BORROW YOUR WAY TO WEALTH

The Credit Maximizer: Some Helpful Hints for Real Estate Investors and Other Mortgage Shoppers

If you're buying real estate, your credit score counts big. Author and industry insider F. Michael Johnson explains some surprising ways to make yours better. If you're in the market for real estate, what do you do first? Do you: a) find a really great property and head to the bank to take out a loan, or b) get approved for the best loan possible and then look for an appropriate property? If you're like most people you probably said "a." But according to real estate investing insider F. Michael Johnson, you're putting the cart before the horse. Whether you're looking for an investment property or a home to live in, it pays to take care of financing issues first. And one of those issues-a critical one-is your credit score.

"Most people probably don't even think of their credit score until they find a property they want and are desperate to get a loan," says Johnson, author of Borrow Your Way to Wealth: How to start with nearly nothing and end up rich in real estate! (Acacia Publishing, 2004, ISBN: 0-9666572-6-8, $11.95). "But if you wait until then, you've lost your leverage. I strongly advise any potential real estate buyer to get his or her financial ducks in a row now-long before they start looking at a house to live in or a duplex to rent out."

In days gone by, most credit decisions were made based upon an underwriter's ability to navigate through your credit report, explains Johnson. The trouble with this process was that subjectivity could have far too much to do with the underwriter's decision to bring much comfort to the lending industry overall. Thus, with necessity once again being the mother of invention, a tool called credit scoring was created.

Today, the three big credit bureaus' reports now come with a credit score. And just how important is this score, you may ask? Well, for starters, scores are being used to determine your creditworthiness for most consumer credit purchases. They are now as a matter of course being widely used to determine your insurance rates and even whether you can qualify to rent an apartment.

The trouble with credit scoring is that consumers, for the most part, have no idea how credit scores are calculated or, worse than that, how to improve their score. Johnson explains both, below:

The Basics: How to Check-and Correct-Your Credit Score
STEP ONE: Obtain a copy of your credit report from each of the big three credit bureaus. Presently, they are available for approximately $8 each. Credit reports can be ordered either online or by contacting each bureau individually at the addresses below:

Equifax:
P.O. Box 740241
Atlanta, Georgia 3074-0241
1-800-685-1111

Experien: (formerly TRW)
P.O. Box 2104
Allen, Texas 75013-2104
1-888-397-3742

Transunion:
P.O. Box 34012
Fullerton, California 92634
1-800-888-4213

STEP TWO: Check your reports for any inaccuracies. Be sure that your credit information has been reported correctly to all three bureaus.

STEP THREE: If mistakes are found, you'll need to contact the creditor who erroneously reported the information and have them remove it. If they say that they will, that is not good enough. You'll need a letter from them correcting their mistake.

STEP FOUR: Forward the letter to the three credit bureaus for correction.

STEP FIVE: A new credit report is ordered to make sure the mistakes have been accurately corrected by all three bureaus.

The difficulty with this method is that it can take several weeks to get the information correctly reported at the credit bureau level. Also, remember that any corrected information must be reported to all three bureaus. If not, the old information will still continue to pop up, adversely affecting your score.

Because of the length of time that's required to fix credit mistakes in this standard manner, consumers will often lose a loan or end up paying a much higher interest rate than if the mistakes had not occurred. The solution to this problem is a fairly new process called "rapid rescoring."

Rapid Rescoring: A Little-Known Way to Boost That Important Number

Rapid rescoring can virtually provide you with a completely rescored credit report within one to five days. One caveat: these rapid rescoring services don't work directly with the general public. They work with mortgage lenders and brokers, so you will have to do a bit of legwork to find them.

Also, unlike the "free" standard method of getting your credit corrected and rescored, rapid rescoring does come with a cost. The fee is based on the number of tradelines that have to be corrected and with how many bureaus they must be corrected. However, says Johnson, if rapid rescoring gets you a better interest rate, the service will quickly pay for itself. He explains the steps involved in rapid rescoring:

STEP ONE: The consumer (borrower) supplies the broker with letters of correction from creditors who have misreported the borrower's credit.

STEP TWO: The broker requests a rapid rescore of the borrower's credit.

STEP THREE: The borrower's correction letters/requests and supporting documentation are forwarded by the lender to a repository company.

STEP FOUR: The credit repository company verifies the information.

STEP FIVE: The credit repository forwards the information to a repository contact.

