

The FICO system weights your credit history based on the information available, usually just the sources to which a particular bank subscribes. Because banks may subscribe to as many as four different credit-scoring systems, credit report accuracy across multiple bureaus has become essential for effective personal finance management.

How is your FICO score calculated?

According to FICO, five elements make up your credit score:

  • Payment history (35%)
  • Your credit utilization, or how much of your credit you’re actually using (30%)
  • Length of your credit history (15%)
  • Recently issued credit (10%)
  • Types of credit used (10%)

Experian launched its VantageScore algorithm as an alternative to FICO, with a few tweaks to the traditional model that emphasize available credit and your overall debt load. TransUnion and Equifax use their own versions of credit scoring, and all three credit bureaus assign “letter grades” to consumer credit profiles. (Know your score? Take this quiz to get an estimate.)

How do Banks Rank Credit Scores?

Finding the best credit card often means having to know where your credit scores fall on the spectrum of typical consumers. Over the past few years, lenders have ratcheted expectations skyward. Before the financial crisis of 2008, many banks considered a 680 FICO score “good.” Today, it’s just “fair.” Research from FICO, Experian and Informa Research reveals how banks look at credit scores today:

  • Excellent: 760-850 on FICO, 900-990 on VantageScore or an “A” letter grade.
  • Good: 700-759 on FICO, 800-899 on VantageScore or a “B” letter grade.
  • Fair: 620-699 on FICO, 700-799 on VantageScore or a “C” letter grade.
  • Poor: Below 620 on FICO, below 700 on VantageScore or a “D” or “F” letter grade.

You may also have heard a bank representative or a mortgage broker note that you’ve got a “thin credit file.” That just means your limited credit history makes it hard for a credit card issuer to figure out whether you’re a good risk. Building a track record with a student credit card or secured credit card usually improves your score over time.

Best-Rated Cards for Each Credit Score Range

The best-rated credit cards in each category reveal how lenders view each group of consumers. As risk increases, so do finance charges and fees. Bank managers often rely on the aspirational nature of credit card brands, hoping that you’ll settle for a deal in the category just below your current score range. To help you get started, here are eight popular credit cards (two in each category) that have a reputation for fairness based on acceptance, finance charges and rewards. (Find a better credit card.)

Excellent Credit

The best credit card companies save their most impressive offers for consumers with high FICO scores. Banks assume you’ll pay your bills on time, rarely run through more than half of your available credit and rack up lots of big-ticket purchases that earn them some tidy fees from merchants.

  • Capital One VentureOne Rewards Credit Card. This souped-up version of the popular Venture card carries no annual fee and a crazy balance transfer offer with no transfer fee.
  • Chase Freedom Visa. Its television ads only slightly exaggerate reality: Chase practically falls over itself trying to give free money to cardholders with excellent credit. This all-purpose card boasts a strong balance transfer offer, plus special cash bonuses and rebate opportunities throughout your first year. If you travel frequently, you might get even more value from a Chase Sapphire Card.

The best credit card offers for excellent credit change often, especially when banks try to poach each other’s high-value clients at the end of each quarter.

Good Credit

Under recently revised credit-scoring algorithms, most consumers fall into the “good” category. That doesn’t have to mean giving up on special perks and rebates, though.

  • Citi Forward Card. The best credit card to apply for in this category rewards customers who pay bills on time with reduction in the annual percentage rate of up to 2%.
  • True Earnings Card from Costco and American Express. If you’re already shopping at Costco, you’re probably pretty sharp with your money. One of the best cash-back credit cards on the market, True Earnings doubles as your Costco membership card. It converts up to 3% of your purchases into vouchers redeemable at the nationwide discount warehouse club.

Now that banks have mostly recovered from the credit crunch, expect to see offers and terms for “good” customer accounts improve.

Fair credit

The best credit cards for fair credit often take into account items that don’t appear on your credit report, like rent payments and some utility bills.

  • Capital One No Hassle Cash Rewards. Capital One doesn’t reserve its best cash-back credit card deals for globetrotters and executives. Even with fair credit, you can apply for a version of the issuer’s popular No Hassle cards that lets you earn up to 2% cash back on purchases.
  • Discover Student More Card. Geared toward young adults with thin credit files, Discover’s card offers a 0% teaser APR and an attractive cash-back reward program.

The best credit-card issuers help customers with fair credit “graduate” to better deals as their credit scores improve.

Poor Credit

Before the Credit CARD Act, a handful of banks earned criticism for predatory lending practices applied to consumers with bad credit. Some issuers offered subprime cards that promised small credit limits, then immediately charged hundreds of dollars in service charges. “Fee harvester” accounts preyed on consumers so desperate to improve their credit scores, they felt obliged to shell out significant monthly payments for credit cards they could barely use. (How long will it take you to pay off your cards? Find out with MSN Money’s calculator.)

