12 Reasons Today’s Housing Market Is Not the Great Recession All Over Again

Posted on April 27th, 2020

While it’s becoming easier to compare the housing bust that sparked the Great Recession with today’s uncertain climate, the two just aren’t the same.

You’re probably going to see lots of articles warning of the next housing crash, claiming homeowners will be unable to pay their mortgages and forced to sell due to COVID-19.

But those opinions may ignore a lot of real statistics that paint an entirely different picture.

I used actual numbers from the latest Black Knight Mortgage Monitor report for February 2020 to illustrate.

Greater Share of Homeowners with 10% or More in Equity

then vs. now

First off, today’s homeowners are flush with home equity. In 2007, 14.5% of homeowners had 10% or less in equity. Today, just 6.6% have less than 10% equity.

This is due to several years of strong appreciation coupled with deleveraging.

In other words, not tapping equity via a HELOC or a cash out refinance, while also paying down debt via regular principal and interest payments.

During the early 2000s, homeowners were serially refinancing their homes while also making interest-only payments.

This meant they were overleveraging themselves and often getting into loans they couldn’t actually afford due to lax underwriting standards.

Loan-to-Value Ratios (LTVs) Are Lower Today

To that same point, today’s loan-to-value ratios (LTVs) are a lot lower than they were a decade or so ago thanks to more prudent underwriting guidelines.

The total market combined LTV (CLTV), which includes second mortgages, was 57.4% in 2007, and just 52.3% today.

The average CLTV was 61.83% back then, and just 53.31% today. Again, this shows many homeowners have lots of equity, as opposed to a massive mortgage on an overpriced property.

Simply put, equity means options, and vice versa. Even if borrowers struggle to make mortgage payments, the equity cushion provides better exits like a normal home sale as opposed to a short sale.

It also disincentivizes things like strategic default, where homeowners voluntarily walk away from their “worthless homes.”

Average DTI Ratios Are Also Lower

In terms of borrower capacity to repay, debt-to-income ratios (DTIs) are also lower today than they were in 2007.

While the average DTI at origination was 34.5% back then, it’s currently 33.5%. You might say it’s not much different.

But consider this – how many loans were actually properly underwritten back then? How many were stated income, effectively making the DTI measure useless?

The answer is most loans relied on stated income back then, while today’s DTI ratios are driven by real tax returns, pay stubs, and so on.

Borrower Credit Scores Are Higher, Delinquency Rate Lower

Then we’ve got credit, which is also better than it was leading into the Great Recession.

In 2007, the average original credit score was 708, compared to 736 today. And the average current credit score is 713, much lower than the 747 today.

While credit score isn’t everything, combined with more homeowner equity and better quality mortgages means lower defaults.

And we’re seeing that, with the mortgage delinquency rate 4.92% in 2007 compared to 3.28% today.

Again, you can thank properly underwritten mortgages for that, and a homeowner’s desire to protect the equity they’ve accrued.

Payment-to-Income Ratios Are Much Lower

Part of it just has to do with affordability, or the payment-to-income ratio.

It’s “a measure of how well home prices are supported by current incomes and interest rates,” and is much stronger than in years past.

In 2007 it stood at 31.8%, and today just 20.9%, a testament to how affordable homes are despite prices being nominally high.

Remember, you have to factor in inflation between now and then, along with higher wages, lower mortgage rates, and so on.

While the home may cost more than it did at the subprime peak, it’s actually cheaper for the reasons mentioned.

And again, a borrower’s income is actually verified today, as opposed to them simply stating that they made X amount per month.

Much Less Subprime Lending Today

While credit profiles are mostly better today than they were, subprime lending still exists today.

In the mortgage industry, it’s defined as a sub-620 FICO score, which is all you need to get an FHA loan or a VA loan.

However, the number of active subprime loans in 2007 was a whopping 5.1 million. Today, it’s less than two million.

To make matters better, these homeowners generally have more equity and a boring old 30-year fixed as opposed to some exotic mortgage.

Fewer Adjustable-Rate Mortgages and Option ARMs

Speaking of mortgage product, the number of active adjustable-rate mortgages is nowhere close to what it was in 2007.

