Episode 3- Credit, Credit, Credit before Location, Location, Location!

Dated: 05/06/2020

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Welcome to Ya Don't Know What Ya Don't Know. Today I've got a special treat for you today. I've asked John Hinks, Jr with Lending Path Mortgage to join me and have a conversation with you about the importance of credit. 

John: Hey guys, how are you guys?

Desiree: Great. Thanks so much for being here, John. I really appreciate it. You're coming in and talking with me to talk to our listeners about credit. So today our topic is credit, credit, credit versus location, location, location. So many times we as real estate professionals get phone calls from folks who are extremely excited about finding a house and telling us what neighborhood they want to be in.

But you really haven't done your due diligence first. You haven't taken the time to get preapproved to see what your money is, whether or not you can even buy. So often what you can buy is based on number one, what you afford, what kind of, what you can afford, and then what you can afford is based on your credit.

We’ve got John here to talk about your credit, what is credit, who has it, who maintains it, and then we're going to share some more tips and tricks with you. So John, can you help us?

John: Absolutely.

Desiree: Great.

John: Absolutely.

Desiree: Tell us what is credit?

John: Credit's a history. That's really what credit is. It's a history. It is a history of your ability to borrow and repay.

Desiree: Okay.

John: It's, it's, and it's based on a score.  Between 350 and 850 and uh, there's so many different algorithms with credit, but credit is really just an indication for people that lend to examine your ability to repay and repay on time.

Desiree: So does everybody have credit?

John: Not everybody has credit.

Desiree: Why wouldn't they have credit?

John: They've never borrowed before? And if they have borrowed, they've never borrowed with an organization or a company that reports to a credit Bureau. So not everybody has credit that is in the traditional sense. There is nontraditional credit, like a cell phone, you know,

Desiree: a utility bill, things you do regularly; basic stuff...

John: Yes, they're there. That is credit. You are showing an ability to pay T-Mobile for 12 months on time. That is credit. It just does not reflect on a credit score model.

Desiree: Okay. So you mentioned earlier when you were talking about who has it and where it reflects, you mentioned the phrase credit Bureau. So for our listeners who may not know, what's a credit bureau?

John: A bureau, there are three of them. There's three different organizations. One is called Experian. The other one is called Equifax, and another one is called Transunion. And we have three different companies because there's three different models on how they score, but they all go based off of the same scores,

Desiree: So all three of them are looking at scores from that 350 to 850 range, you mentioned.

John: Absolutely correct, yes.

Desiree: That's awesome.  So who sends those bureaus the information about our credit, our borrowing history, our payment history?

 John: The investor, and the investor would be who we borrow it from.

Desiree: Okay. So in that instance, if I have, say, a Belk credit card, and I spend money on Belk's credit card, they report what, how much I spend and how often or how little I pay them back?

John: On a monthly basis. Belk is going to work with the servicer and the servicer could be a Chase. Okay. We've all heard "Chase" before. Okay. So chase has partnered with Belk. And we go in to Belk, and let's say Belk has agreed to give us a $500 credit limit, and we go in and we want to use our Belk credit card, and we buy a hundred dollars’ worth of merchandise. So at the end of the month, it is reported to the bureaus that we have borrowed a hundred dollars. And, we have a $500 credit limit. So from month to month, Chase will report to the bureaus how much we borrowed and have we paid our monthly obligation back, which could be, could range from, you know, 10 to 15% of whatever the balance would be for something like that or whatever the minimum payment they require if we've paid it on time.

Desiree: Okay. So. That's the same for everybody. So that process and how they report is the same for all investors with all of the bureaus that they're reporting to.

John: That's true in different types of borrowing reflects your score.

Desiree: So that means that there are things that I can do when I borrow money that can make my score higher. Or hurt my score and make it lower.

John: Absolutely.

Desiree: What are some of the things that I can do to improve my credit score?

John: Okay. First and foremost, I'm going to just get right on into it. The first and foremost thing is a 30 day late. Anytime you miss your payment for more than 30 days. That's the biggest, no, no.

Pay your bills on time.

Desiree: Okay. Let's Repeat that. Pay your bills on time.

John: I don't care how much cushion they give you. Pay your bills on time. The second thing is, is just because they give you $500 or tell you, you can borrow up to $500. Don't borrow up to $500. You want to keep your balances below 33% of what is available to borrow, and this is on a revolving debt.

Desiree: Okay, so let's talk about that 33% real quick. I've heard people say 30 I've heard them say 33% I've heard them say 20%. Does it make it better if I'm even further below that 33%? You know, if I'm 20% does that help me have a higher score or it doesn't matter? Once I'm below that 33%.

John: I think being below that 33 just gives you the most optimization, to be honest with you. I've seen, I've seen people buy it down to 10% and I've seen score changes kind of increase just a little bit more, but the maintaining of it, below 33% is where you're going to get the most results.

Desiree: That's great information, John. Is there a difference in your actual credit score? Can I look at my credit score on one location and it be different than another location?

John: Yes. Yes. It would be different.

Desiree: What's the biggest difference?

John: The algorithm that they use. So there are mortgage algorithms and there are consumer algorithms.

Desiree: Okay.

John: So the consumer world, they want to give you an a, they kind of want to show you what your score would be indicative if you were to borrow money from retail places, but a retail is a difference. it's a different uh purchase than purchasing a home.

Desiree: Well, yeah, there's a substantial dollar difference between buying a car or buying clothes or jewelry versus buying a house.

John: That's correct.

Desiree: So that means that the consumer calculation of your score is going to be, I guess, a little bit more relaxed and less restrictive?

John: A little bit more relaxed, a little bit less restrictive, but the ability to continue to pay on the credit cards, if that's the level of purchasing that you're doing at the time. So like, you know, I go to a Sam's and I use my Sam's card there, and. I buy down the balance and then I go back to Sam's. My score's going to indicate that I have a good credit because of the consumer products that I'm buying.

Desiree: So that's why after you have one of those consumer cards for three or four months and you pay your bill on time, they turn around and say, "Hey, you got some more money you can spend with us." That's why they're so quick to increase your limit.

John: That is their plan. That's right.

Desiree: So what you're saying is, my scores based on my consumer activity would probably be higher than mortgage.

John: That's Right

Desiree: That's kind of scary!

John: Because when I pull your credit, the score algorithm's going to be, Hey, you sure do go to Sam's a lot? And the algorithm is going to be a little bit more focused on how much are you borrowing? How many different places are you borrowing from? Are you showing a trend that you have spending habits or borrowing habits that could put you in trouble in purchasing a home?

Desiree: It sounds like when I use my Sam's card or use my Belk card, it's great for those vendors, if you will, that I'm using it, but then when you're looking at my credit, because I want a mortgage, it looks like I need those cards to live my life versus making a choice and being able to pay off that choice because I want the rewards or the purse. It makes it look like I need to use that money on that card. So I'm kind of looking desperate for the card.

John: You nailed it. You nailed it. I mean, that's, that's really the thing is the mortgage. The mortgage algorithm is more for protection for you. You know, they don't want you getting into a home if you cannot afford the home.  So it's going to be a little bit more strict. The consumer side of it is almost have been encouragement. Your score is this, keep borrowing, do more, do more. And that's where you have to be careful between those two scores.

Desiree: if I want to be able to see what my credit looks like personally, say I'm thinking I want to buy a house, but I'm know I'm not quite ready or I'm just not sure if I'm ready. Is there a way for me to check my credit before I get to you? Because I don't want to waste your time if I've got a lot of work I need to do. Is there a way for me to kind of look into it?  I've done some research online. I've talked to my clients, and we hear a lot of names thrown about. I've heard annualcreditreport.com. I've heard Credit Karma. I've heard, a commercial on TV talking about Credit Sesame. Those are all legitimate places then that I can go and see my credit?

John: Umm Hmm

Desiree: Okay. Is there a difference when I go to those?

John: There is a difference and that's why I always encourage if if buying a home is something you want to be ready for, go ahead and consult a mortgage loan officer to get your credit pulled.  in my opinion, because we actually have the tools to be able to tell you what you can improve on, to get your score where it needs to be in order for you and a good loan officer is going to give you that information. Whether you're ready to buy or not, it does not hurt your score putting a mortgage inquiry on your credit report,

Desiree: zero, no hurt whatsoever?

John: That's the rumor.  that's, that's what we're told. That changed in 2011, I believe. I may need to go back and fact check that.

Desiree: So that means if I were to call you today or if I sent a client to you today and you pulled their credit, if they had a 600 score unknowingly, when you pull their credit, they should still have that 600 score. So when you pull it, it should not see a reduction in that score just because you're taking a look.

