Credit Issues to Avoid

This week I spent some time helping three families who are trying to buy a property from foreclosure. The property is a vacant lot and listed for sale by a Realtor. What makes it attractive is it provides each of them a water view, so it's in each of their best interests to keep the property vacant, and their best course of action to control this is to own the lot. As we gathered on the deck of one of the families, and discussed what the right amount to offer was, I quickly began to see that financing would be an issue.

In spite of each of their willingness to take on additional debt, the real question is, will the lenders allow each of them to acquire a 1/3 interest in a vacant lot. Oh, did I mention that the lot was waterfront and offered for $250,000? How to finance a vacant lot (with equal ownership of three families) becomes an issue. Most banks and mortgage companies want real “skin in the game”, more than they would if you were considering purchasing a house that would be your principle residence.

We are in the midst of interviewing lenders as I write this, but I believe these folks will have to come up with 50% down and finance the balance. And we are looking at setting up an LLC to actually hold the property, with an exit strategy for dissolving the LLC or at least buying out the “partner” who wants out first.

But as with any real estate deal, the bottom line is going to be financing. And this gets back to your credit “worthiness”. And so the lenders look directly at your credit score, from about 350 (poor) to 800+ (excellent) is a numerical rendition of your credit report. The higher your score, the more likely you'll get approved for credit and the more likely you'll get the best rate and terms. Conversly negative actions posted to your credit report, can ruin your credit score.

Here's my list of no-nos if you ever want to get a mortgage in the future. Remember these “dings” will stay with you for from seven to ten years, so if you want bad luck do yourself a favor and just break a mirror—don't do these:

Don't be a deadbeat. Any late payments; 30, 60, 90 days late will brand you as a deadbeat. Even one 30-day-late payment, while it may not ruin your credit, will appear on your report and can remain on your report for years.

Respond immediately if they're bringing in a collection agency. When the lender gets tired of your deadbeat behavior it will call a third-party collection agency. The collection agency will report this to the credit bureaus and again, seven years of bad luck.

Don't let them give up on you. Discuss partial payments, keep the account open. If the lender gives up on your collection case, acknowledging you'll never pay the bill, it charges off the debt and puts your credit report on notice for seven years.

Avoid a bankruptcy if you can. Tax liens, judgments and bankruptcies are killers for your credit rating. Judgments against you will fade in seven years, even if you pay them off. Bankruptcies can dog your credit report for 10 years and unpaid tax liens never go away.

A settlement is better than a bankruptcy. If you pay a portion of your debt to your lender in a settlement, for example if you have a short sale and most of the mortgage is covered, you can get a settlement notice on your credit report, and while it lasts for seven years there are millions of other folks like you, so I am of the opinion that issue will be forgiven.

Nobody wants a foreclosure. If you can't or won't pay your mortgage the lender will eventually foreclose and relieve you of your home. Another seven year negative notification will drag down your score. The same applies when you give the home to the lender to avoid a foreclosure. Lenders call this “jingle mail” where instead of the monthly payment, the envelope sent in by the borrower contains the house keys.

Dane Hahn is a real estate professional with Tarpon Coast Realty in Englewood, Sarasota and Boca Grande. He will answer your questions and can be reached at 941-681-0312 or at dane.hahn@gmail.com You can see him on the web at www.danesellsflorida.com.