Entering the Great Recession, there were a staggering 12,890,000 ARMs in circulation. Today, just 3.2 million.

Additionally, 4.95 million of those 2007 ARMs were scheduled to reset (higher) within three years.

Just 320,000 of today’s ARMs are scheduled to reset in three years. These borrowers also have fantastic options to refinance to a lower or comparable fixed-rate mortgage.

Then there were the option ARMs, which numbered 2,230,000 in 2007. Those are/were truly toxic mortgages that total just 320,000 today.

So to summarize, today’s homeowners have more equity, higher FICO scores, lower DTI ratios, properly-underwritten loans, and mostly fixed-rate mortgages with interest rates at/near record lows.

Throw in the fact that housing inventory is at its lowest point in years and it’s hard to compare then to now, even with COVID-19 beginning to make us question everything.

Source: thetruthaboutmortgage.com

Debt to Income Ratio Calculator

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Your Debt to Income Ratio (DTI) is a basic calculation used to express affordability. You can use a DTI calculator to find your own ratio. 

How to Calculate Your Debt to Income Ratio

Your DTI is calculated by combining all of your debt repayments and subtracting them from your total income, before expressing the calculation as a percentage. Use your gross monthly income and include rent/mortgage payments in your total outgoings.

As an example, if you earn $5,000 a month but pay $500 in rent, $250 in credit card payments and $250 in personal loan payments, then your ratio is 20%. This is considered low. However, if your income is just $2,500 and you have the same outgoings, then that ratio becomes 40%, which is considered high enough to cause financial stress.

How Important is It?

Lenders use the Debt to Income Ratio to estimate a borrower’s ability to make repayments. If we use the above calculation as an example, you have just $1,500 leftover every month after rent and minimum payments. If we add food, travel costs, and other essentials to the mix, that could drop as low as $500. 

That will be a huge red flag to a lender, who will seriously doubt your ability to make future repayments. A DTI above 40% will also impact your chances of getting a mortgage, with many lenders refusing to lend to anyone above 43%.

There are still personal loans available to consumers with a high DTI, but in these cases, they are supplied with a view to consolidation. The same goes for student loan refinancing.

How Your DTI Affects You

Your DTI does not directly affect your credit score, because the credit bureaus do not display your income or factor it into the equation. However, they do calculate something known as credit utilization, which works in a similar way.

Credit utilization is a comparison of the amount of credit that you have available versus the amount of credit that you use. A high score shows lenders you’re desperate to take what you can get and are more prone to maxing out credit cards; a low score suggests the opposite, hinting at more responsibility.

Credit utilization should be kept below 30%. This means you should avoid borrowing more than $3,000 on a $10,000 line of credit. Credit utilization accounts for 30% of your credit score and is a key factor in calculating your score, so it’s worth paying attention to.

One of the easiest ways to improve your credit utilization is to increase your current credit. Contact providers and ask them for a higher limit. This will increase the amount of available credit without increasing the used credit. 

How to Improve your Debt to Income Ratio

We’re stating the obvious here, but there are two ways to improve your Debt to Income Ratio, you can either earn more, or pay less. The former is easier said than done, but there are more options for the latter:

  • Pay more than the minimum – it may seem counterintuitive and won’t do you any favors in the short-term, but in the long-run it will clear more of the principal, lower the interest rate, and improve your rating.
  • Use windfalls and savings to clear debt – that vacation in the sun may seem like a great idea, but a few years’ peace of mind and easier access to credit and a mortgage is better than sunburn and beachside cocktails.
  • Avoid acquiring new debt – avoid taking any new credit, even if you qualify for it.
  • Keep an eye on your DTI to monitor your progress – it helps to know how fast you are progressing. You can use our Debt to Income Ratio calculator for this.