John: Correct. So I mean, credit karma might say 640 we pull, it's a 600. So our pull is the real pull for mortgage credit report. And then that is the score. So if it was 600 the day before I pulled it, it should have been a 600 the day I pull it.

Desiree: Okay. I know personally, I've gone to www.annualcreditreport.com and I've gone annually, like the name says, just to see what's on my credit.  I have always, and a lot of people have had the fear of being hacked and wanting to make sure that there's nothing, unnecessary or incorrect on that credit. Is that still a good resource just for seeing what I have? If I'm not looking for the scores.

John: Absolutely, it's a checkup.

Desiree: I read an article on the Business Insider just this past week or so, that on April the 20th 2020 annualcreditreport, because of the corona virus and people were having job insecurities, have changed their rules. And now you can go have your credit checked weekly with no impact, just to monitor, to make sure everything is as it should be. And nothing crazy has shown up that shouldn't be there. So I think that's a great resource for our listeners, um, to see what's on their credit; not in an anticipation of scores or anything like that, because I do know annualcreditreport does not give you your scores unless you pay for them. And once again, paying for your scores from them are not going to benefit you if you're trying to get mortgage ready. But it should show you what's on your credit. So if you've got bills you haven't paid, or you've got a brother that's got similar name and initials with you, you can see, make sure that your credit hasn't been mixed up or things of that nature.

I think that would be something good to do. I haven't tried it yet to see, because I just did it for my annual, but I'm hoping someone. Will be able to let me know whether or not it's working for them.

John: I think it's probably the one of the greatest things that they've ever done is to be able to monitor your credit without having to ding your credit by pulling it, especially with the consumer. I've personally never understood why monitoring your credit on a month to month basis would hurt your credit. I think a lot of times people don't know that when things pop up on their credits, especially those pesky medicals and it's always an ability to monitor it. So I think them doing that is great. I think that's one of the best steps they've taken in a long time.

Desiree: That's great information about annualcreditreport, and you mentioned that having credit cards with high balances and not paying your bills on time will hurt you. But is it true that having too many credit cards, regardless of the balance, will also hurt your scores?

John: I've always been advised by a lot of credit experts that yes, too many cards. And when you pull your credit report, it will tell you, some things underneath your score and the mortgage algorithm, at least as far as what things could be hurting or stopping your credit from going higher. But one of the things is too many trade lines.

Desiree: Trade lines are people you owe money to?

John: That's correct. That's correct. So if I owe Belk, Best Buy, Kohl's, and you name it, Sam's, Walmart, and, and the list just goes on down. More is not better.

Desiree: Even if more has lower, zero balances, it's still not better?

John: It's still not better.

Desiree: Gotcha. So too many cards. Too much money on the cards, not paying your bills on time and not paying them at all. What about people who have had bankruptcies or foreclosures in the past? Do those hurt their credit or does that impact change over time?

John: It hurts their credit, but it's not a deal killer. I mean, there are ways to rebound.  It's going to take some time especially after foreclosure. Okay. Okay. So you just got out of a foreclosure. There are extenuating circumstances that you can qualify for a new mortgage due to the last foreclosure, but if you have a recent foreclosure, any mortgage bank or so forth. If we're talking about the mortgage itself, getting qualified, there is a waiting period and the waiting period varies for which loan program you're wanting to do and also the reason why you had a foreclosure.

Desiree: So having a bankruptcy on your credit or having a foreclosure on your credit doesn't mean you can't buy again. It just means that you're going to have to be patient. You're going to have to do some work, maybe even some credit repair. So you'll be ready once the timeframes that are imposed by the loans let you move forward.

John: It goes back to the original question. What is credit? Credit is history, it is a story?  So if your most recent story is that you could not afford your bills or you cannot afford your house payment, then the new creditors are going to say, I'm sorry. We can't help you at the moment. Show us a story. Show us a history that you have the ability to borrow and repay.

Desiree: So then that means that there are also behaviors that you can do to improve your score. And earlier you mentioned keeping your credit card balances below 33%. If I do happen to have credit cards, does it help me if I've had them five, 10 years with great payment history versus a brand-new credit card, or it could a brand-new credit card help me?

John: Longer the history, the better. So be selective when you borrow. Be selective, but the longer the history, the better is actually, I can speak personally, I have no problem talking about this. I had a credit card since I was 19 years old, the same credit card, but it didn't give me points and it didn't give me all the fancy things as some of the new credit cards gave me. I didn't get all the fancy points to go on vacation or whatever it was.

