Repair Your Credit…

Buy a House!

The Ultimate “How To”

Credit Repair Guide

Kathleen K. MacKenzie
Copyright© 2008 by Kathleen K. MacKenzie. All rights reserved. No part
of this publication may be reproduced (by any means) without the express
and written permission of the publisher or author. ISBN: 978-0-557-
02816-0

This guide is dedicated to helping future

homeowners make their dreams of home
ownership come true!

This publication provides the Author’s opinion and expertise in the field of
residential real estate sales. Neither the Publisher nor the Author intend
with this publication to render legal or accounting advice.

All names and persons in this writing are purely fictional. Any correlation
between actual people and the characters is strictly coincidental.

With regards to real estate, tax matters or legal matters, the Publisher and
Author strongly suggest that the reader seek, when necessary, the services
of appropriately licensed professionals who comply with the local licensing
requirements of the community in which the reader resides.

The Publisher and Author disclaim any personal liability, loss, or risk
incurred as a consequence of the use and application, either directly or
indirectly, of any advice, information or methods presented herein.

NOTE: For simplicity’s sake, people of both genders are referred to

intermittently throughout this guide. This in no way signifies that
women are better in some roles while men are better in others!

My deepest gratitude goes to the following people for making this book
possible: Merry Zumwalt (whose editing help was priceless!); John
Winkler for sharing his knowledge and guidance over the years; and to
James C. Ivy for his non-stop encouragement to write! Thank you.

2
 Contents
chapter 1: denied ........................................................ 5

chapter 2: identifying debt & income ...................... 11

chapter 3: creating a workable budget..................... 19

chapter 4: getting debt under control....................... 25

chapter 5: working with creditors ............................ 31

chapter 6: improving FICO scores ........................... 41

chapter 7: qualifying for a home loan ...................... 45

chapter 8: finding money for down payments ......... 63

glossary...................................................... 67

index ......................................................... 77

3
4
 chapter 1
denied

“Oh, okay. Thank you,” Donna said before hanging up the

phone. The disappointment was easy to read across her face.

“Another denial?” asked David.

“Yeah.” Donna confirmed. “I think we might as well give up

on buying a house. All those companies saying no down
payment, bad credit okay don’t tell you the details. We’ll
never get a loan that doesn’t charge over ten percent interest.”

5
David nodded in agreement as he turned his attention to the
newspaper in his hands. Donna sat down at the kitchen table.
She rested her head in her hands as she tried to come up with
other ideas.
§

She and David were now in their early thirties. They had
talked about owning their own home for a few years. Yet
they had just been told, again, their credit scores were too low
and their ratios were too high to qualify to buy a house they’d
liked. Sure, if they could come up with enough cash for a
twenty percent down payment and pay a higher than market
value interest rate they could buy the house. But, that was
crazy. There just didn’t seem to be any good choices for
Donna and David to buy a home. Last year anyone could get
a loan. People were getting loans with no documents, just
“stating” their income with no proof. Now with the mortgage
crisis sweeping across the nation, it seemed nobody could get
a loan. Had they waited too long? Had they missed their
opportunity to own a home?

Does this sound familiar? Would you love to buy a home, but
don’t have 20% for a down payment. You know there are
programs out there, but maybe you just don’t even know
where or how to start the process and it just seems too
overwhelming? Then follow along as Donna and David
discover how set up a budget, improve their credit scores then
apply and are approved for a FHA loan to purchase their first
home – all within only 3 months!!*

6
 *Note: Time necessary to repair credit and be approved
for home loans vary from case to case. It could be as
quickly as 60 days or take as long as two years, or more.
The key to success is to plan your strategy and stick to it,
no matter what!

“Look at this…” David said as he placed the newspaper on

the table and pointed at an advertisement. “This company
works with people to pay off their bills.”

“Does it say anything about improving their credit scores?”

Donna inquired.

“No, but listen, ‘Shortly after working with ABC Company,

we were able to buy our first house,’ David read.

“Hmmm.” Donna got up from the table and went over to the
computer in the corner of the living room. “ABC Company?”
she asked David.

“Yep. What are ya doing?”

“I’m checking on them. You know, find out what other

people have experienced with them.”

“Oh, good idea!” approved David, as he went back to reading

the newspaper.

A few minutes pasted by in silence.

“Wow, this is very interesting,” Donna said as she read the

screen.

7
“What’s it say?” David asked as he walked over to Donna to
see the screen from behind her shoulder.

“It says this company charges you $250 - $500 to ‘help’ you.
They negotiate with your creditors to lower your payment,
then you mail them the monthly payments for everything. But
this is where it gets interesting…according to a few of the past
customers, ABC is notorious for making the payments late,
which only worsens your credit score!”

Donna continued reading. “Oh, check this out…” she said

pointing at the screen. “Although there are legitimate
consumer credit bureaus and counselors available, if you hope
to purchase a home within the next year or two, avoid them.”

“Why?” David asked trying to find the spot Donna was

reading from.

“Doing so may lower your already low credit score! In the

eyes of mortgage or loan companies (should you be hoping to
buy a house or car), it actually hurts you because they take it
to mean you can’t handle your own finances or create and
follow your own budget.”

“Very interesting.” David said softly as he continued to read

the computer screen from behind Donna’s shoulder.

“That kind of seems dumb to pay someone to make things

worse for you, doesn’t it.” Donna stated. She started clicking
on links to related items.

“Oh, look here!” Donna said pointing at the computer screen.

Here are step by step instructions to help people like us clean
up our credit so we can qualify for a house loan. I’m going to
print this!”

8
“That’s what we need,” David said. “We can do it ourselves
and save money.”

Too bad so many people get sucked into throwing good

money after bad just trying to clean up their credit and get out
of debt. Don’t let yourself go down that road.

Follow along with Donna and David as they go through the

process of cleaning up their credit including:

• identifying debt & income

• creating a budget
• getting debt under control
• working with creditors
• improving FICO scores
• qualifying for a home loan
• finding money for down payments

9
10
 chapter 2
identifying debt
& income

“Is this everything?” David asked as Donna joined him on the

living room floor with another file in her hands.

“Yep,” Donna confirmed as she placed the file on top of a

large pile of folders.

“Okay…now we start separating everything into piles,” David

read from the instructions Donna had printed out earlier.
“Bank statements here, credit card statements here, school
loans here, utilities here…”

11
Donna and David spent the next 45 minutes going through,
separating and organizing all of their receipts and statements.

“Wow! Look at all of this!” Donna exclaimed as she looked

at David and the piles around them. “Okay, what’s next?” she
asked.

“We get a handle on all this stuff,” David answered.

“According to the instructions, we determine what we owe
and then what our true income is. Here is the form. How
about I’ll look for the information and you write it on the
form?”

“That works for me,” Donna agreed.

For the next several hours David and Donna worked through
the process of identifying their debts and income.

Now it’s your turn.

step 1
Gather up the last statement received for:

Creditor Expenses:
• all credit card statements
• student loan statements
• medical bills (doctors, dentists, prescriptions)
• child support payments paid out
• any other statements of bills you owe

12
 Income:
• bank statements
• paycheck stubs
• child support payments received
• social security payments received
• annuity or benefit statements
• any other sources of regularly received income
(weekly, monthly, etc.)

step 2
Gather up the last 12 monthly bills received for living
expenses:
• electricity
• natural gas or propane
• water
• house phone
• cell phone
• cable TV or satellite TV
• internet service
• vehicle fuel
• vehicle maintenance (oil, plates, etc.)
• food / groceries
• entertainment / leisure
• miscellaneous

step 3
Separate into piles of like-kind bills/statements as broken
down in Steps 1 and 2.

13
step 4
Go through each creditor pile. Determine the following:
• balance owing
• interest rate
• minimum monthly payment

Put this information on the “Getting a Grip” Form.

step 5
Go through each living expense pile. Add up the total of each
category for the year. Divide by 12 to determine monthly
average paid. Put this amount in the appropriate column of
the “My Current Budget” Form.

EXAMPLE - Average Monthly Electricity Bill

a) Determine monthly total paid:
Jan: $230 May: $75 Sept: $175
Feb: $224 June: $125 Oct: $125
Mar: $125 July: $175 Nov: $75
April: $75 Aug: $225 Dec: $100

b) Total 12 months: $1729

c) Divide by 12 for monthly average
÷ 12 months = $144 monthly average

step 6
Go through each income pile. Determine the 'take home'
amount (after all deductions). This is your true income. Put
these amounts on the “My Current Budget” Form.
Once this is complete, congratulations, you’ve made a great
start into turning your credit situation around!

14
 David & Donna’s current budget

Net Income
Source Monthly Amount Total
Paycheck (take home) 1479.32
Paycheck (take home) 3375.18
Child Support -0-
Art Income 90.00

(Add column for...) Total Income: $4944.50

Expenses
Rent 2000.00
Electricity 225.00
Water 82.00
Heating 55.00
House Phone 35.00
Cell Phone 75.00
TV 120.00
Min. Credit Card Pyts. 60.00
Other Loan Pyts. 240.00
Internet Service 50.00
Vehicle 850.00
Gas / Pyts / Mtnc.
Transportation -0-
Food 500.00
Health (Rx, etc.) 55.00
Leisure/Entertain 200.00
Miscellaneous 100.00
Total Expense: 4647.00
Income less Expense = Net Savings $297.50

15
 my current budget

Net Income
Source Monthly Amount Total
Paycheck (take home)
Paycheck (take home)

(Add column for...) Total Income:

Expenses
Rent
Electricity
Water
Heating
House Phone
Cell Phone
TV
Min. Credit Card Pyts.
Other Debt Pyts.
Internet Service
Vehicle
Gas / Pyts / Mtnc.
Transportation
Food
Health (Rx, etc.)
Leisure/Entertain
Miscellaneous
Total Expense:
Income less Expense = Net Savings

16
 getting a grip on your debt
David & Donna’s SAMPLE

Creditor Account # Monthly Balance Interest

Pyt. Owed Rate
VISA 4500-4200- $25 $3578.00 21%
0000-8502
Credit 42159 $240 $2500.00 10%
Union Loan
MasterCard 5923-3000- $35 $4860.89 17%
0000-3857
Car Loan 24931-001 $375 $20,000 8%

getting a grip on your debt

Creditor Account # Monthly Balance Interest

Pyt. Owed Rate

17
18
 chapter 3
creating a
workable budget

“That took some time! So now that we’ve got everything on

these forms, what are we suppose to do with them?” asked
Donna.

“According to these instructions,” David read, “our next step

is to look at our current budget and see where we can cut
some expenses.” David continued, “Then apply the money
from the cuts to paying off the debt.”

“Looking at this, we should have just about $300 left over at

the end of the month,” Donna said. “So how come we never
do?”

“Maybe it’s all the latte coffees, parking, beer on the

weekends that we are paying cash for…” David offered.

“Yeah, you’re probably right. We need to start watching that.

We’re throwing away over $3570 a year…and don’t even
know where. That’s not good!” Donna pointed out.

19
 §

Does this sound familiar? Where’s all your money going to?
How can you get a better handle on your finances?

This chapter guides you through creating a budget. A budget

you can live with. The key is sticking to it.

“Let’s get to work,” David said as he looked over their current

budget. Some of this stuff is nice to have, but we don’t need
it. We could probably do without it until we get our debt paid
off. Are you willing to go without some stuff for a little
while?” David asked Donna.

“What are you thinking of eliminating?”

“Well, we could probably cut out at least half of the money

we spend on leisure and miscellaneous if we paid attention to
what we’re spending it on. And possibly, cut down on the
food bill too. We could buy fresh foods instead of the frozen
stuff and all those fast food lunches.”

“I think we could. Our health might even benefit from eating

fresh food instead of the chemicals in the frozen food. We
might even loose some weight too by eliminating all those
fattening fast meals. Yeah, we can do that.” Donna agreed.
“Oh, how about eliminating the cable TV? Donna pointed out.
“We could go for evening walks or spend time playing some
games. I haven’t played Monopoly™ in years…that could be
fun!”

“You know, I think tightening our budget is going to help us

in a lot of ways besides just financially!” David agreed.

20
David & Donna’s revised budget
After their discussion and agreement on how to proceed,
Donna and David came up with the budget on page 22.
How did they do it? Here’s how:

• Cell Phone: Changed plan to get cheaper rates.

• Cancelled Cable TV and are only watching ‘free’ TV

(ABC, CBS, NBC, CW and PBS).

• Changed shopping habits and now purchase cheaper, fresh

food (improved health as by-product).

• Cut leisure expenses in half. Found more ways to enjoy

themselves that don’t cost a penny (walks, board games,
getting together with friends).

• Stopped buying the latte coffees, the spontaneous

miscellaneous purchases.

• Doubled amount being paid towards credit card balances.

• Increased monthly savings by $90.

This new budget left them with enough money to double their
credit card payments plus have more money deposited into
their savings each month!

Despite doubling the credit card payments, Donna and David

are also saving more money each month as well. To increase
their money even more, they are depositing it into an interest-
bearing savings account. This money is not to be touched
except for emergencies.

