Bankruptcy & Foreclosures

One of the questions that I seem to encounter time and time again pertains to borrowing money; specifically what’s the best method to get a lender to shell out the cash you seek while not raking you across the coals (interest rate wise) in the process? I’ve been quick to dispense a bit of wisdom from my standard bag of tricks throughout the years but now it appears as though the tides are turning against the borrower as the economy goes through its shake-up. Don’t get me wrong, it is still possible to borrow money, but lenders are tightening up and potential borrowers are going to have to apply with a bit more savvy than before.

Credit Score

The first area to increase your chances is by no means unique to the present economy troubles: credit report! Most consumers have some idea of the importance of maintaining good credit but now more than ever will this affect individuals looking to borrow. To give an example, just a few months ago my company had no trouble securing mortgages (subprime) for individuals with FICO scores as low as 500 and now we’re struggling to get scores in the mid 600s financed.

Organization

Lenders are going to respond to organized borrowers now more than ever before. If you need to apply for a loan, sit down with your lending officer with a plan in hand. This plan should include your budget, repayment schedule, and plans for the money in question. If it’s a toss-up between two candidates, odds are your lender will lean toward the more organized applicant.

Capital & Collateral

Sadly the days of 100% financing are blamed for contributing to the whole subprime mess in the first place, so borrowers expecting to walk in with nothing more than a smile are going to have to rethink their strategy. Lenders are currently in the process of decreasing risk so don’t be surprised if they wish to establish personal property or income from another source as a prerequisite to be considered for a loan. Business loans in particular are going to force borrowers into putting up physical property as collateral for loans: Inventory, supplies, buildings, etc.

These are tough times as far as lenders are concerned. If all goes wrong, they are going to be clawing to recover as much of their investment as possible. Keep that in mind when applying for a loan.

I know, I know, we hear it all the time: Pay your bills on time and you will be rewarded with a high credit score, slip up and your score drops. One of the most common questions around here is “how exactly is my score computed?” or better yet “how long does a mistake remain on my report?”

I have some good news and, well, some more good news. Fair Isaac & Company (FICO), the group responsible for the current credit score model, is just about set to release a new formula of computation! Better yet, the new formula plans to further benefit those who pay their bills on time.

Since 2006, FICO has been assembling their new credit rating system and may still take a few months before consumers see changes in their credit score (as the bureaus themselves (Experian and TransUnion) adapt to the new rating formula. Interestingly, the new model began development long before the current recession flared up.

So what’s the point of the model makeover you ask? Surprisingly, the core of the new design was intended to alleviate the exact economic situation we’re currently going through! The idea behind it is to provide a better differential between good risk borrowers and bad risk ones by giving creditors a more accurate prediction of the potential for default. What’s this mean to you? If you happen to be a consumer in fair standing with a pretty solid track record for making your payments, your score could very easily jump by as much as 25 points under the new formula.

Let’s take a look at some of the individual areas the new formula plans to improve:

The system treats a single large slip up (even as much as 90 days) as an “isolated delinquency” to individuals with a 10-year credit history. Routine late payments of less than 90 days will still damage your report but at least now a legitimate mistake won’t haunt you so severely.

Also under the new system, multiple credit inquiries in a short period of time won’t be so damaging to your credit score, as now they will be weighted less heavily in calculating the overall number.

Finally, the new system actually rewards borrowers who demonstrate the ability to stay on top of both revolving debt (credit cards, lines of credit) and installment loans (auto loans, mortgages). Believe it or not even if you show a hodgepodge of loans but a solid history of paying them on time, expect your score to jump up as well.

With all of the preparing, decorating, shopping, baking, and wrapping occupying the months leading up to this week, Christmas has come and gone in a flash leaving many individuals to focus on the upcoming new year. In my last post we discussed some of the shaky economical situations that 2007 will likely be remembered by but on the immediate horizon, there will certainly be affects of the sub-prime industry rearing their ugly head as we cross over in 2008.

It is likely that the lending industry as a whole will tighten its collective belt in repercussion to the events of 2007. Prepare for increased difficulty when attempting to borrow money from your bank and this means more than just morgages. Car loans, home-equity lines, personal loans, and even some student lending will likely be affected. For obvious reasons, lending institutions are likely going to increase their stipulations before approving loans. To make matters worse, interest rates will likely suffer as well.

However, I don’t mean to spread doom and gloom in this topsy turvey time, but rather just to remind potential borrowers to keep their credit report squeaky clean at least until things level out again. What better to resolve for the new year than to iron out any rough spots that may be tainting our credit reports.