But that was then, and this is now. If you’re looking to rebuild your credit with a low-cost card you can actually use, check out these two offerings:

  • Orchard Bank Classic MasterCard. The best credit card for those with bad credit, this MasterCard offers a second chance for consumers who’ve had bad luck or learned some tough lessons. This card offers reasonable terms and fees for cardholders committed to making on-time payments.
  • Public Savings Bank Open Sky Secured Visa Credit Card. Sometimes, it takes a little more to convince banks that you’re ready to handle a line of credit. Public Savings Bank lets you borrow against a secured savings account, up to $3,000. With fair rates and fees, compared with other secured credit cards, Open Sky can help you build the 18- to 24-month track record you’ll need to qualify for traditional credit cards.

The best credit card to have at any given time is the card that gives you the highest possible value for your money. Remember to balance your desire to build a strong credit score with the real costs associated with each credit card you add to your wallet. Keep your spending in check, and use online banking tools to track your purchases and rewards. Review your credit score regularly to make sure your plan is having the intended result.

This article was reported by Joe Taylor Jr. for CardRatings.com.

Study: Bankruptcy Considered or Filed by One in Eight Americans

A study recently published by the web site Find Law indicates that a considerable percentage of the U.S. population (one in eight survey respondents, or nearly 13 percent) has either considered filing for bankruptcy or actually done so.

That figure may seem high, but in a nation of consumer debt, depreciating home values and a limited job market, perhaps it’s no wonder that so many of us are in need of serious the serious financial protection and debt relief that bankruptcy can offer.

Who Is Considering Bankruptcy?

The study breaks down potential bankruptcy filers in part by age:

  • Americans between 35 and 54 are reportedly the group most likely to consider bankruptcy as an option.
  • Americans 18 – 34 and 55 and older are, according to sources, half as likely as the middle age group to consider or actually file for bankruptcy.
  • Senior citizens (those 65 and older) are apparently the least likely group to consider bankruptcy as a debt relief option, at only seven percent.

How Have Bankruptcy Filing Numbers Changed in Recent Years?

Sources indicate that in 2010, 1.5 million Americans actually filed for bankruptcy protection. This number marks the highest annual total since 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) took effect and tightened the standards for those interested in bankruptcy protection.

Why Do So Many People Need Bankruptcy Protection?

While no two bankruptcy cases are alike, bankruptcy filers often note common triggers that led them to seek the protection of the bankruptcy court. These include:

  • Unexpected medical expenses: Illness and injury can both cause serious medical bills to build up, particularly for those people who are uninsured or underinsured. And even an otherwise happy event, like the birth of a child, can prove very expensive.
  • Change in family makeup: Divorce and death are difficult to deal with on their own, but are often compounded by the financial troubles they cause. Many families are forced to face unpleasant financial realities after divorce or death carries off a primary breadwinner.
  • Job loss or reduction: Even good employees are at risk of losing their jobs in the current economic climate, and even though layoffs have slowed in recent months, the unemployment rate remains high. It’s no secret that this type of financial burden can lead a household to seek bankruptcy protection.
  • Fear of foreclosure: Even those with good health and steady jobs may find themselves unable to keep up with their mortgage, and some families opt to file for bankruptcy in hopes of fending off mortgage foreclosure.

Considering the many factors that can contribute to a household’s decision to file for bankruptcy protection, it may be a wonder that only one in eight Americans has thought about personal bankruptcy!

Six Ways to Improve Your Chances of Getting a Mortgage

From AOL

Mar 25th 2011
Ann BrenoffAnn Brenoff RSS Feed

New homes for sale

Remember how Spring was always the home-buying season? Don’t count on that happening this year and you can point the finger, at least in part, at the new lending hoops buyers must jump through. According to MortgageMatch.com, one out of three home buyers will fail to get a mortgage this spring.

Understanding the mortgage process and meeting lenders’ more stringent qualification requirements have become big obstacles for applicants, according to a survey the site conducted. Most recent home buyers — 70% — described the mortgaging process as more difficult than they expected. And those who bought homes during the bubble years, when mortgage loans were given out like candy at Halloween, are especially shell-shocked by the new lending standards.

One of the biggest problems home buyers run into today concern their credit scores and how, in general, they don’t work to improve them before applying for a loan. In the same vein, a recent Fannie Mae survey found that poor credit was the top reason that renters gave for not buying a home.

(Following closely behind poor credit was the self-awareness that they couldn’t actually afford to buy or keep up a home and the perception that now is not really a good time to buy. Hooray for enlightenment on the first point, but with home prices back to 2002 levels and interest rates among the lowest ever seen, how isn’t this a good time to buy?)

Back to the mortgagematch.com study: A full 35% of successful buyers said they didn’t even know their credit scores when they started to look for houses to buy. Somewhere, a Realtor is clenching his or her teeth just reading that. These buyers decide they want to buy a house but don’t know their credit scores? Home-buying is a process that starts with getting your financial house in order and then hitting the brick and mortar ones.

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Sue Stewart, senior vice president for Move, Inc. said, “Buyers who prepare themselves financially early before they start looking for a home will have a better chance of succeeding. If you want to be in a position to land the best mortgage … get your documentation together and find a lender you trust.”

