There has been a lot written about credit. Without 
you will need it. Even with cash, you will probably need it in the economic reality we live in. However, I don't want to concentrate on how you can repair your credit or make it look better, I am going to concentrate on the reality of why your credit stands where it does.
The old cliche 'Bad things happen to good people' is true. I will vouch for such. But, there is a certain part of credit not often talked about in the lending industry. That part is you created the credit score you now have to live with.
There are 4 Keys To Lending:
Collateral - In traditional lending, this is the amount of money you have to put forth as a down payment when purchasing a home. In refinancing, this is the scale that balances what you have with what you want, do see if the 'what you want' side can carry a little more weight.
Capacity - This is one's ability to pay back the money they are asking to borrow. This is why you may be asked for pay-stubs, your last 2 years W-2's, bank statements, the most recent statements on your retirement accounts, etc. Put it this way, if I have money and live in a Capitalistic Society, I don't care if I'm lending to God....I want to make sure God can afford to pay me back.
Credit - Lenders are big on high credit scores, the higher your score the better you look. Yet, they also look at your pay history on the credit you've had past and present. If you have been trustworthy in the past, you are likely to be worthy of trust in the future, too. As in life, you are often judged by your past.
Character - Your job stability, your residence stability, along with your credit file, gives a glimpse to your character. The more stable your job, credit, & residence history are....the better your character looks and probably is.
That said, we all know that things happen. You may lose your job, live above your means, medical bills mount up, the amount of money you are making doesn't equal or exceed the economy you live in. In fact, you get behind. In some cases, you can't catch up at all. It's hard borrowing from Peter & Paul and knowing you still owe Mary.
So, I say, know the other (Fifth Key) to Lending. The Human Element! Let's address why your credit isn't as proper and proud as it should be. That element is a financial tool in this industry that is overlooked, understated, and not communicated in the proper way. That (Fifth Key) is a letter, a Credit Explanation Letter.
Personally, I love this aspect of lending. Not because I enjoy basking in the limelight of somebody else's financial misfortune, but because it introduces the Human Element into lending. With all the numbers, statistics, programs, products, guidelines, gidgets, jargon, yabba-dabba-freaking do....let's get back to being more than a number here folks. I was always taught that any file I put together to be submitted to the lender, must have a letter addressing any credit problems or issues of the past. Any late payments, bankruptcies, charge-offs, delinquencies of any kind....need to be addressed. The Credit Explanation Letter, while mandated by some lenders, serves as a valuable tool in making your case stronger to ensure you get the best loan for your needs.
Time-lines must match, events that happened must correspond to the dates of delinquency on the credit report. It tells a story and flows real nice....kind of like Mister Rodgers. Not too many of us like paying bills, but if we can....we do (at least I'd hope). If we can't, why can't we and how is that going to be turned around from here on forth? This is your chance to make a case for yourself and with a Mortgage Professional working with you to make it all pretty and stuff, it lends an added boost to your credibility in attaining a loan. So, if you have had credit issues currently and/or in your past, it may not be a bad idea to light a candle, grab a pen and paper, and pour your financial woe onto paper. Include that with the documentation you provide your Mortgage Professional. Consider them your editor, every human could use one.
Does a letter really make any difference or does it give you more ammo to fire at the underwriters? In our area letters from buyers to sellers are not used very often and a few times when out of the area buyers asked about submitting a letter with a low offer I have discouraged wasting the time.
Jason... is this a blog that is actually related to mortgages? ;o) <teasing> Hit some key points and as stated, a credit explanation can make or break a loan decision sometimes. Or at least delay it.....
Dan's comment confuses me a little. Letter from buyers to sellers? I can see if he is talking about real estate and the buyers offer... and even then, I have heard that this works some. But as you stated, in regards to credit, this can help. Good job. And look... I am # 4....
Jason, considering the foreclosure rate right now, this could become an art form. I agree with you that we really don't take the human factor into account any more at all.
Oh, by the way, if you ever get to the position that you loan money to God, don't forget your buddies down here. ;-p
Jason Sardi - You are a comment hog.
Sarah Cooper - Thanks for stopping by and my guess is if you are writing letters on behalf of your clients....more times than not, the offer will be accepted.