And I closed that credit card and paid it off and I didn't know any better.  you would think I would know better. Sometimes I'm a plumber with leaky pipes, but I closed that card. The credit limit was not high and it dropped my score 30 points when I closed that credit card.

Desiree: Oh my goodness! So that means it's better to pay it off and not use it than to close it thinking you're doing yourself a favor.

John: That's what I believe. Yeah. Yeah. That's what I believe. And, and unfortunately, it sometimes it can feel like a blind man in a room throwing a dart on the board and that's what your score is. Some things don't make sense, but the fact that I had a longstanding card that I kept the credit limit. Uh, I kept the balance lower than the 30%, and the credit limit, paid it on time for over a decade. And the fact that I closed this card, it affected my score. Here's the good news. I was able to get my score back up with my new spending habits, with my new cards and so forth, but I did not need to get rid of that card. That card was helping my credit rating.

Desiree: Does everyone who needs to get a mortgage loan have to have a credit card?

John: No. You do not have to have an open revolving credit card.

Desiree: Wonderful. That'd be good because I'm talking to a lot of folks and their fear is not being able to manage credit, so they don't want to open a credit card. And I've heard people say, I've talked to different loan officers and lenders and they say, open a secured card. Is there a difference between a secured credit card and one that you would get at Belk or the letter that comes in the mail saying, Hey, you've been preapproved for a visa.

John: I think a secured credit card is stronger than an open revolving credit card because you're actually showing that you can borrow against yourself.

Desiree: What do you mean borrow against yourself?

John:  A secured card is, I'm using secured collateral with the bank, so if I go to a credit union and I say, borrow against my own money. Then that means I'm borrowing against my own money.

Desiree: So that means you're giving them your money to create a credit card for you.

John: Correct. So no matter what, there's no way I can really not pay myself back cause they have my money.

Desiree: And it's yours. it's not like you went to someone random or unknown and said, give me money. You said, I need to use my money differently and I'm going to borrow against my own money, as you said.

John: Correct.

Desiree: So that also means that there is no instant fix. Whatever damaged your credit, whether it was nonpayment of bills, a bankruptcy, a foreclosure, a closing of a credit card that was doing you wonderfully. Whatever time it took to possibly bring your scores down, it's going to take time to get it back up. Maybe not the same amount of time, but there's not an instant fix. There's no way of just making stuff miraculously disappear from your credit, and all of a sudden you're going to have wonderful scores. Most of the improvements do take time

John: and effort and a little pain.  got to pay your bills and you do need to get on the phone. And if you have, let's say if you are upside down on your credit, let's say that you are in trouble with your credit. I always try to say, don't let your credit control you. You control your credit. You know, if, if you really get down to the nitty gritty of it, we borrowed this money, we used this money for whatever reason that we needed at the time, and then we need to pay it back.

We were disclosed the terms upfront, we were told what the terms were and we have to pay this money back. So even if it's a damaged credit line, if it's something that has had late payments and so forth, and it's just got a history on it that's just so ugly. A lot of folks want to close it and be rid of it and whatever. If you pay that thing down and pay that thing off, and then you start using it on a regular basis as a normal line, you will be surprised how you can take that negative account and turn it into a positive account. So when I say effort, sometimes the hard thing to do is to work on paying something that you just absolutely is a drain or an anchor on your credit to get rid of it.

Desiree: So, just be responsible, pick up the phone!

John: Pick up the phone!

Desiree: Call that vendor.  And I have had experience with some of my clients. Some of those bills, those vendors haven't received money from you in a long time. When you pick up the phone and say, I'm just trying to do a little bit better, oftentimes they may negotiate to accept less payment than what you may have originally owed because they haven't received anything over time to begin with.

Yeah, that's, that's a savings. If you owed somebody $500 five years ago, but you need it to be right to buy a loan and you pick up the phone, they may accept $150, $200. And that means you've saved money. That's money that you can use to pay off another bill or money that you can put to savings or pay for inspections. There's still a benefit into trying to handle the bills you made.

John: Absolutely.

Desiree: Since this is starting your process into potentially home buying, when your credit is better, that in turn makes your interest rate lower?

John: Yep.

Desiree: And so what does a lower interest rate do when you're trying to buy a home?

John: Thousands in interest over the life of the loan.

