Buyer Beware: 'Tis the Season

Boy, you’re going to think I’m the Scrooge…and this article may not apply to most of you…but I want to reach out to those of us who rely on our credit cards to help finance the holidays.  You see, years past it was not uncommon for home owners to get into the spirit and purchase many gifts for our loved ones–going over the top (meaning beyond our budget).  Yes, it feels great to see the look of joy and surprise on little Johnny and Susie’s face when the open the gifts they’ve been longing for…but this year, you may not have the “fix” of meeting with your Mortgage Professional in January to “reorganize” your debt.   Just in time for the holidays, Fannie Mae is unrolling DU Version 7.1 which really puts a damper on cash out refinances.

This officially takes place over the weekend of December 13, 2008; however lenders will start implementing this soon (so that loans are in compliance for Fannie Mae once they are purchased).   A cash out refinance will be limited to 85% of appraised value of your single family residence.   By the way, if you’re refinancing a second mortgage/home equity loan that was not used for the purchase of your residence, this is classified as a “cash out” refinance–even if you have never received cash out and you only reduced the rate on your second mortgage on a previous refinance.  (A refinance including a “non-purchase” second mortgage is treated as “cash out” with pricing and underwriting–no exceptions).   This will force more home owners to FHA mortgages which allow higher cash out refinances at a cost (upfront and monthly mortgage insurance regardless of loan to value).  

Factor in home values and you can really see the challenge with doing a cash-out refinance.  Lenders count on appraisals to establish a value for your home.  This value is based on what other homes like yours have recently sold and closed for in your neighborhood.  No sales?  A short sale?  Ugh.  It doesn’t matter what’s listed down the street, what your assessed value is or what you feel the home is worth in the lenders and appraiser’s eyes.

Tis the Season for big sales, no interest or payment for X many months and credit card companies including blank checks in our statements with dreams of sugar plum fairies and hopes that we’ll indebt ourselves further.  Please don’t do it. 

  • Make a budget for your holiday shopping.
  • Pay cash.
  • Consider a gift exchange for your family.
  • Find alternatives to spending for celebrating the Season.

You may wind up trapped, like Ardell’s Six Pack Joe, once your interest rates kick in and your bills start piling up with no refinance in sight.   I’m here to say that YOU do have a choice and you need to be informed and responsible for your debts.   Mortgages are getting tougher (especially refinances) and chances are, your home equity is not here to rescue you.

I won’t go into how credit cards and home equity loans are being frozen or the credit lines are being reduced without notice (and how damaging it is to your credit scores when your borrowed amount is above 50% of the credit card limit).  

You have less than two months to plan for Christmas.  Don’t be stuck with extra debt and tanking credit scores…your home equity may not be there to save you (even if you have it, you may not have affordable access to it).

Understanding Credit Score and Credit Repair

Credit remediation is a subject consumers often face with fear and trepidation, and for good reason. With the exception of recognizing that the best score wins, the average home shopper knows very little about the whole credit scoring process. Sub-prime borrowers who are eager to move into A-Paper territory often find themselves at a loss when trying to find ways to upgrade their credit history. The good news is there are ways to improve less-than-perfect credit scores and obtain a loan for the home you really want.

The first step in the process is making sure that you have a current copy of your credit report. Congress recently amended the Fair Credit Reporting Act so that consumers may now receive one free credit report annually. There are three major credit bureaus: Equifax, Experian, and Transunion. Since entries can vary across bureaus, you’ll want to request a free report from each of the three companies. (Go to

It’s also important to know just what a good credit score is. Most A-Paper scores generally begin around 680, although this number may differ slightly among lenders. Don’t despair if you come up shy, there is always room for improvement. Increasing your score just 5 points can save a significant amount of money. For example, if your score is 698 and you increase it to 703, then you could save yourself thousands of dollars over time as a result of a slight improvement to your loan’s interest rate.

While credit repair is necessary for some, it’s not the only way to increase your credit score. Even if you have stellar credit, you can enhance your score through these steps:

  • Evenly distribute your credit card debt to change the ratio of debt to available credit. Let’s say you have a credit score of 665. If you have debt on only one card, and four additional credit cards with zero balances, evenly distributing the debt of the first card could move you closer, and possibly into, that ideal bracket.
  • Keep your existing accounts open and active. The average consumer is usually anxious to close credit card accounts that have zero balances, but doing this can cause them to lose the benefits of a long-term credit history and increase their ratio of debt-to-available credit. The bottom line is don’t close those old accounts!
  • Keep credit inquiries to a minimum. Each inquiry into your credit history can impact your score anywhere from 2-50 points. When it comes to mortgage and auto loans, even though you’re only looking for one loan, multiple lenders may request your credit report. To compensate for this, the score counts multiple auto or mortgage inquiries in any 14-day period as just one inquiry, so try and stay within that time frame.

Remember, credit scores don’t change overnight. Improving them requires time and diligent effort on your part, so it’s a good idea to get the ball rolling at least three to six months prior to submitting your application for home financing.

If credit repair is what you need, you can either begin the process yourself or seek out a repair service. If you decide to make your own improvements, visit as many websites as possible to get information regarding credit laws and consumer rights. Diligently search through them and educate yourself to ensure that you don’t sustain any self-inflicted wounds. A good place to start would be the Federal Trade Commission’s website, which contains a wealth of helpful literature.

If you’re facing severe or complicated credit issues, then you’ll probably want to enlist the assistance of a professional credit repair company. Before you do, be sure to familiarize yourself with the FTC’s regulations on credit repair. With over 1100 credit repair companies to choose from, it’s important to be certain you are dealing with a reputable firm. Examine the FTC’s information on fraudulent practices to avoid falling prey to credit repair scams.

Addressing credit issues can be uncomfortable to say the least. But by taking these steps now, you’ll be that much closer to obtaining the home of your dreams.

Additional Resources:

To order your free credit report, go to:

To read the Fair Credit Reporting Act, go to:

For the Federal Trade Commission’s information on consumer credit, go to: