We’ve all seen the news of the government bailout of the banks that were too large the fail, too important to the economy. Now we watch the news of bank presidents and higher executives getting large bonuses. If you own or run a company in financial trouble, do you still give large bounces? Then, we hear of banks reported record profits a year later. Tell me again how this bail out was good for us?
The hope the government had for the banks to loosen their credit guidelines and start to loan again. (Funny, looser credit guidelines got us into a spot of bother before, right?) What I saw was a shutdown of lending, raising fees and paying less interest on products to the consumer, helping that profit we spoke of above. In our Mortgage world, underwriting has become increasingly more guarded to say the least. You can still get loans, but it’s harder to qualify than it was a year ago for those who had no action in the mortgage meltdowns. Just folks, high credit scores, good down payments, good income to debt, now have to jump through hoops. A strong credit profile is needed for sure in today Mortgage underwriting.
I looked at a credit profile the other day for a friend of mine. Noticed there were many of their credit cards that were at the limits of available credit. FYI- that is not a good situation for your FICO scores. You want a high limit with a low balance for a good FICO. Having a good FICO score gets you lower interest rates, better offers on insurance, and many other privileges. So, I counseled this client about their close proximity to the debt balance versus the available limit. I was told that every time they make a payment on that card, the bank lowers their credit limit. Boy that is a great way to affect your FICO in the negative. Every time the FICO model sees that you have an available limit of 3,000 on a credit card and you owe 2,900, they grade your score more harshly than if you only owed 1,500, 1,000 or less.
So if the bank continues to lower your available credit line every time you pay down your credit balance, your credit score continues to suffer. Now how again are the banks helping us? Every time we pay down a debt, Dave Ramsey is encouraging you to close that card, cut it up. Never use it again. I like most of what Dave has to say except for this. I say to leave that credit card or line open. That is just my advice.
Advice that you get over the phone nowadays, when you’re having financial trouble with your home should be looked at that same way, get a few opinions of what to do. A new client told me this story: They were upside down on their home at the time and looking for options. The home was on the market and an offer comes in to purchase his house for below market, called a short sale. They went to the bank with that offer. The bank said they wouldn’t accept it until he stopped paying his mortgage for three months. What kind of advice is this? With no other options he could see he went delinquent on his mortgage for three months. The buyer stayed, purchased the house and now this gentleman has a short sale on his credit profile. What nobody explained to him at the time were the ramifications of a short sale on your credit. The guidelines states, if you have a short sale, you need to wait four years before you can purchase a property again. There is a guideline that if extreme circumstances existed and forced the short sale that could be reduced to two years, but it is a panel that would read the explanation letter that you provide and make the decision. Which is hard to get through that time if you haven’t already taken on a contract and started the process. Hence possibly losing money, they deny you and say it’s a wait for four years.
So confidence is what I’m lacking. I’m lacking confidence in my industry and what we’re telling people what to do and not to do for the sound use of money.
What are you being told that does not pass your meter of truth?