DTI and Credit

To give you an idea of how much your DTI affects your finances, here is a rough guide based on percentages acquired through our Debt to Income Ratio calculator:

  • DTI Score up to 15%: A low and favorable score, but as with all forms of debt, it’s worth monitoring your situation to ensure it remains that way.
  • DTI Score Between 15% and 25%: A ratio considered relatively safe and low. You shouldn’t have any issues.
  • DTI Score Between 25% and 40%: At this point things begin to look ominous, but it’s still salvageable. You will be offered higher rates when applying for new credit and should seek help via debt management. 
  • DTI Score Over 40%: Look into debt settlement, management or counseling. You are on the verge of being rejected for mortgages and will struggle to get loans and new lines of credit.
  • DTI Score Over 50%: You may qualify for some consolidation loans or refinancing options, but this is a severe state and requires immediate attention.

DTI Isn’t Everything

It’s important to remember that your Debt to Income Ratio score is just a rough calculation of affordability. It is used by lenders to determine whether you can afford to meet repayments, but it’s not the only thing they consider, nor is it the most important.

It’s not uncommon to have a high income and a fantastic credit score as well as a DTI of between 30% and 40%. In such cases, everything discussed on this page, including your score in our Debt to Income Ratio calculator, may seem a little strange. In such cases, just remember that the DTI is there for your benefit as well as the benefit of lenders. It’s a small red flag telling you that you should look into fixing your debt before acquiring any more credit or making any big financial decisions. 

It goes without saying that you can’t remain financially secure for long if more than a third of your income is spent on minimum payments, especially if you don’t own your own home and have any savings. 

Source: pocketyourdollars.com

What Is an Investment Property Mortgage?

If you’re looking for another source of income or want to start a side hustle as a home flipper, you may be considering the purchase of an investment property. Getting a mortgage loan for an investment property can be trickier than getting one for your primary residence, and obtaining a mortgage for investment property will require you to have a stronger financial picture than your typical mortgage loan would, too.

That doesn’t mean it’s impossible, though. Knowing your options when it comes to lending types, credit and financial criteria, and funding guidelines can help you navigate the process and ensure that you’re doing as much as you can to set yourself up for success.

In this article

What is an investment property mortgage?

An investment property mortgage is a loan that is used to purchase a property for either rental income or to flip and sell for a profit. Underwriting guidelines are more strict on investment property loans when compared to purchasing a home to live in or a vacation or secondary home.

Not all lenders offer investment property loans, as the risk of default is higher compared to lending money for a primary residence you plan to call home. That’s because you’re likely to continue paying your home mortgage payments in times of financial crisis. However, if rental income isn’t coming in for some reason, and you have to choose between paying your personal mortgage and your investment mortgage, you’re likely to pay to keep the roof over your head than pay on an investment property. This is also why mortgage interest rates are higher for investment properties vs. primary or secondary homes.

To get approved for a mortgage on an investment property, you must:

  • Have a good or better credit score
  • A down payment of 10% to 25%
  • Cash reserves available
  • Stable employment

What is an investment property?

An investment property is a unit that is purchased to provide a stream of income or to flip and sell for profit. This could be a single-family home or a multi-unit building with four or fewer units. Apartment and condo buildings with five or more units are considered commercial real estate and fall under separate guidelines.

Examples of an investment property can include:

  • Single-family home
  • Duplex
  • Triplex
  • Townhome
  • Condo

While many investors seek to gain a stream of income from renting their units out to tenants, others prefer to purchase a home to update or improve and then resell to make a profit. Either way, investment properties can be a lucrative source of income if you’re smart about your investment and are able to nail down an investment property loan for your purchase.

That doesn’t mean there aren’t risks, though. As with anything, there are pros and cons to owning rental properties as well as tax benefits that make purchasing investment properties an attractive way to make money. But with mortgages at historically low interest rates, buyers with the funds, credit and the desire to invest could consider an investment property a viable source of income.

Difference between investment property loan vs. regular mortgage

While you’ll choose from the same loan types — conventional, fixed, adjustable rate, government-backed — for both regular mortgages and investment property loans, the interest rates and lending requirements vary vastly from one to the other. From a lender’s standpoint, a mortgage loan for an investment property is riskier than for someone’s home, which is reflected in higher interest rates. The average interest rate can be as much as 0.75% more for investment property loans when compared to conventional mortgage loans.

On top of higher interest rates, lenders also have stricter guidelines to follow for investment property mortgages. For example, the real estate lending standards set by the FDIC limit the loan-to-value of an investment property at 85%, whereas the LTV of an owner-occupied residence can be as high as 100% depending on the loan type and lender.