21
 David & Donna’s updated budget
Net Income
Source Monthly Amount Total
Paycheck (take home) 1479.32
Paycheck (take home) 3375.18
Child Support -0-
Art Income 90.00

(Add column for...) Total Income: $4944.50

Expenses
Rent 2000.00
Electricity 225.00
Water 82.00
Heating 55.00
House Phone 35.00
Cell Phone 55.00
TV -0-
Min. Credit Card Pyts. 60.00
Other Loan Pyts. 240.00
Internet Service 50.00
Vehicle 850.00
Gas / Pyts / Mtnc.
Transportation -0-
Food 400.00
Health (Rx, etc.) 55.00
Leisure/Entertain 100.00
Miscellaneous 50.00
Additional Pyts. 300.00
Total Expense: 4557.00
Income less Expense = Net Savings $387.50

22
Now take a look at your personal situation.
• Where can you cut back?
• How will you cut back?
• How will it affect your life?
• Will you honestly be able to maintain it?

Design your updated budget…and then stick to it. You will

soon see light at the end of the tunnel!

23
 your updated budget
Net Income
Source Monthly Amount Total
Paycheck (take home)
Paycheck (take home)

(Add column for...) Total Income:

Expenses
Rent
Electricity
Water
Heating
House Phone
Cell Phone
TV
Min. Credit Card Pyts.
Other Debt Pyts.
Internet Service
Vehicle
Gas / Pyts / Mtnc.
Transportation
Food
Health (Rx, etc.)
Leisure/Entertain
Miscellaneous
Additional Pyts.
Total Expense:
Income less Expense = Net Savings

24
 chapter 4
getting debt
under control

“Donna,” David instructed, “look at the ‘Getting A Grip’

form. We need to determine the order of how to pay off the
credit cards, starting with the highest interest rate first.”

“What I’m seeing here,” Donna discovered, “is we should

focus on paying off the VISA first. It has the highest interest
rate at 21%.” Then the MasterCard, then the loan from the
Credit Union and finally the car loan.”

“Uh-huh. But first, we need to contact each of the creditors

and ask them to lower the interest rates.”

25
“Do you really think they will?” questioned Donna.

“They might, but if we don’t ask, they definitely won’t.”

David got on the phone calling all four of their accounts. He
was able to easily get the two credit card interest rates
lowered.

“Cool! MasterCard and VISA have both lowered their

interest rates, plus we’ve already found a way to double-up on
our credit card payments, from cutting costs in our budget.
Now we can pay more towards the VISA credit card. Once
that’s paid off, then we add the amount we were using to pay
off the VISA to what we are already paying towards the
MasterCard. When that’s paid off, then we add what we had
been paying towards the MasterCard and the VISA to the
Credit Union loan, and so on. In no time, we should have all
those debts paid off, and have an extra $900 per month to add
towards savings,” David explained.

On page 27 is the pay-off schedule showing how David and

Donna dug themselves out of debt.

Now, look at your situation. Which of your loans or credit

cards have the highest interest rate?

Call all of your creditors. As long as you don’t have past due
balances, request them to lower the interest rate or you’ll take
your business elsewhere. Nine out of ten times they will
lower the interest rate.

26
 getting a grip on your debt
Donna & David’s SAMPLE

Creditor VISA MasterCard Credit Car Loan

Union
Acct # 4500-4200- 5923-3000- 42159 24931-001
0000-8502 0000-3857
Monthly pyt. $25 $35 $240 $375
until
previous
debt paid off
New Mo. Pyt $325 $360 $600 $975
Balance $3578 $4860.89 $2500 $20,000
Owed
Old Interest 21% 17% 10% 8%
Rate
New Interest 18% 15% 10% 8%
Rate
Months to 11 14 4 22
Pay Off
Total $30,938.89
Balance
Owed
Total Pay-off 51 months
Time

Using David and Donna’s new budget (giving them an extra $300
monthly to use towards paying off debt), they have put together
this pay-off plan. David and Donna will be completely out of debt
in just over 4 years, and have an extra $975 per month income
even if their income does not increase!

NOTE: You do NOT have to be completely debt-free in

order to qualify to purchase a home. Some debt in good
standing (being paid in timely manner) actually helps you.
For more information, see “Qualifying Ratios” in Chapter
7.

27
 §

While you are on the phone with your credit card companies,
ask them to raise your credit limit as well. You won’t use this
increased credit limit, but by increasing it, you are actually
improving your FICO score!

Start chipping away at your debt by paying off the credit card
or loan with the highest interest rate first. When that is paid
off, then pay off the 2nd highest interest rate and so on until all
your current debt is eliminated.

Whatever you do, do NOT add more credit card or personal

loan debt. It defeats the purpose.

getting a grip on your debt

Creditor
Acct #
Monthly pyt.
until
previous
debt paid off
New Mo. Pyt
Balance
Owed
Old Interest
Rate
New Interest
Rate
Months to
Pay Off
Total
Balance
Owed
Total Pay-off
Time

28
notes

29
30
 chapter 5
working with
creditors

The next weekend Donna and David were finishing up their

lunch of fresh pasta salad and home made bread. “I’d
forgotten how good fresh warm bread is!” Donna said as she
put the dishes in the dishwasher. “And it wasn’t hard to make
either with that bread maker you gave me for Christmas last
year. You were trying to hint, weren’t you?” teased Donna.

David smiled as he wiped off the table. “Sticking to our new

budget is going to be easier than I thought. That’s a relief.”

“We’d better get moving on the next part of our credit clean-
up,” David suggested as he walked over to the computer.

“What part is that?” Donna inquired.

“We’re supposed to order a copy of our credit reports so we

can look them over and see if there is anything negative or
wrong on them. And if there is, then we can get it taken care
of.”

31
“Oh that’s right,” Donna said as she pulled up a chair to sit
next to David. “The report is free, right?”

“Yep. One free report per year, per person,” David said as he
went to the website.

“That was easy,” David said as he hit print on the computer.

He handed Donna her report as he took his off the printer.

“What are we looking for?” Donna asked trying to make

sense of the report.

“Anything that says delinquent, collections, bad debt, late

pay, or anything else negative.”

Depending on what appears on your credit report will

determine what action you take. The rest of this chapter
covers, in detail, the step-by-step instructions on how to solve
various credit issues:
• paid debt still appearing as owed
• disputed debt shown as owed
• collection or past due debt owed
• removing judgments
• removing bankruptcy or foreclosures
• old debt
• paying through the ‘back door’
• reporting accurate negative information

32
debt appearing that has been paid
1. Find your paid receipt for the debt. Ensure the paid date
appears along with how it was paid (check, cash, credit
card).

