Monday, February 19, 2007

Secrets of Investing Part Deux: The 3 Cs

Last time we discussed the First Secret of Investing: Cash is King. You don't need to read that one to understand this one, but it wouldn't hurt you. Go ahead. I'll wait.

"Tall, and tan, and young and lovely, the girl from Ipanema goes walking..."

All done? Then on we go.

Today we're going to discuss the 3 Cs of mortgage loans: Credit, Capacity, and Collateral.

Actually, I lie. Today we're only going to discuss Credit. It's long enough for a whole book, let alone a blog post.

Credit: essentially, we're talking here about the three credit reporting bureaus, Transunion, Equifax, and Experian. There are other reporting agencies, but they're not used by any of the lenders I work with. These three bureaus exist for the purpose of making your life miserable. Haha. Actually, they exist to make money, like all companies do, and that should be borne clearly in mind when appying for credit, and even more clearly when disputing an incorrect item on your credit. They are in the business of making money. You are not their client; the financial institution - the lender - is. The lender wants every piece of information it can get, especially anything derogatory, and this puts the bureaus at cross-purposes with you, unless your credit is perfect.

But I digress.

Your credit scores will range from 300 to 850 according to the book, but in reality, nobody has an 850 and nobody has a 350. The lowest score I've ever seen is a 418, and the highest is an 832. Nearly everyone has a score between 550 and 720. Roughly, the scores break down like this: 720 and up is perfect, 680-720 is good, 620-680 is average, 580-620 is fair, and below 580 sucks. You'll not get a conforming loan below 620, and not usually below 660. The score that counts is the middle score of the three, or the lower of two if you have only two. If you have only one, you're going FHA, but that's another column.

How does one get a 700 score? The short answer is "don't miss payments". This, however, presupposes that you a) have payments and b) know that "missing" one means to be more than 30 days late making the payment to the lender. If you pay for everything in cash, this will HURT your credit score. It also presupposes that you know what payments not to miss. Cell phone companies, utility companies, cable companies, DISH network, insurance companies, and those sorts of people do not report to credit bureaus until you go to collections (usually after 90 days of not paying them). Paying these people on time is a fine thing to do morally, but it will not make any difference to your credit score. On the other hand, ALL credit card companies, car loan companies (except for the hard-money people), student loan companies, and home lenders report every month (well, okay, student loans report every 90 days). If you have to miss a payment, miss them is this order:

1. cable company
2. utilities (especially in the winter -they really can't cut you off)
3. insurance
4. student loans
5. credit cards
6. car loans
7. home loan

Lenders figure that if you're going to miss a payment on something they could repossess, like a car or a house, then there's nothing that will get you to repay, and your credit will get slammed.

That covers credit defense. Let's talk about credit offense, building your score. There are a number of factors that contribute to your score along with lates, including your balance-to-limit ratio, your credit line depth, and length of time for established lines. You want your balances between 25 and 33% of the line limit. Paid off cards are great, but they'll hurt your score, especially if you haven't used them for a while. You want continuous activity on your lines. Credit depth refers to the number of lines open, and you want at least one of each kind of line - mortgage, installment (car, furniture), and card. Ideally, have a couple of the latter. You will need at least 3 lines, and you're not going to be docked for open lines unless you top 8 or 9.

Length of time established means that you want a couple of trade lines open when you're 18 and never closed. The longer the better. This also means you shouldn't pay your car off early. Refinance it, if you have to (though this is not always wise), but don't pay it early. Also, believe it or not, if you have an old collection account (over 2 years old) you should NOT pay it off until after you have the loan you're applying for. New activity on old derogatory credit will hurt your score.

When in doubt, ask a professional. 801-310-3407. Ask for Chris.

One other thing. I posted recently on the "Free Credit Report" hoopla, to the effect that you shouldn't believe everything you read or see on TV. Your credit score is MY credit score, that is, the score I get when I pull your credit, not the score you get when you do. Don't waste your money. My score's going to be different, and it isn't going to hurt your credit worth mentioning to have me look. You can pull your own credit, then tell me what your score is, at which point I will smile and ask if I can pull your credit as well. Little-known fact - lenders allow me to upload MY credit to their systems, not yours. If it doesn't have my name at the top of it, it's useless to me except as background information. And since I'm going to give you your scores and review the report with you, you might as well wait.

Yes, Diana, that means I can help you and Ben out. Call me.

See why we're not going to deal with the other 2 Cs today? Wasn't that enough?