While buyers who purchase a home with a regular mortgage can get away with a much lower down payment — in some cases as low as 3.5% with an FHA loan or 0% with a USDA loan — investment property lenders want more down on the property. Depending on the property, the lender and your credit, expect to pay between 10% and 30% down on the property.

Lenders also expect borrowers to prove they have at least six months worth of cash reserves available to pay for the mortgage, whether or not they have tenants lined up yet.

Requirements for an investment property mortgage

While lender requirements vary, some general requirements you can expect when applying for an investment property mortgage include:

  • Low debt-to-income ratio. Freddie Mac’s investment property guidelines for DTI for is 45%. The lower your DTI, the better chance you have of getting a low interest rate on your loan and more lenders vying for your business.
  • Significant amount of borrower funds. You’ll need a significant amount of cash that you can prove came from your savings or investments to get an investment property mortgage. Your down payment and closing costs may not include the use of gifted funds, so plan accordingly when sourcing cash if you don’t have the money saved and ready for use.
  • Higher than average credit profile. You’ll need a relatively high credit score to qualify for an investment property loan. Most lenders will require a minimum credit score of 620 to qualify for an investment property mortgage, though some like Guaranteed Rate will go as low as 580 and others will require a much higher score to qualify. But even if you can find a lender who will work with a lower score, you may want a higher score before applying. Higher credit scores command better interest rates and lower down payments.
  • Financial documents. As with a regular mortgage, you must provide pay stubs or other ways to show employment income, as well as your prior year’s tax returns and any other information or documentation that the lender requests.

Where to get an investment property mortgage

Though it’s riskier to lend money to investors, this likely won’t limit the lender options you have to choose from. While not all lenders offer investment property loans, there are a number of mortgage lender types to consider, including:

  • Conventional banks
  • Online lenders
  • Credit unions
  • Peer-to-peer lenders

Online lenders and credit unions may offer better interest rates or have more lenient guidelines than conventional banks, so these lenders are worth checking out. Credit unions are member-owned nonprofit financial institutions that require you to join as a member, but the application process is generally simple and can greatly benefit you in the form of lower rates, flexible lending parameters and other perks.

Private investors, known as peer-to-peer lenders, are also an option, though interest rates tend to be even higher with shorter repayment terms. These types of lenders also often charge more fees, including pre-payment penalties, to borrowers.

Another option is to do a cash-out refinance on your primary residence to pay for the investment property. Depending on the amount of equity you have available, you can pay for some or all of the cost without having to find an investment property lender. This isn’t always ideal though, since you’re essentially wiping out the equity in your home for a more risky investment.

Ultimately, the best way to find the right investment property mortgage is to shop around and see what different lenders offer. Each borrower has different needs and goals, so you may have to shop around to find a lender that’s a good fit for you. It’s smart to do that no matter what, though — as you should shop lenders in order to save money on rates and fees, too.

Compare top mortgage lenders

We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

Source: thesimpledollar.com

Can I Get a Mortgage With Student Loan Debt?

Do you remember your college experience? More Americans than ever before are attending college or university, but there’s just one little cloud that rains on that parade: debt.

The unfortunate reality is that many young Americans who are beginning to think about buying a house or starting a family are still on the hook for at least some portion of their student loans. This has the potential to make buying a house difficult, and many analysts believe that this has contributed to the overall decline in millennial homeownership. Fortunately, there are steps you can take to limit the impact your student loan debt has on your housing prospects.

Buying a house is definitely possible, even with student loan debt! Today, we’ll talk about how student loan debt affects the home buying process, and how a supportive loan company like Homie Loans™ can help you overcome these potential obstacles.

The Challenges of Getting a Mortgage With Student Loan Debt and How to Overcome Them

There are many reasons why having a large chunk of student loan debt can be a challenge during the home buying process. Primarily, it has to do with debt, savings, and your credit score.