2. Write a letter (see sample letter on page 34)

3. Enclose copy of paid receipt (you keep original with a

copy of the letter you send)

4. Send to:
Experian
P.O. Box 9595 / 701 Experian Way
Allen, TX 75013
(1-888-397-3742)

Equifax
P.O. Box 740241
Atlanta, GA 30374-0241
(1-800-685-1111)

TransUnion
P.O. Box 2000
Chester, PA 19022-2000
(1-800-916-8800)

5. Mail by: Certified Mail, Return Receipt Requested

The reporting agencies have 30 days to get back to you (in

writing) about the account. They are also required to send
you a new free credit report if changes are made.

33
 paid debt notice
(SAMPLE LETTER)

Date
Your Name
Your Address
City, State, Zip Code

Complaint Department
Name of Credit Reporting Agency (send to all 3)
Address
City, State, Zip Code

To Whom It May Concern:

I am writing to dispute a debt appearing on my credit report.

This debt was paid in full.

This item (give name of creditor, type of account, account

number and amount showing not paid) was paid in full on
(date). Attached is a copy of the receipt showing proof of
payment.

Please send me a corrected copy of the credit report. Thank

you.

Sincerely,

Your name

Enclosure: Paid Receipt

34
disputed debt
Debt showing up on an account that you have disputed and
are refusing to pay due to quality of merchandise, non-receipt
of merchandise, cancellation, etc. must also be dealt with.

Again, you will want to write a letter similar to the letter on

34. This letter outlines your dispute and requests that your
dispute be noted on your credit report if the dispute goes
unresolved.

“collection” or “past due” debt

A collection is a debt that is past due and the creditor has
hired a collection agency to gather payment from you. It
could be several years old. It may be something you were not
even aware of.

If collections or past dues are showing up on your credit

report, take the following steps:

1. Write a letter (see sample letter on page 36)

2. Send to:
Experian Equifax
P.O. Box 9595 P.O. Box 740241
Allen, TX 75013 Atlanta, GA 30374-0241
(1-888-397-3742) (1-800-685-1111)

TransUnion
P.O. Box 2000
Chester, PA 19022-2000
(1-800-916-8800)

3. Send by: Certified Mail, Return Receipt Requested

35
 collection account notice
(SAMPLE LETTER)

Date
Your Name
Your Address
City, State, Zip Code

Complaint Department
Name of Credit Reporting Agency (send to all 3)
Address
City, State, Zip Code

To Whom It May Concern:

I recently obtained a copy of my credit report. To my

surprise, there were several derogatory charges shown that I
was not aware of, do not know what they are for, or are in
error. They are listed below.
Creditor Account #
List creditor name List account number
List creditor name List account number
List creditor name List account number

Please send me verification that these charges are mine (copy

of invoices showing exactly what they are for) within thirty
(30) days of receipt of this letter so I can verify their
authenticity. If you can not do so within thirty (30) days, then
please remove the creditor/account from my credit report—as
required by law—and send me verification of the deletion.

Sincerely,

Your Name

36
The reporting agencies have 30 days to get back to you (in
writing) about the account.

debt showing as “judgment”

A judgment occurs when you are taken to court (sued) for a
debt and the court rules in the other party’s favor. The only
way to remove a Judgment is to go (in person) to the
courthouse and pay off the debt. Be sure to get a receipt for
payment and a copy of the Judgment and copy of Dismissal of
Judgment. Then follow the process for “paid debt” and use
the sample letter on page 34.

bankruptcy or foreclosure
Unfortunately, if you have gone through a bankruptcy or
foreclosure, that will stay on your record for 7-10 years.
However, if that time limit has expired, write to all three of
the credit reporting agencies to request it be eliminated. They
will have 30 days to delete it. Be sure to send your letter by
Certified Mail, Return Receipt Requested so you have proof
of what day your letter was mailed.

debt appearing on credit report that

won’t be removed
The last step in cleaning up your credit report is paying off
debt that you have been unable to get removed after doing all
of the proceeding items. This process is a little bit more
involved, but can be taken care of rather quickly. Follow the
guidelines given in Chapter 2 using the “Getting a Grip” form
or follow the process outlined below, ‘paying through the
back door.’

37
paying off your old debts through the
back door
Whenever you pay off a delinquent account (“charge-off”)
which has appeared on your credit report, it is a good idea to
pay it “through the back door”. This means, don’t send the
money directly to the creditor, but pay it through your local
credit bureau. If you send the money directly to the creditor,
your account may not be credited correctly, and the “charge-
off” may remain on your credit report. Even if the creditor
does apply the money correctly, it may take several months
for them to report the correction to the credit bureau. If you
pay through the local credit bureau, the correction to your
credit report is made immediately!

Here are the step-by-step instructions:

1. Call your creditor and negotiate a settlement. Offer as
little as 50-cents on the dollar and see what they will take.
Talk with them about removing late fees and other
charges, as well as freezing the account so no more
interest charges are applied.

Remember, these people are trained to be nasty, so stay calm

and reasonable even if they don’t! If the person you are
talking with becomes abusive, ask to speak to a supervisor. If
the first person you talk with says they cannot negotiate a
settlement, ask to speak to a supervisor. Keep going until you
reach someone who will negotiate.

2. Request that they remove the account entirely from your

credit report once you have reached a settlement amount.
If they refuse (and they probably will), tell them you want
your credit report marked “Paid” or “Settled”.

38
3. WRITE DOWN THE NAME AND PHONE
NUMBER OF THE PERSON WHO AGREED TO
THE SETTLEMENT, THE TERMS OF THE
SETTLEMENT, AND THE DATE THE
SETTLEMENT WAS REACHED.

4. Call your contact person at your local credit bureau. Tell

that person that you have reached a settlement on a
“charge-off” and you wish to pay it through the credit
bureau so that your credit report will be corrected
immediately. He/She should give you detailed
instructions on how to proceed.

Usually, the credit bureau contact person will ask you to bring
in a money order in the agreed upon amount payable to the
creditor, plus the name and phone number of the person with
whom you reached the settlement. The person at the credit
bureau will then call the creditor (name you gave them),
confirm the agreement, send the money order to them and
correct your credit report immediately.

Be sure to ask for an updated credit report once the changes

have been made. It should be free.

reporting accurate negative information

www.ftc.gov/bcp/edu/pubs/consumer/credit/cre03.shtm

www.consumercreditrepair.com/Credit-Repair-Options

If you do have some derogatory items on your credit report,

follow the preceding instructions. Within 30-60 days, you
will be well on your well to qualifying to buy a home, because
your credit report has been improved, resulting in higher
FICO scores.

39
40
 chapter 6
improving
FICO scores

‘Low rates, low down. Apply today to buy your new home,’
said the radio announcer as David and Donna were heading
home from the Farmer’s Market.

“That reminds me, David,” said Donna, "we need to get to

work at increasing our credit scores." What are those called?
FICO scores? Didn’t we find instructions for that
somewhere?”

“Yes, we do need to get to work on increasing our FICO

scores. I put the instructions in the Budget file.

“Great, we’ll get going on that after we put all this fresh food
away…and have some lunch,” Donna said.

“Okay,” David said as he pulled the car into their apartment’s

parking lot.

41
what is FICO?
FICO is a rating system designed by Fair, Isaac & Co. FICO
ratings range from 300 up to 850. These numbers are arrived
at using a complex formula and represent to lenders how you
manage your debt. The breakdown, typically, is as follows:

FICO RATING SYSTEM TABLE

Score Meaning
720+ Excellent Risk to Lender. You will be able to shop around for
the best interest rate and make a smaller down payment on a
home.
680- Very strong credit. However, will probably have to pay ½ point
719 to get best interest rate on home loans. Low or no down
payment programs are options to you.
620- Fair Risk to mortgage company. You may need to pay off some
679 debt and do some explaining, but usually, you will be able to get
near market interest rates with a standard down payment (5-
20%).
580- You are a risk, but do qualify for a home loan using an FHA
619 loan. This will enable you to purchase a home with only 2.25%-
3% down. Good option for people who have ‘troubles’ on their
credit.
450- Poor risk to mortgage company. You do not qualify for any
579 home loan products. Review previous section on how to
improve your FICO score.

credit scores vs. interest rates.

The days of the “no-doc” loans, the “stated income” loans and
subprime loans to anyone who can fog a mirror are gone as a
result of the mortgage crisis we currently are in.

The lower the credit score, the higher the interest rate or
points you are charged. If your FICO score is under 580, you
need to work on improving your credit score (takes sometimes
as little as 60 days!), before you will qualify for a home loan.

Review Chapter 5 to determine all you can do to improve

your credit score. Pay all your bills by the due date (not grace

42
date). You must have a minimum of 12 months with no late
payments in order to qualify for a FHA loan, 24 months for a
conventional style loan.

credit scores vs. loan types

A VA loan has the easiest qualifying, if you have served in
the military. The next easiest to get into is a FHA style loan
(for people who have not owned a home within the past 3
years). The hardest type of loan to qualify for is a
conventional. (More detail in ratios section).

what can you do to improve your credit

score?
credit cards. The ideal number of credit cards to have is three
to five. The longer you have had those credit cards, the better.
Never let your balance rise to over half of your maximum
limit. To increase your FICO score, pay off your credit cards
and/or call to increase your credit limits.

canceling credit cards. Having a credit card with a zero

balance is much better, than canceling a credit card. It shows
you have a line of credit available, but do not need it. When
you cancel a credit card, you lose that line of credit, and that
increases your overall credit usage ratio, which could lower
your credit score.

variety of credit. If you have a high FICO score, you

probably have or had a car loan and currently have 3-5 credit
cards (all in good standing).

pay your bills on time. Late payments (30 days or later)

appear on your credit report and negatively affect your score.
There must be NO late payments showing up on your credit
report for a minimum of twelve months.

43
due date vs. grace period. Pay your bills on the DUE Date not
during the Grace Period. Keep your balances low. Your
credit score will be higher.

short term loans. Loans from Pawn Shops, finance companies

and others for minimal amounts do not help your FICO score.
They can actually hurt it as it shows inability to budget for the
long term.

“Hmmm,” David thought out loud. “We’re paying down our

two credit cards. We have two other types of credit: our
personal loan and our car loan. We’ve been paying all our
bills on time and we cleaned up that old debt we didn’t even
know was on the credit report, but” David hesitated,
“according to these instructions, we should have a minimum
of 3 credit cards, not just 2. So maybe, we should get one
more credit card…but we won’t use it except for emergencies.
Let’s look into getting a credit card with no annual fees. That
way it won’t cost us anything.”

“Let’s do it,” Donna agreed. “I bet within another month

we’ll be able to qualify for a home loan.”

“That would be great. Sooner or later we’ll own our own

home,” David declared.

44
 chapter 7
qualifying for a
home loan

David and Donna were making substantial progress. They

had been approved for a new credit card. Their debts were
shrinking, all bad debts had been eliminated from their credit
reports and they were sticking to their budget. They were
actually enjoying their new lifestyle. So much less stress! It
was time to try to find out if and how much of a home loan
they could qualify for.

“Let’s find out what price range of home we’ll qualify for,”
Donna said as she sat down at the computer.

At first the thought of applying for a home loan can be

overwhelming and frightening. But it’s just a process to go
through. The process is:

45
 • price range determination
o running your numbers
o estimated PITI or PI amounts
o front end ratios
o back end ratios
o how long does it take
• pre-approval determination
• pre-approval letter obtainment

what price range do you fall in?

It’s easy to find out what price range you should be looking
in. This is determined by your income and your long-term
debt. Visit a lender’s website and click on their loan or
mortgage calculator. (See list of websites on page 45.) Why
would you want to get this information before going out
house shopping?

why do you need to know the price

range?
It saves you time and reduces stress. If you don’t know what
your limit is, you will end up wasting a lot of time and gas
looking at homes you can’t qualify to buy. If you go looking
first…find a house you love, then go apply for a loan and are
denied, you will end up disappointed and frustrated. Further,
if you then go out to look at houses you can purchase, nothing
will compare to that house you had your heart set on. None
will be as nice as the ones you saw earlier. This could lead
you to give up completely on buying a home. Don’t set
yourself up for disappointment! Get pre-approved first and
focus only on the price range you are approved for and can
maintain monthly payments in.

Another reason is lenders have limits on how much they will

lend based on your income. You may think you can easily

46
make your mortgage payment using 75% of your income, but
the lenders won’t let you do that! What about the cost of
maintenance or unforeseen emergencies? There are limits
based on the type of mortgage you use (discussed in detail in
a few pages).

what’s needed to “run my numbers”?

To know what price range you qualify for, go online to any of
the websites listed in the table below. This is known as pre-
qualification. The process is quick and easy!
Online Mortgage Calculators and Mortgage Companies
www.mortgage-calc.com
www.bankofamerica.com
www.bankrate.com
www.realestate.yahoo.com/calculators
www.moneycentral.msn.com
www.nationalmortgage.com
www.DiTech.com
www.Lendingtree.com
www.best-mortgage-companies.com
www.mortgage101.com

Back at the computer…

47
“David, we don’t need to put our names in, but we do need to
plug in numbers. I know my monthly income, but what’s
yours before taxes?”

David takes out his wallet. “Just happens I have my paycheck

stub right here. Let’s see,” David says as he pulls out his pay
stub and looks it over. “Gross monthly pay is now $4000
even-steven. That raise last month really makes a
difference!”