Desiree: It's saving you money or costing you?

John: Saving you thousands of interest over the life of the loan, saving you a monthly cashflow because your payment will be lower. But a higher credit score when you're purchasing a home qualifies you for programs that offer different incentives that can help you get an even better mortgage.

Desiree: So having a higher credit score could mean you can buy more house for the money, pay less for the house, or qualify for programs that will help you pay for the house that you want to get in.

John: Correct. cause that goes from the interest of the loan to even the mortgage insurance that we all hear about; the mortgage insurance is cheaper. Your homeowner’s insurance is cheaper. Homeowners insurance is much more inclined to give you a better premium if you have better credit.

Desiree: So better credit means it's better for you in every aspect of the process if you're buying a home.

John: There are companies that have an appetite for better credit scores, and therefore when they have that appetite for a better credit score, they will give you a better premium, which means less money. So when you look at a mortgage payment with the higher scores, you get the better payment because you get a better interest rate, a better program, a better mortgage insurance rate, and better homeowners insurance.

Desiree: Since prices of homes are typically driven by locations, school districts, suburban versus urban, the better your credit, the better interest rate you can get. It gives you more options for finding the location of your home. Because typically you can only buy exactly what you can afford. So if you can afford a little, then you're only going to be able to go to those places that support the price point of the home you're buying.

John: Credit is everything.

Desiree: That's the way it needs to be. Credit is everything. If your credit is good, your options across the board are even better. Knowing your money from the very beginning allows you to go out and shop for exactly what you want, exactly what you can afford, and be excited about the entire process.

I haven't found anything that's more distressing to me than to have someone start looking for a home online and then pick up the phone to call me and I say, well, let's talk about the price point your lender preapproved you for. And they say, great. And they've been looking, let's just say in the 200,000 price range. And I get them on the phone with John and John has the conversation with them. He has them send them the details, he needs to verify income and assets, and then he picks up the phone and says, Desiree, I've got bad news. I know, I don't like hearing those phone calls. I'm pretty sure, John, you don't like making those phone calls.

John: No, yeah, no,

Desiree: I don't want you to be set on a house that you love and then for John's phone call to both of us say Desiree, their price point really needs to be 20,000 lower. You will not be satisfied with anything that I show you at 175 or 80,000 when you've just seen the $200,000 house. You're going to be disappointed. You're going to feel like you're settling. You're going to feel like the houses are not worth you, and that this is not the process for you. When in reality, we just didn't set our expectations and start the process the way we should have. What is your recommendation, John, to people who are thinking about starting the process?

What do you do if someone picks up the phone to you first? Do they tend to call you first or do you tend to hear from the agent saying, I've got somebody who needs to talk to you?

John: First and foremost, I think you call your realtor; the person that is going to guide you in the home buying process from the very beginning, whether you've had your credit board or not. So all the way to the very end, and then a year after, the realtor is going to put you in touch with the mortgage lender they think will probably suit your needs. And whether you think you are ready or whether you think you're not ready, getting a start, that's, that's the first step. And the first step is pulling credit.  I've had lots of clients where I've checked their income and they're in a great position to, to buy a home and then we, we check their credit and there is something on there that they didn't realize was there and it stopped the process. Go ahead and check your credit if you're not ready, you can be put on a path to get ready. That's why they call my company Lending Path. As we like to put you on a path to home ownership. The realtor, the mortgage lender, we want you in a home. We want you to buy a home, and a good one is going to help you along that path. The first step is getting with a realtor and having the realtor get you in touch with a mortgage lender that is going to take care of you.

Desiree: Thank you so much, John, for joining me today. You've provided a lot of great information and clarity on a topic that intimidates so many. For my listeners, if you're interested in starting the home buying process, I encourage you to reach out to our guest host John Hinks Jr with Lending Path Mortgage.  His email address is johnjr@lendingpathmortgage.com or you can reach him at (803) 546-0522. We've also partnered with Urban Financial Solutions. If you're interested in or in need of credit repair services. They have graciously agreed to provide a one-time discount to our listeners who call to schedule a consultation, please call or email me directly for your special discount code.  I can be reached at Desiree@yadontknow.com or (803) 730-2406.

Thanks for listening and I'll talk with you again next week.

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C. Desiree Merriweather

With 17+ years of real estate experience, my career has given me more than the ability to take care of my family. It has given me an awesome opportunity to assist anyone who wishes to have a piece of ....

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