Your Debt-to-Income Ratio

Your debt-to-income ratio (also known as DTI) is a metric that lenders use to evaluate your finances when they’re looking at offering you a home loan. It can be calculated by taking all your incoming money (salary, investments, etc.) and comparing that figure to your total existing debts. The higher your DTI ratio, the riskier a lender will consider your loan.

Your student loan debt is considered in your DTI by looking at your monthly payment or your total outstanding balance. Remember, student loan debts have different requirements, standards, and deadlines. A certain percentage of those, no matter their circumstances, will be counted toward your DTI.

Cut Down on Debt

You don’t need to be entirely debt-free to buy a home, but you should definitely have your debt under control, and preferably under the standard 28% debt-to-income ratio. To lower your DTI, you can either look for ways to elevate your income, or you can pay off some debt – preferably both! When paying off debt, look for the debt with the highest monthly interest rate, and pay that off first.

Some people choose to refinance their student loans, which is a way to negotiate a new monthly payment and a corresponding lower interest rate. If you can refinance responsibly, this is a good action to take.

The Price of a Down Payment

Even if you do have a good DTI, chances are it’s more difficult to save when you have to put money towards your student loan debt every month. Every $100 that gets repaid is $100 that you can’t put into your own savings. Many people with student loan debt find saving challenging for this reason.

Look Into a Loan

There are a lot of things that younger buyers don’t know about the home buying process. One of the most important things to realize is that in some circumstances, there are loans available that can help with either your down payment, or your mortgage. These programs include down payment grants (great for lower-income buyers), forgivable second mortgages, and matched savings programs.

Your Credit Score

Another way that student loan debt affects your ability to buy a house is through your credit score. If you haven’t made your payments on time, or if you’re relying on multiple credit cards and lines of credit to make ends meet while paying off your debts, this will negatively affect your credit score. The lower your credit score, the harder it will be to get a good interest rate on your mortgage.

Improve Your Credit Score

There are a lot of factors that go into determining your credit score. Healthy financial habits will help keep your credit score high. These include paying off debts on time and using a smaller percentage of the credit that’s available to you. It’s also a good idea to avoid new debts like a car loan if you’re planning on buying a house in the near future. It will also help you to pay your payments on time, this is an easy way build credit.

Get Pre-Approved for a Mortgage in Advance

Another great way to make the home buying process easier, especially if you have student loans, is if you get pre-approved for a mortgage in advance. That way, you’ll know your budget going in, and there’s no rush to secure a mortgage in the middle of the house-hunting process.

When you’re pre-approved, it can also help sway sellers, because they know you’re serious about your purchase and have taken the time to come in with all your documentation ready to go.

Make the Home Buying Process Easier With Homie Loans

Having some student loan debt doesn’t mean the housing market is closed to you. With some careful financial planning, you can continue paying off your student loan while searching for your dream home.

If you want a partner in the process that can also offer substantial savings on a great mortgage rate, try Homie Loans. You can take advantage of our great rates even if you’re not buying with a Homie agent! If we can’t offer you the best locked loan rate, we’ll give you $500 in cash.*

Read more about preparing your finances for homeownership!

Tips for Affording Your First Home
Common Home Buying Fears and How to Overcome Them
What Are Closing Costs?

*Subject to Terms & Conditions

Source: homie.com

Understanding Derogatory Marks on your Credit Report

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A derogatory mark can remain on your credit report for up to 10 years and cause a lot of damage to your credit score. But what exactly is a derogatory mark (also known as a negative mark or derogatory account) and how can it affect your credit score, and can it be removed?

What is a Derogatory Mark on Your Credit Report?

A derogatory mark is a negative mark that appears on your credit report following a financial mishap. It generally refers to any adverse outcome that has a long-lasting impact on your score, which means it includes bankruptcy and missed payments, but not hard inquiries.

Derogatory marks can appear on your credit report via one of two ways:

  • Reported Information: Lenders send information to credit reporting agencies and this information is used to build your credit report and calculate your credit score. It includes all data pertaining to your payment history, including derogatory marks from collection accounts and late payments.
  • Public Records: A credit bureau can add information to your credit report that is public record. This tends to be very damaging and can last for up to 10 years. It includes bankruptcy filings and tax liens, as well as civil judgments.