STEP SIX: The repository contact verifies the documentation supplied by the borrower and makes the necessary modification to the credit file.

STEP SEVEN: The repository sets up a suppression file regarding the modified date to prevent changes by subsequent tape updates.

STEP EIGHT: The repository confirms updated credit scores as available.

STEP NINE: The broker runs a new credit report for the borrower with updated credit scores.

"Myth conceptions": Clearing up Common Credit Score Misunderstanding

Once you've corrected all credit report mistakes, is there anything else you can do to maximize your credit score and thus get a better mortgage rate? Johnson says yes. There are plenty of myths floating around out there that can damage your credit. Knowing what they are is the first step to avoid making a costly mistake.

MYTH #1: Old medical collections don't really affect my credit score.
TIP #1: Dead wrong. Medical collections are often resold again and again. Each time they're resold they can be newly reported to the credit bureaus.

MYTH #2: It's no big deal if I'm thirty days late on a small $15 credit card payment.
TIP #2: Payment history constitutes a whopping 35 percent of your credit score. That late $15 credit card payment can torpedo your credit score.

MYTH #3: If I shop around and consolidate most of my credit cards onto just a couple of cards, I can better my score.
TIP #3: Not necessarily. Credit card consolidation in this manner usually entails credit inquiries. Each inquiry can drop your score between five to ten points. Also, if your remaining credit cards are now close to their limit, you could have really done yourself a credit disservice. Maxed-out credit card balances work against you. Your credit limit ratio makes up 30 percent of your credit score. Try to keep your balances less than 50 percent of your available credit limit.

MYTH #4: I think I'll just put that appliance I've been wanting on my credit card instead of getting an installment loan. I put all of my charges on my credit cards.
TIP #4: You might want to rethink this a little bit. The reason being that 10 percent of your score comes from the types of credit you use (i.e., installment, revolving, mortgages, etc.) Try not to be top- heavy in any one category.

MYTH #5: I consider myself a pretty wise shopper. I'll check around at different places to see who will give me the best deal on that new car I want to buy.
TIP #5: Beware, beware, beware!!! As unfair as it might seem, every time you give someone permission to run a credit inquiry on you it pulls down your credit score. You can very easily eliminate yourself from getting the best interest rate by shopping at too many places for the best interest rate. Ten percent of your credit score is derived from credit inquiries.

MYTH #6: I'll start fresh with my credit. I'll get rid of every card I haven't been using for the past two years.
TIP #6: Be careful on this one, too. Fifteen percent of your credit score comes from the length of your credit history. Don't end up taking a long credit history and cutting it too short. What's that old saying about throwing out the baby with the bath water?

MYTH #7: I'm in the process of shopping for a house and I think I'll pay off some of my old outstanding collection accounts before we close on it.

TIP #7: Nix on this one too. The best thing to do is pay them off at the closing table when you sign for your new home or refinance it. In this manner, you are not giving a current update to adverse credit before you sign on the dotted line. Paying old collections off any earlier can adversely affect your score and consequently your interest rate as well.

"As you become more aware of credit scoring and how you can affect it, you'll begin making sound credit decisions that will improve your financial future," says Johnson. "This is true for everyone, but it's especially important for people who want to shop for a mortgage in the near future. And if you're buying real estate as an investment, it is absolutely critical. I teach my clients many strategies for making serious money in real estate, but they all begin with a person's credit score. Start improving yours now. It's never too late, but more to the point, it's never too early."

About the Author:
F. Michael Johnson spent his early years as a Hollywood writer, as well as co-founder and executive vice president of a publicly-held entertainment company. During that time he appeared in such publications as The New York Times and Premiere magazine, and was featured on HBO and KFYI. Since transitioning to real estate in the early nineties, he has been creating successful real estate investment portfolios in one of the hottest markets in the country for clients from all over the U.S. He's helped hundreds to master a method of acquiring real estate investment properties using 100 percent financing from wholesale lenders, tax deferments from the IRS, seller concessions to offset most closing costs, and help from the big three credit reporting agencies in obtaining the best interest rates possible.

About the Book:
Borrow Your Way to Wealth: How to start with nearly nothing and end up rich in real estate! (Acacia Publishing, 2004, ISBN: 0-9666572-6-8, $11.95) is available at bookstores nationwide, online booksellers, Book Clearing House by calling 800-431-1579, and direct from the publisher at www.acaciapublishing.com or by calling 866-265-4553.