Dan Cummings - In my experience, it can help. Given the exact credit situation, loan to value, and everything else...if you send in 2 loan files and one has a kick butt credit explanation letter and one doesn't or has something like, "I just couldn't afford my bills at the time"....guess which one is getting axed?
Jeff Belonger - No, this post was really about the last time I shaved. I remember thinking about how smooth the whole loan process should be. I used my new razor, it was nice. I don't even like shaving. What the heck was this post about?
Andrew Trevino - You are right, this could become an art form....I want to master it myself. If I am in a position to lend money to God, I would hate to think I would turn God down. I may even be out of RESPA compliance because I couldn't send God the turn-down because I didn't have his proper address:-(
Jeff... Guess the confusion is because I didn't separate a two part comment.
First was the question about letters pertaining to credit and how they help. Not being in the mortgage business I figured everything is based on numbers and there was not much room for adjustments based on the human factor that a letter would provide.
Secondly was a continuation on Sarah's comment about letters from a buyer making an offer look better to the sellers.
Jason,
How true is that, character, there is alot more than just a score, now as for the credit explanation letter, I think thats great and very few use these, for any credit issues with their clients, I think they will more common practice now...
Nicely done :0)
Tom Weiss
Dan.... I pretty much understood that. But without putting words in your mouth, I thought I would just bring it up to clarify this for others. I hope Jason or someone answered your question about letters from buyers to the lenders. If not, yes, it can help. But this is for manually underwritten loans. We call this a LOE (letter of explanation) It's more helpful for those that went into bankruptcy who had some dings on their credit after the bankruptcy. We typically want a very detailed reason to what happened during and after the fact.
Jason... sorry, hope that I didn't hijack this, even though keeping with topic.
Is it Saturday yet?
Jeff - No problem, I apprecitate you stepping up. I will beat you down later:-)
Rob - 21 minutes and counting...
I think with what is happening in the world today, it is refreshing to know that someone is looking beyond the numbers. It is apparent you always have. Others mostly bypassed it to get to the core of the lending request and disregarded the 5th Key. Very well said my friend.
PS, Congrats on your piece on Sally's group.
Marlene - My fav is the Fourth C as well.
Tom - The senior partner at my firm was very firm that we always had one written up for our clients, whether we thought the lender would require it or not.
Paul - It will always be a numbers game, but this helps the cause.
William - Thank you Sir, your insight is always appreciated and well valued.
Sis - Our guys & gals in the Military are a great example.
Thesa - Everytime I rob Peter to pay Paul, Mary dumps me:-(
Diane - Thank you and if I ever can be of help, never hesitate to contact me.
Joe - I agree with you there.
Example of what I think is a Good Credit Explanation Letter, written by the Senior Partner at FCEGI, Scott Geary:
To whom it may concern: February 16, 2006
As requested, the following is an explanation of the deterioration of my credit file over the last year and a half.
> The $409.00 medical collections was a disputed bill. I believed my insurance company was to have paid that bill. I had not heard anything about it since. If need be, I will call the creditor for information and status. It can be paid through this loan.
> My financial difficulties began in the late summer of 2004. My print shop lost a large volume client to a competitor, costing me in excess of $2500.00 monthly in revenue. I have juggled personal and business expenses since, in efforts to keep everyone paid. In December of 2004, I enlisted the help of a credit counseling service to handle repayment of my revolving debt. Since, all has gone relatively well. Little by little, we have replaced the lost client though the addition of several smaller clients.
> My mortgage payments have been made on the last day of every month for the current month since December of 2004. I believe that the November 2005 payment was made by phone in the late evening of the 30th, and was too late in the day to be credited on the 30th. I have been unable to make 2 payments in any month to avoid that type of mistake. In April of 2005, my 2nd mortgage was 30 days delinquent due to tax payments that had to be made. I brought the account up to date immediately and have not been late since. That mortgage was also in December of 2004. A communications error with my counseling company caused that error as I thought that debt was included in the repayment plan. These late payments represent the only delinquencies I have on mortgage payments in my life.
The home loan I am requesting will pay all of my outstanding obligations, along with lowering my monthly payments nearly $600.00 per month. The goal of this entire transaction is to get my credit back to the high quality it has been for all of my adult life. I appreciate your consideration and assistance.
Sincerely,
Thomas H. Rodgers