The many things that can cause derogatory marks include:

  • Miss a payment (can include a student loan, credit card, or any other debt).
  • Allow an account to enter collections or to be charged-off.
  • Settle your debt via a debt settlement company.
  • File for bankruptcy.
  • Your home is foreclosed.
  • You have unpaid tax debts.
  • You owe a debt through the courts.

How Derogatory Items Affect Your Credit

The way that a derogatory mark impacts your credit will depend on a number of factors, including your current credit score and credit history. If you have a bad credit score, the reduction may be minimal; if you have a good score it could remove up 150 points from your total.

This may not sound like much when you consider credit scores run from 300 to 850, but 150 is enough to send a previously “Exceptional” borrower into the “Fair” range, bypassing “Very Good” and “Good” on the way and greatly reducing their chances of securing low-interest loans.

You won’t see as big of a drop if your score is already low, but you could easily become one of the 16% whose scores are in the lowest possible “Very Poor” range, at which point you’ll be rejected for nearly all types of loans and credit cards.

Of course, it also depends on the type of derogatory mark. Bankruptcy, for instance, will impact your score much more than a late payment.

Open and Closed Derogatory Marks

There are two main types of derogatory mark: Open and Closed. These refer to the status of the account. An account that is in collections, for instance, will be classed as “Closed”, as is the case with ones that have been charged-off. An account that continues to receive monthly payments is classed as Open.

Both Open and Closed derogatory marks can seriously damage your credit score.

How Long Does It Take to Get a Derogatory Mark Removed?

There are a few ways you can remove derogatory marks quickly and with relatively minimal fuss. However, in most cases, they will remain for the term, which can vary depending on the type of mark. 

  • Bankruptcy: Whether you file for Chapter 7 or Chapter 13 will dictate whether the mark remains for 7 or 10 years.
  • Foreclosure: If you fail to make mortgage payments then your house may be repossessed, with the derogatory mark remaining for 7 years from the date of foreclosure.
  • Short Sale: A short sale can appear as a settlement or charge-off and will remain on your credit report for 7 years.
  • Collections: A collection will show for 7 years plus an additional 6-months from the date it was due. This may be true even if you clear the account in that time, although this isn’t always the case.
  • Tax Liens: Will remain for 7 years from the date they were filed, providing they have been paid.
  • Judgments: Both paid and unpaid judgments typically remain for 7 years, but it depends on the statute of limitations in your state of residence and on whether or not the judgment has been renewed.

What are the Permanent Effects?

Bankruptcy is one of the most damaging derogatory marks you can have, so let’s use that as an example. The average American credit score is around 700 (based on the latest FICO Score) and based on this score, bankruptcy can reduce it by between 130 and 150 points.

That’s a big hit to take in one go, especially if you have additional problems coming your way in the near future. However, once those problems have been dealt with, your score will gradually improve. There are ways that you can expedite this process and improve your credit score, but regardless of whether you employ a credit repair process or not, the effect of that bankruptcy will gradually reduce over time.

Once the 7- or 10-year period has elapsed, it will disappear completely and will no longer influence your credit report. There’s a good chance your credit utilization score will be low, as high-limit, low-balance credit cards are not exactly easy to come by during bankruptcy, so you’ll need to work on improving your score. But the worst of the process will be over and the effects of that derogatory mark will no longer be felt.

How to Avoid Derogatory Marks on your Credit Report

Everyone is at risk of getting a derogatory mark because no one is infallible. If you have active accounts, there’s always a chance that you will miss a payment or two, triggering a domino effect that ultimately results in a plummeting credit score and a litany of negative marks.

Keep your credit score strong and your credit report positive by following these simple rules:

  1. Be Aware of Your Credit Reports: Check with all credit bureaus at least once a year. You are legally entitled to a free credit report from each one every year and there are multiple free credit report services that can keep you informed all year long.
  2. Follow Through: Contact doctors and hospitals after appointments to make sure there is no remaining balance. As discussed in our guide to Medical Debt and Your Credit Score, medical bills are not added to your credit report unless they enter collections. Some debtors only learn about unpaid medical bills when they receive a derogatory mark or a demand from a debt collector. 
  3. Pay All Debts: Don’t assume you have gotten away with debt just because it doesn’t show on your credit report. It may appear eventually and if you don’t make payments it could enter collections. Pay all debts or at least learn more about them to better understand your options.
  4. Make All Payments: Every monthly payment has to be made on time. The longer you delay, the more damage it will do to your credit score and the longer it will take you to recover and repair your credit.
  5. Use Debt Relief: If your debts are too high, consider debt management, debt consolidation or even debt settlement, but always read about them beforehand and make sure you’re aware of the pros and cons before you commit.