“It really does. And if I didn’t say it before, Congratulations,

honey,” Donna said over her shoulder. “Okay, got it. Next
they are asking for,” Donna continued reading from the
computer screen “pensions, social security, child support,
dividends, annuities…”

“We’ve got all that stuff already figured. I’ll go get the
budget and bring it to you,” David said as he went to get the
file.

“Organizing really has helped us, hasn’t it?” Donna called out
to David.

how is your estimated mortgage amount

determined?
When a bank or lender is deciding if loaning you money to
buy a home is a good risk, one of the many things they
consider is “ratios”. There is a front-end and a back-end
ratio.

what is a front-end ratio?

A ‘front-end ratio’ is simply what the percentage of your
proposed house PITI payment (principal + interest + taxes +

48
 insurance) is against your gross family income. The
maximum percentage allowed is determined by the type of
loan you wish to use:

Loan Type Requirements** Front-End Ratio

Conventional
(3-20% down) FICO scores over 620 28%*

FHA 580 FICO required

st
(3% down) 1 Timeare
*Some mortgage companies or more
not owned forthan
lenient 3 yrs.
others. 29%

VA
(0% down) 90+ Days Active Military Duty 38%

* For further requirements and your unique situation check with your loan officer.

Here are some examples to help you grasp the concept. For
each example answer the following questions:

• Does this family qualify for a mortgage loan based on

the front end ratios?

• If so, which type of loan do they qualify for?

Example 1:
David and Donna currently rent an apartment. They’ve worked
hard to clean up their credit and have found a home they’d like to
buy. The monthly mortgage PITI payments will be $1600. Both
work full-time. Their combined gross income before taxes) is $5583.
Neither has ever served in the US Military.

49
 Answer Key:

Example 1:

• $1600 is what % of $5583

• $1600 ÷ $5583 = 28.6%.
• Qualify for either FHA or VA based on ratios.
• No military service eliminates VA loan eligibility
• Haven’t owned a home, qualifies for FHA.

Example 2:
Example 3:
This couple owned a lovely
Young couple, with a baby
home prior to the husband
on the way, currently rents an
joining the military. It was
apartment. The husband
sold when he left to serve the
earns $48,000 annually. The
country. After two years away,
wife’s annual salary is
the husband has returned to
$36,000, but she will be going
his wife. He has just started a
on leave once the baby is
new job with a $4000 monthly
born. They have found a
salary. The wife has been
house they like with a
working at the same job for
monthly mortgage PITI
the past 4 years earning $2500
payment of $1750. The
monthly. They want to
husband attended college and
purchase a home that would
did not serve in the military.
have a monthly mortgage
payment of $2250.

50
 Example 2:

• $2150 is what % of {$4000 + $2500}?

• $2150 ÷ $6500 = 33%
• Qualifies only for VA based on ratios (slightly over
limits for FHA)
• VA loan qualified for from Husband’s 2-year military
service.

Example 3:

NOTE: Because wife will not continue working, her

income cannot be considered.

• $1750 is what % of {$48,000 ÷ 12}?

• $1750 ÷ $4000 = 43.75%
• Without the wife’s income, they do not qualify for any
home loans.

what is a back-end ratio?

The ‘back-end ratio’ is simply what the percentage of your
proposed house payment PLUS your monthly recurring long-
term debts are against your gross family income. The
maximum percentage allowed is determined, again, by the
type of loan you qualify to use:

Loan Type Requirements** Back-End Ratio

Conventional FICO scores over 620 36%
FHA 1st Time or not owned for 3 yrs. 41%
VA 90+ Days Active Duty 50%

* For further requirements and your unique situation check with your loan officer.

51
 Here are some examples to help you grasp the concept. For
each example answer the following question:

• Does this family qualify for a mortgage loan based on

the back end ratios?

Example 1:
David and Donna rent an apartment. They want to buy a house. They
have a $375 monthly car payment; $60 for minimum monthly credit
card payments; and a monthly payment of $240 on a personal loan.
We’ve already determined they qualify for a FHA loan based on their
28.6% front-end ratio for a house with a monthly PITI of $1600.
When we figure the back-end ratio, do they still qualify?

Answer Key:

Example 1:
FRONT END:
• $1600 is what % of $5583
• $1600 ÷ $5583 = 28.6%.
• Qualify for either FHA or VA based on ratios.
• No military service eliminates VA loan eligibility
• Haven’t owned a home, qualifies for FHA.

BACK END:
• $1600 PITI + $375+$60+$240 debt = $2275
• $2275 ÷ $5583 = 40.7%
• Maximum Back End on FHA Loan is 41%.
• This family qualifies because 40.7% is less than 41%.

52
Example 2:
This couple owned a lovely home prior to the husband joining the
military. The house was sold when he left to serve the country. After
two years away, the husband has returned to his wife. He has just
started a new job with a $4000 monthly salary. The wife has been
working at the same job for the past 4 years earning $2500 monthly.
They want to purchase a home that would have a monthly mortgage
payment of $2250. They don’t have any vehicle loans, but they do have
credit card debt of $125 month. (When figuring long-term debt, use the
minimum monthly payments.)
Example 2:
FRONT END:
• $2150 is what % of {$4000 + $2500}?
• $2150 ÷ $6500 = 33%
• Qualifies only for VA based on ratios (slightly over
limits for FHA)
• VA loan requirement met from Husband’s 2-year
military service.

BACK END:
• $2150 PITI + $125 debt = $2275
• $2275 ÷ $6500 = 35%
• This couple easily qualifies considering the back-end
ratio for VA Loans can go up to 50%.

53
Example 3:
Young couple, with a baby on the way, currently rents an apartment.
The husband earns $48,000 annually. The wife’s annual salary is
$36,000, but she will be going on an open-ended leave once the baby
is born. They have found a house they like with a monthly mortgage
PITI payment of $1750. The husband attended college and did not
serve in the military. They also have student loans of $115 per
month, credit card debt of $100 per month, and a vehicle payment of
$250 per month. What is the largest monthly mortgage payment
they can qualify for based on the ratio charts?

Example 3:

In Example 3, we discovered the young couple could not

qualify for the mortgage they had requested. Using the front
and back end ratio tables, determine what is the maximum
PITI payment they qualify for. (NOTE: Because wife will not
be working, her income can not be considered.)

Loan Type:
Conventional 28% of gross income
FHA 29% of gross income
VA – no qualifying military service

FRONT END:
• $48,000 ÷ 12?
• $4000 x 28% = $1120 conventional style loan
• $4000 x 29% = $1160 FHA style loan

The maximum PITI house payments based solely on the

front end ratio is $1160 per month (FHA). However, they
also need to qualify based on their back end ratios.

54
BACK END:
Conventional can’t exceed 36% of gross income
• $1120 + $115 + $100 + $250 = $1585 month
• $1585 ÷ $4000 = 40% (this is too much!)
FHA can’t exceed 41% of gross income
• $1160 + $115 + $100 + $250 = $1625month
• $1625 ÷ $4000 = 41% (this qualifies!)

The easiest way to figure out what they will qualify for is
to determine the amount that is 41% (maximum back end)
of their monthly gross income:

• $4000 x 41% = $1640

• Now, deduct the total monthly debt payments:
• $1640 - $115 - $100 - $250 = $1175
• $1175 is the highest monthly PITI payment this family
qualifies for.
• $1175 + $115 + $100 + $250 = $1640 month
• $1640 ÷ $4000 = 41% (maximum acceptable level)

how long does it take to determine my

price range?
In this hi-tech world, just jump on the Internet and do a search
for any lender website (see page 45 for some). Click on
Mortgage Calculators, enter your information (numbers only,
name not necessary), and in a few seconds, you will have your
answer!

Donna finished entering all the numbers. “Okay, here we go,”

Donna said as she depressed the enter key on the mortgage
calculator. “According to this we qualify for house payments
of $1600. Wow!” The price was higher than she had
expected. “I wonder what that makes the sales price of the

55
house and how much down payment we’ll need. I’m not
really sure this is right. Maybe we’re missing something?”
Donna said.

“Maybe. I think it might be time to start looking for a local

lender and set up an appointment,” David suggested as he slid
his wallet into his back jean pocket.

“Let’s search for some local lenders now,” Donna said as she
looked back towards the computer screen. “Maybe we can
meet with someone next week.”

“Sounds good to me.” David said as he came up behind

Donna and hugged her.

Obtaining pre-approval is the second step in searching for

your new home. It is a little more involved then determining
the price range to shop (pre-qualified), but the benefits
include:
• Advantage in the home-buying process
• Increased leverage over other buyers
• A Pre-approved buyer is like a “cash buyer”
• Avoids headaches – smoother transactions
• Quicker closings

A “pre-approval letter” gives you an edge over the

competition, gets your offer seriously considered, and can get
you a faster closing!

what is pre-approval?
A lender pre-approval states you have supplied all
documentation and information, and based on the results you

56
are approved for a loan up to a specific amount. The only
thing that would stop that pre-approval would be the condition
or other factors surrounding the house you choose, not your
finances.

how do you get pre-approved?

In order for this determination to be made, a loan application
will need to be made. Along with the loan application, the
following supporting documentation will be required:

• 30 days worth of paycheck stubs (1 monthly paycheck;

or 2 bi-weekly paychecks, or 4 weekly paychecks)

• 2 years of tax returns with corresponding W-2's

• 3 months of bank statements (checking, savings and

any other bank accounts)

• Evidence of child support received, if any

• Divorce Decree (if applicable)

• In case of self-employment, requires two years in

business with 2 years of income tax returns with all
schedules.

Once the loan officer has this information, he is able to

confirm your income. He will also run a credit check (pull
your credit report) which shows him several things, like:

• Your payment history (on time, slightly late or

continually late?)

• Any outstanding debts you have, the monthly payments

and balances owed

57
 • Any collection accounts against you and their amounts

• Any judgments or liens against you

• Any bankruptcy within the last 7 years (if you filed

bankruptcy over 2 years ago, this alone can’t stop you
from buying a home!!)

• Your FICO score

Supply paperwork and correspondence. If your credit isn’t

perfect, gather the paperwork and correspondence (letters of
explanation, bills received) to help you overcome it.

Honesty. Be honest with your lender. It saves time and helps

the lender to be able to work with you to overcome anything
negative on your credit report before presenting your
application to the underwriter.

Don’t give up! If one lender tells you “no”...don’t stop! Ask
your real estate agent for help finding another lender; or get
on-line and try at least 2 others.

Knowledge is Power. Become completely educated. Pick

your lender’s brain and your agent’s brain. There are no
dumb questions!

“Do you have everything?” Donna asked David as they

stopped outside the lender’s office that Monday afternoon.

“I think so. I double-checked the list before we left.”

David stopped and turned, looking into Donna’s eyes,
“Now, honey, if this doesn’t work out right now, don’t be too

58
disappointed, okay? I just don’t want you to get your hopes
up. So, if it doesn’t work out this time, at least we’ll know
what we’ll need to do to make it happen.”

“You’re being too negative,” chided Donna. “We’re going to

be approved. We’ve worked so hard to get to this point.
Come on, let’s get in there and know it for sure!”

David smiled as he opened the door and followed Donna into

the office. The lender was there and ready for them.

how is the pre-approval amount

determined?
The Loan Officer combines all this information to determine
what type of loans are available to you (FHA, VA or
conventional). The best program available for you depends
on your unique situation. (Do you have a large or small down
payment? Do you want a 30-year or 15-year mortgage? etc.)
With the numerous loan programs available to consumers
today with interest rates near a 40-year low, if your credit is
decent, you have many options to purchase a home.

Shop around! Check with at least three lenders, compare the

interest rates, the APR rates and go through all of the charges,
paying particular attention to “junk fees”. Junk fees are the
fees mortgage companies charge that are basically pure profit
to them. FHA loans do not allow these fees to be paid by
Buyers (Buyers ask the Sellers to pay these). The less junk
fees charged, the less closing costs to be paid.

When comparing two mortgage companies that offer the same

interest rate (6%), but the APR (Annual Percentage Rate) is
different, go for the company offering the lower APR. The

59
difference between the interest rate and the APR is the money
the mortgage company is earning off your business the first
year of the loan (includes all fees). In other words, if the
interest rate is 6% on a fixed 30-year note, but the APR is
6.95%, .95% is the total of extra money you are paying for the
loan during the first year.

What if the interest rates are different? Here’s an example:

Company A: Interest: 5% APR 6.25%

Company B: Interest: 5.25% APR 5.95%

Which is the better deal? It depends on your unique situation.

The APR includes one-time fees paid at closing. The interest
rate is ongoing throughout the life of the loan (15, 20 or 30
years). If you plan to live in your home less than a few years,
you will end up saving by going with Company B (lower
upfront fees). However, the longer you plan to own the home,
the more important the interest rate becomes. So opt for
Company A for the long-term ownership (7+ years).

how long does it take to get pre-

approved?
When you first contact your loan officer (by phone, fax, e-
mail or website), he or she will ask you a series of questions
and then order a copy of your credit report. In addition, you
will be asked to supply documentation providing proof of
your answers (paycheck stubs, bank statements, income tax
returns, letters of explanation about negative items on credit
reports, etc.)

Don’t despair if your credit is not stellar. Your lender may be

able to put your financial situation in a better light when you
honestly talk to him about what happened.

