Leveraging Credit and Buying Power

If you are a new primary-residence buyer or avid Real Estate Investor, here are some things you need to know:

A solid and dependable financing source with diverse financing programs will be the main contributing factor in your success as a Real Estate Investor. Part of this success will be a direct result of your knowledge and ability to effectively manage your credit, and credit scores. You need to understand how your credit report will impact your ability to qualify for top tier financing, and in some cases simply qualify for any financing at all. You must not just “Know How to”, but you must be committed to following simple & basic guidelines to help build, preserve and/or hedge against, your ability to continue meeting lending guidelines.

Face reality.
Way too many of my clients feel they have great credit, when in fact, their credit is marginal to good at best. In today's mainstream sectors, “Credit Scores” will set the pace in credit risk evaluation. The lending industry will judge you based on the middle of all three scores:

750 – 800 Excellent Credit
720 – 749 Excellent Credit, however, you will need to take precautionary measures
680 – 719 Good Credit
650 – 679 Fair Credit
600 – 649 Marginal / Poor Credit
550 – 599 Bad Credit
525 – 549 Really Bad Credit
500 – 524 Feel lucky to get a loan
Below 500 You are wasting your time. Consider acting responsibly by managing your debt and savings before thinking you should buy a house.

Where to go to find out what your scores are
Don't get suckered into thinking that your REAL score is the one you saw on that free report web site. A mortgage score is different, and you will be disappointed. If you are considering a mortgage, spend the $15 and get a credit report from a mortgage lender, like me.

Here are some things you can do to build your credit, preserve your credit, and hedge against reductions in scores as you inherit new debt (Close on new transactions):

Credit Cards:
Only keep 2-4 revolving Credit Cards Open. Your total amount of revolving debt should not exceed 40% of the total amount of credit reported on your credit report. In other words, if you have nine total lines of credit, you should not have more than 3 or 4 open credit cards.

Close all department store, retail store and gas cards that are not “the big four” – Visa, MC, AmEx, Discover. These cards are completely useless.

Only keep “Major” cards open, such as MC, Visa, Discover and AMEX (Revolving).
If you have multiple “Major” cards than you should have open, close the newest cards and keep the oldest ones open.

Increase the available limit on your oldest “Major Cards”, which you decide to keep open (5 – 20k). This leverages your debt-to-credit ratio.

Prove to the creditors and credit agencies that you are not afraid to use your credit. Do not however, maintain a balance in excess of 30 – 40% of your available credit. DO NOT payoff your credit cards.

DO NOT play the game of opening new accounts because of low introductory rates, balance transfer incentives, or even for that matter, lower rates. Opening a new credit card will have a negative and in some cases a significantly negative impact to your credit score no matter what.

Note: Sometimes one must make a lateral move, or even pay a little more interest in order to move forward at a much faster pace. Closing a new credit card account with a 7% rate and keeping an old account open with a 10% rate may not seem prudent. However, if this means the difference between a 717 and a 724 score, then that will mean the difference between a 6.5% and a 7.125% rate on a $100,000 or several $100,000 mortgages. So tell me…does paying an additional couple hundred dollars of credit card interest per year justify saving several thousands of dollars in mortgage interest resulting in you qualifying for top tier pricing? You bet it does! DO NOT MICRO MANAGE your finances in the wrong areas.

Negative credit report items
Negotiate payoffs for any outstanding collections, liens and/or judgments you may have. Even if you dispute such, keeping them on your bureau as an "Outstanding" debt, will effect your credit score.

Stop allowing people to pull your credit. Multiple credit inquiries are detrimental to credit scores. Any lender will also require a written explanation for each inquiry, including information about whether a new line of credit was established as a result of the inquiry. This becomes difficult to manage. You need to have a “clean credit appearance” in order for lenders to give you best-rate pricing. Any duplicated or erroneous items on your credit report should be removed by writing a letter of dispute to all three major credit bureaus. Don't believe the myth that negative credit will fall off your credit report after seven years. It only applies to accounts that have been satisfied. Open Collections, judgments and liens will remain on your credit report indefinitely. The 7-year clock begins to tick only after the account has been satisfied.

Hedging Your Debt to Income Ratio:
One of the most common mistakes home-buyers make is their failure to plan ahead. Planning ahead with your financing is more important than finding a good deal on a home. A good deal on a home may result in an extra few thousand dollars in profit. Failing to plan ahead with your financing can mean tens of thousands of dollars in unnecessary costs!

Contrary to what most believe, you should always proceed forward with “Full Documentation” loans until you reach a point where you simply cannot qualify for any additional financing. At that point, it is time to proceed forward with a “Stated Income Loan Program.”

Why is this so? Full Doc loans equate to better rates, more lenient credit & reserve requirements and higher loan to values. In other words, it equates to more money. Next time you ask your accountant to employ “Creative Accounting Measures” and inflate your expenses, think about how much more you’ll be paying in the years to come. DO NOT be penny smart and dollar foolish.