Countless people lost everything as a result of the banking and real estate meltdown. These individuals may be down, but they are not out. They are committed to rebuilding their financial lives, but they may have little idea of how or where to start. This is where you come in. By having the knowledge to guide your clients in the right direction, you will differentiate yourself from others, strengthen your relationship with your existing clients, and open yourself to an entirely new group of potential clients. Every individual in this situation must work their way through the same basic steps. The difference is that with your help, they can position to move through these steps in a fraction of the time and be in a much stronger financial position on the other side.
Sorting Through the Rubble to Bring Closure to Outstanding Issues
Before we can even consider helping a client purchase a new home, or anything else for that matter, it is integral to understand their current position. Credit issues, outstanding debt ratios, foreclosures, bankruptcies, and judgments all create significant roadblocks for an individual seeking financing in the future and must be dealt with prior to moving forward. Remember that even with an 800+ credit score, some of the issues mentioned above can eliminate a client’s ability to secure financing. The overall financial picture of the client must be sorted through in order to determine options, as well as the appropriate payments an individual can afford to pay and/or funds available to settle and bring closure to their issues.
Stability and Good Financial Decisions are the Keys to Rebuilding
Remember, it’s not about how much you can qualify for, or what percent of a discount on the debt you can negotiate in a monthly payment. Rather, it is about what YOU can afford, whether it’s a monthly payment or lump-sum, ALL things considered. The last part—all things considered—is a whopper. People will often negotiate a monthly repayment plan that may be less than the original debt or payment, but no more affordable than the original monthly payment, all things considered. Remember, prior to their financial crisis, many of these consumers had never missed a single payment in their lives, which means they always had available credit to fall back on in a pinch. Today, they have to manage their money to the penny because they may not have one dollar of credit to fall back on. Their budget must include an emergency fund. However, the majority believe money management was not the thing that caused the problem in the first place, so this is not something they need to worry about. They are wrong! As a result, the idea that they need to manage money better than they did in the past does not even occur to them until it is too late. If they are to pay off outstanding debt or rebuild themselves moving forward, they cannot miss a single payment. If they do, they will end up back where they started. They must focus on money management in a way they never have before. Only then can they make decisions from a position of financial accuracy. Being thrifty is not money management, and balancing a check book at the end of the month when it is too late to do anything about it is futile. These people must become experts in day-by-day money management, because they cannot afford to make mistakes when there is no available credit to fall back on. The problem is, despite what people will tell you, managing a controlled monthly spending plan is extraordinarily challenging. The notion that “I’ll just make more money” is NOT an answer to this dilemma. Make no mistake…success or failure will depend on this skill!
Clearing Away the Junk
After we have sorted through everything and created a clear picture of what we need to pay, negotiate, or settle, it is important to ensure that these items are all recorded and accounted for in the proper ways. Simply paying off an account or settling a debt may not be enough. If you settle a judgment with a law firm, nine out of ten times, the law firm will not record this with the county where the judgment was originally filed. Getting a paid receipt or a letter of satisfaction from the law firm is NOT enough! You need to make certain that your efforts are rewarded in credit reporting and underwriting when seeking financing in the future. This must be done at the time the debt is settled. If you do not realize this until you are in the midst of underwriting for financing, fixing it at that point could actually hurt your credit and not help!
Here is another one of those issues that everyone thinks they understand but, in fact, do not. Allow me to illustrate. Did you know that the average consumer’s credit score fluctuates by as much as 40 points throughout the course of the month, depending on when the payees (mortgage companies, auto loans, credit cards, etc.) report the payments to the credit bureaus? Did you know that one missed payment, even a minimum payment on a credit card, can lower your credit score by as much as 100 points? Did you know that seeking financing at a car dealership could eliminate your ability to purchase or refinance a home for one to two years? Did you know that if your credit score is pulled for a home loan and car loan, and these occur five minutes apart, that the score could literally be 20 to 100 points different?
Each time credit is pulled, it is pulled under a permissible purpose, meaning the type of financing you are requesting. When credit is pulled for each unique type of financing, different formulas and algorithms will be applied to the same information on your credit report. This can create a totally different score with the very same information. For example, if you missed a car payment two years ago, but have never missed a mortgage payment, your credit will be different when requesting these two types of financing. The reason is that when your credit is pulled under the permissible purpose for auto financing, it will focus on your auto payment history and apply more negative weight to a missed car payment than if your credit were pulled for a mortgage financing. While it is certainly more complicated than that, you at least can get a sense of how this works. This is why pulling your own credit report or score is basically worthless when you go to the bank to get a home loan, car loan, or even a credit card.
Did you know that paying your credit off in full each month is not nearly as valuable as carrying a low balance and managing credit? Conventional wisdom would tell you that the less you use credit, the more solid you are, and the faster your credit score will recover. This is wrong! If your goal is to rebuild your credit, you do not get to opt out of the credit system as an answer to overcoming your credit challenges. Did you know that the more times you demonstrate an on-time payment, the faster you will build up credit and overcome negative weight? So, one credit card payment that reports to the three credit reporting agencies will provide you with 36 on-time payments to offset your negative credit over the next three years. However, if you have six credit cards (6 x 36 months = 216), you would have had an opportunity to demonstrate 216 payments over the same period of time. Which one do you think will offset more negative payment history and build a good credit profile faster…36 on-time payments or 216?
Obviously, the issue is that if you do not manage your money flawlessly, the very thing that would help you rebuild your credit will ruin you. Did you know that if your average balance exceeds 20% of your available credit line, it can and will lower your credit score? Did you know that credit card companies generally do not report what you pay your credit card down to at the end of the month, but rather the average balance you carry throughout the course of the month? The other possibility is that they report whatever your balance is when they produce a new bill, despite the fact that you might be paying it in full. All of this proves that money management is literally the single most important tool to ensure you can quickly recover. With that said, knowing the rules to the game is critical.
Building the Foundation
Preparing for future financing is often the most difficult part of the process of rebuilding. The reason is simple—rather than requiring a few specific actions or decisions, it requires a fundamental change in the way we think. I call this positioning for future financing. If you know the underwriting guidelines and standards in advance, you can manage your financial affairs to position yourself to qualify for financing in the future. With that said, how many consumers even know the underwriting requirements and standards, much less position themselves two to three years in advance? Here is a brief example: You will need to have two active trade lines with at least 24 months of payment history to qualify for a home loan. How would you like to attempt to purchase a home, and then have a mortgage professional tell you that you need to establish another credit card and use it for two more years before you can purchase a home?
You Can be the Hero
Imagine if you had no barriers, and you could go back to where you started your working life, bringing with you the knowledge and experience you have now. How much more could you have accomplished, and how much faster could you have done it? Guess what? Tomorrow is a new day, and we all have that chance. Be a hero in someone’s life and help them overcome their challenges, or maybe even be the hero of your own story. You can overcome financial obstacles and position clients to become homeowners in a fraction of the time you thought possible. You just need to be willing to help them when they need it most.