Strategies to Remove Derogatory Entries on your Credit Report

Contrary to what you might have been promised elsewhere, there is no sure-fire way to remove derogatory marks from your credit report if they are accurate. There are companies that promise to do this, but the vast majority are outright scams seeking to sell you on a service that doesn’t exist while the rest offer risky and immoral strategies such as buying tradelines.

These scams prey on the desperate and make a killing by exploiting the debt relief industry. Stay clear of them and trust your instincts—if it sounds too good to be true…well, you know the rest.

Check your Credit Report

Credit reporting agencies aren’t as reliable and flawless as you might think, far from it. They can, and often do make mistakes. An FTC study found that 1 in 4 consumers has an error on their report that is severe enough to impact their score. 20% of these have their reports fixed after filing a dispute with the credit bureau responsible; 80% experience modification of some kind.

The first step in any credit repair process, therefore, is to check your credit report and become acquainted with the specifics. Not only will this allow you to identify and deal with fraud and errors, but it will also ensure you’re fully prepared to tackle your financial issues head-on.

Right the Wrongs

If your credit score has dropped as a result of several derogatory marks, it’s fair to say that you didn’t have control over your finances. You need to change that going forward:

  • Create a list of all outgoings and incomings.
  • Calculate your debt-to-income ratio (DTI).
  • If your DTI is high, acquire a debt consolidation loan or refinance.
  • Start budgeting and making sacrifices.
  • Prepare some emergency funds to cover you in the future.

Rebuild Credit

Unsecured credit card debt and personal loans probably got you into this mess in the first place and should be avoided. However, there are a few forms of credit you can use to rebuild your score without taking a big hit in the process and without being subjected to countless refusals and high-interest rates:

  • Secured Credit Card: A card that is “Secured” against a cash sum. It’s like a phonecard—you place some money on it and then use the card to spend that money. Every month your score will gradually improve and you’ll have a clean, positive credit account to your name.
  • Lending Circles: We wrote an extensive guide to lending circles here, discussing how these programs can help you to quickly and safely build credit, without acquiring costly interest rates.
  • Store Cards: A store card is basically a credit card with a high-interest rate and a ton of perks. These cards can be dangerous if you’re impulsive and have a history of running high credit card bills, but if you’re relatively responsible and have every intention of clearing your monthly balance, they can be useful. They’ll give you an account you can use to build credit and will provide you with additional features and perks. Keep the limit low to avoid temptation and don’t spend more than you can afford to repay. 

Don’t Rush

Credit repair takes time and is not something you should rush into. Doing so could lead to regrettable and costly mistakes, such as opening new accounts you can’t afford or committing to a debt relief program that damages your score. It’s important to take your time.

Wait for 7 to 10 Years

After 7 to 10 years, the derogatory mark will disappear completely, but after just a few years you’ll start to notice its effects much less. From that point on you can begin to rebuild your credit so that when the derogatory mark finally clears, your score is in “Good” or “Very Good” standing.

Conclusion: Derogatory but Not Devastating

Derogatory marks are negative, there’s no denying that, and they can do some serious damage to your credit report. However, all this damage can be reversed with a little patience and perseverance and you can still have a strong credit report even with the odd negative mark.

So, don’t despair if you’re hit with a derogatory mark—stay cool, learn the cause, look at the solutions, and do all you can to avoid additional marks landing on your report.

Source: pocketyourdollars.com

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Good Financial Cents, and author of the personal finance book Soldier of Finance. Jeff is an Iraqi combat veteran and served 9 years in the Army National Guard. His work is regularly featured in Forbes, Business Insider, Inc.com and Entrepreneur.