Ask A New Jersey Closing Expert

Managining creidt is a long and sometimes confusing process. There are people everywhere giving contradictory advice. So here is my take on the couple of myths out there that hurt potential homebuyers chances to get a good mortgage.

1. You should avoid using credit cards

Thats a myth is crazy. There is an article that I read in the American Chronicle that acutally advocated that consumers stop using “their credit cards, pay off everything and go to an all-cash plan.” Boys and girls this is bad advice in my opinion as in order to prove to the FICO scoring system that you know how to manage revloving debt, you MUST dare I say NEED to have active credit card accounts with some balances on them. I dont suggest you go off the deep end and get 15 credit cards and just charge everything onto your cards that you cannot pay down. But I do suggest you get one or two credit cards to buy your groceries, gas, dinners with the family etc. and then you pay them off every month; that will show the scoring system that “hey this guy/girl can handle credit and is a financially prudent person.”

2. The Type of Credit Card Doesn’t Matter

Here is a little suprise; it does! The credit scoring system does not like third party finance cards i.e. department store cards, clothing store cards. The scoring system defers and gives perference to major credit cards such as good old Visa and Mastercard.

3. Paying off a Charged-Off Credit Card Account will Improve Your Credit Score

This is definitely a myth because if you have an old charged off credit card debt and you make payments on it all of a sudden, you renew the 7 year credit reporting statute from the date of the payment (Thats the Law People). The best path to take in my opinion is to debt negotiate i.e. offer the creditor .25-.50 cents on the dollar as payment in full exchange for the a deletion letter from the creditor; the important thing to ask for is the Deletion Letter.

 Thats my take on some of the myths I hear and read out there. Do you research and do your thinking but do not follow the myths in the market blindly.

Your friend,

Ankit Duggal

www.qualitycloser.com ”Fulfilling all your Closing & Notary Needs”

Resources:

American Chronicle Article , Jan 10, 2007 publish date

You Magaznie, Santi Rodriguesz, March 2008

“What started in subprime is likely to continue cascading into the markets and keep the economy down until 2010, economist Paul Krugman forecasts. Bottom line for homeowners: An average drop of 25%.” - Paul Krugman, Economist

It’s a terrible market out there but there are still people saying that we should jump in now as the market has seemed to bottom. Are they right?- Maybe. But I think that we are still not at our bottom; Why do I think this:

“Today’s housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low interest rates of a weak economy. Either the economy’s long-term prospects will get worse or rates will rise. In either scenario, housing will weaken.” Business Week

A. Prices still disconnected from fundamentals. House prices are still much too high, far beyond any historically known relationship to rents or salaries. Yearly rents are 3% of purchase price. Mortgage rates are 6.5%, so it costs more than twice as much to borrow money to buy a house than it does to rent the same thing. Worse, total owner costs including taxes, maintenance, and insurance are about 9%, which is three times the cost of renting. Salaries cannot cover mortgages

B. Buyers borrowed too much money and cannot pay the interest. Now there are massive foreclosures and senators are talking about taking your money to pay for your neighbor’s McMansion, even though no one in the US has been made homeless by foreclosure. In fact, forclosed owners end up far better off: they go reap large savings every month, since it costs less than half as much money in rent as they were paying to “own” the very same thing.

C. Shortage of first-time buyers. High house prices have been very unfair to new families, especially those with children. It is literally impossible for them to buy at current prices, yet government leaders never talk about how lower house prices are good for pretty much everyone, instead preferring to sacrifice American families to make sure bankers have plenty of debt to earn interest on. Every “affordability” program drives prices higher by creating more debt for buyers to use.

D. Fraud. It has become common for speculators take out a loan for up to 50% more than the price of the house he intends to buy. The appraiser goes along with the inflated price, or he does not ever get called back to do another appraisal. The speculator then pays the seller his asking price (much less than the loan amount), and uses the extra money to make mortgage payments on the unreasonably large mortgage until he can find a buyer to take the house off his hands for more than he paid. Worked great during the boom. Now it doesn’t work at all, unless the speculator simply skips town with the extra money

As this post hopefully shows you that there is still a lot of bad in the market that we have to clean up. We are no where close to having bottomed yet as Real Estate analyst at big firms have stated that we are still in the middle of the housing decline and have yet to see the full effect of the exotic ARM blow up. Hope this gives you all food for thought.

Your friend,

Ankit Duggal (AD); www.qualitycloser.com

Sources:

1. Business week

2. “US Housing Crash Continues”; Housing Crash Continues, Bubble Pops. http://patrick.net/housing/crash.html