Some tips before you apply for a mortgage to help you beat the odds:

  1. Pay down your debt. Reduce your total debt — your monthly payments on cars, student loans, credit cards — before you start the mortgage application. The goal is to reduce your overall debt-to-income ratio and improve your credit score. The somewhat unrealistic guideline that lenders want everyone to toe is that your total housing expenses not exceed 28% of your monthly gross income. For decades, people have exceeded that quite happily but now the lenders believe they know best and they control the money.
  2. Clean up your credit. Start with figuring out what your reported scores are. Obtain your free credit report from each of the three credit bureaus (Equifax, Experian and TransUnion) and carefully review them, noting all negative items. Correct inaccurate or outdated items. Your credit score needs to be a minimum of 680 — preferably 720 or higher — to qualify for a lower interest rate on a mortgage.
  3. Delay any large purchases, don’t apply for any new credit until you close on your house. Lenders check credit reports at the time you apply and then again right before closing. A last-minute spending spree is going to be flagged. Once you clear the mortgage hurdle, feel free to move about the cabin and decorate your new house to your heart’s content. (That’s said in jest; charge wisely.)
  4. Increase your down payment. This reduces the loan-to-value ratio and improves your chances of getting a loan. How do you do this? You save up for it or call up your rich relatives. There are also a lot of community programs to help first-time buyers, so check around.
  5. Get your paperwork together. Your lender will want to see pay stubs, bank statements, assets, credit documents, income tax returns, all financial statements and possibly your fourth grade report card. OK, I made that last one up, but you get the idea. This is paperwork central. And you better make copies of everything you send them in case they ask you for it a third time.

IRS debt guidance really hits home

From the Boston Herald

By Kenneth R. Harney
Sunday, March 13, 2011

WASHINGTON — The IRS has issued fresh guidance on how to handle canceled mortgage debt in the upcoming tax season — just as hundreds of thousands of homeowners have negotiated loan modifications or short sales or have been foreclosed upon during the past year.

It’s a huge issue, widely misunderstood by consumers, and involves potentially billions of dollars of tax liability.

When most debts are canceled by a creditor, such as unpaid balances on student loans or credit cards, the forgiven amounts are treated as ordinary, taxable income by the Internal Revenue Code. But under a special exemption adopted by Congress covering distressed home mortgages, many owners can escape the ultimate double-whammy: getting hit with extra taxes because your mortgage went seriously delinquent or you lost your house.

In its latest guidance, the IRS focuses on several key points that owners — and former owners — need to know. Tops on the list: Just because a lender wrote off a portion of your mortgage debt, this doesn’t mean you automatically qualify for special tax treatment. To the contrary, there are essential tests you need to pass to qualify: The debt your lender canceled must have been used by you “to buy, build or substantially improve your principal residence.”

There’s a lot packed into these words, so it’s important to parse them carefully. Start with the house itself. It can’t be your second home; it can only be your main residence, and fully documentable as such.

Next, the unpaid mortgage balance your lender canceled as part of a modification, short sale or foreclosure cannot have been used for non-qualifying purposes, like for something other than acquiring or constructing the house or making capital improvements to it. Refinanced mortgage debt used for kids’ tuitions, vacations, buying cars or paying off credit card bills won’t make the grade.

The IRS offers a hypothetical example of how borrowers can mess up their chances for tax relief. A taxpayer took out a first mortgage of $800,000 when he purchased his home years ago. Thanks to strong appreciation in property values, the house was soon worth $1 million and the owner refinanced the mortgage to $850,000. The loan balance at the time of the refinance was down to $740,000, and the owner used the $110,000 in cash-out proceeds to buy a new car and pay off credit card debts.

Bad move. A year or two later — presumably well into the recession and housing bust — the home value had plunged to between $700,000 and $750,000. The owner then convinced his bank to allow a short sale for $735,000 and to cancel the remaining $115,000 of unpaid debt.

Does the owner get tax relief on the full $115,000 under Congress’ special exemption? No way, according to the IRS. He only escapes income taxes on just $5,000 of the $115,000 because he spent the other $110,000 on a car and credit card balances — neither of which counts as “qualified principal residence” debt.

Greg A. Rosica, a tax partner with accounting giant Ernst & Young, says misunderstandings of the rules about mortgage debt forgiveness are “commonplace.” People often don’t know that the money they used for vacations and other purposes “just will not qualify” under IRS rules. Taxpayers who walk away from their houses may be liable for taxes, said Rosica, if at some point the property “no longer was their primary residence” — say it was converted into a rental property.

The IRS highlighted some other key points in its guidance:

• Mortgage cancellation relief is capped at $2 million for singles and married taxpayers, $1 million for married owners filing separately.

• Anyone who’s had mortgage debt cancellation as part of a loan modification or foreclosure should go to IRS.gov and download Form 982 and IRS Publication 4681 for additional filing details. Alternatively they can call 800-TAX-FORM to request copies. Lenders who write off unpaid mortgage balances typically provide borrowers with a year-end IRS form 1099-C cancellation of debt statement, including the amount of the loan forgiven and the fair market value of the property.

If you’ve had mortgage debt canceled but have never received a 1099-C from your lender, get in touch and request it if you want to avoid federal tax hassles.