60
If there are issues on the credit reports, these are addressed by
writing a Letter to File. This letter will be read by the
Underwriter who will either approve or disapprove your loan.
You want to really pull on the heart strings as you explain
your circumstances with this letter. Try to keep it to one page,
if you can. You will need to explain the circumstances
surrounding all past due payments that you were not able to
have removed or cleared up on your credit report from your
previous attempts (see Chapter 5).

The quicker you complete the loan application and supply the
necessary paperwork, the sooner your loan officer can pre-
approve you.

Depending on various factors, this process can take from 30

minutes to 3 weeks to complete. Also note, some lenders
charge a fee for the credit reports ($12 up to $75 for EACH)!

The loan officer, using the various financing options you

qualify for, will give you the maximum loan amount you have
been pre-approved for, the estimated monthly payments and
the estimated amount of cash required to close. All of this
information will be given to you in writing on a ‘Good Faith
Estimate.’ It’s required by law.

The pre-approval decision is based on your income, debt,

credit history and credit report scores.

obtaining a pre-approval letter

Once an approval is obtained, the loan officer will then
prepare a “pre-approval” letter, giving you and your Realtor®
a copy. When the time comes, your Realtor® attaches the
Pre-Approval letter to your Purchase Offer. In many cases,
it’s now a requirement with offers.

61
Donna squeezed David’s hand trying to contain her
excitement as they left the lender’s office. “Wow, we’re
approved and have the letter to show it! I’m so excited.”

“I’m pretty amazed at how easy it all was…and how fast!”

David smiled at Donna.

“I think we should take our lender’s suggestion and hire a real

estate agent to help us buy a home,” Donna continued. “I had
no idea that their services were free to buyers. I’m glad to
know the seller’s pay them to bring buyers, not us!”

“Me too. We’ve got nothing to lose and a fabulous home to

gain….let’s call that woman he recommended now so we can
go see homes this weekend!”

As they walked to the car, David squeezed Donna’s hand and

smiled. Her excitement was contagious.

You, too, can be on your way to owning your own home with
a loan at market interest rates requiring a zero or small down
payment. It all starts with repairing your credit. It’s a process
you work through. Everything you need to do is outlined in
the previous pages, so get to work…and you too will soon be
holding the key to your new home!

For detailed information about the house buying process (and

how to find bargains), order Stop Dreaming…Start Owning
by Kathleen MacKenzie available at Amazon.com.

62
 chapter 8
finding money for
down payments

Laws, rules, regulations concerning lending practices seem to

be changing almost daily in today’s world. So always check
with your lender about the newest and greatest programs for
assistance with down payment for first-time homebuyers or
for people who have not owned a home for the past 36
months.

At the time this book was written, there were two major
programs available.

1. Federal Government $7500 Tax Credit program until

July 1, 2009. This is like a long-term no-interest loan
for home buyers. This is a tax credit (not deduction)
and is interest free. For further information, check
with your lender, agent or CPA.

2. Federal Government USDA program. This is a 100%

loan program (i.e., no down payment required!) but is

63
 limited to low population areas. You’d be surprised at
some of the suburbs of large cities that qualify for this
program. For more information, visit:

http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do

or ask your lender or Realtor® for more information.

3. Access Program. 103% financing (zero down plus

rolled in closing costs, so no money needed to close).
Requirements are FICOs over 620 and maximum
annual income of $69,100.

possible sources of down payment

funding
Lastly here is a list of other possibilities to cover down
payment and closing costs (Probably a combination will be
needed):

1. Money stuck away for a worth cause

2. Savings Account

3. Tax Refund

4. Money from a relative (gift letter, specific form needed)

5. Salary earnings above debts from now until closing

6. Rent savings at beginning of first month of home

ownership (you will usually have no rent or mortgage
payment the first 30 days of being in your new home)

7. Proceeds from an inheritance

64
8. Borrowing against cash value of life insurance

9. Refinance of automobile (or other asset)

10. Funds from sale of a car, boat, computer, truck, cattle, etc.

11. Other Sources include:

• retirement funds
• IRA
• 401-K, stocks,
• bonds
• CDs

65
66
 glossary

APR
Abbreviation for Annual Percentage Rate which is the
actual cost of obtaining a loan (fees charged by lender for
borrowing money)

Bankruptcy
A process a person uses to be forgiven for debts owed.
Bankruptcy does not forgive taxes or government student
loans. Chapter 7 eliminates debt. Chapter 13 sets up a new
payment plan for paying off debt.

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Closing
The meeting with the Title Officer held at either a title
company or an attorney’s office when all the property
transfer and loan documents are signed and notarized.
Sometimes all parties will meet together, other times just
one party will meet with the Title Officer.

Collection Accounts
Accounts that have not been paid in a timely matter and
have been turned over to a Collection Agency to pursue
payment, late payments and interest.

Conventional Loan
Loans that require higher FICO scores than FHA or VA
type loans. Requires a higher down payment and are not
insured or ‘backed’ by a governmental agency.

Credit Reporting Agencies

Agencies that keep records of debts incurred and repaid by
consumers. There are three major reporting agencies in
the United States: Experian, Equifax and TransUnion.
Lenders may use just one of the reporting agencies or the
average of all three reports to determine credit worthiness
of a loan applicant.

Credit Scores - See FICO

Debts
Short Term – Debts incurred that will be paid off within
12 months.
Long Term – Debts incurred that will take more than 12
months to pay off. Vehicle loans, school loans, child
support payments are examples of long-term debts.

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Down Payment
Partial payment of total amount owed for house. This is
paid at the time of closing.

Earnest Money
Money paid by purchasers at the time of offer acceptance
as an indication of earnestly wanting to purchase the
property. This money is accepted by the closing or title
officer and is applied to the buyer’s down payment at
closing.

Equifax – See Credit Reporting Agencies

Experian - See Credit Reporting Agencies

Fannie Mae
A government agency (Federal National Mortgage
Association {FNMA}) designed during the Great
Depression to buy and sell FHA and VA loans in the
secondary market.

FICO
The most commonly used scoring system designed by
Fair, Isaac and Company. A FICO score indicates to
lenders an applicant’s likelihood of repaying a debt based
on their payment history, current debts, length of credit
history, recently obtained credit and types of credit.

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FHA
A government agency (Federal Housing Authority) that is
a mortgage insurance program designed during the Great
Depression (1934) to strengthen and expand American’s
ability to purchase homes with lower down payments.
Since 1965, FHA has been a part of the Department of
Housing and Urban Development (HUD).

FHA Loan
A loan, guaranteed by the FHA, that requires a smaller
down payment and is easier to obtain because of lower
FICO score requirements (minimum of 580). Many first-
time homebuyers use this financing option. Loan limits
are adjusted to local area real estate markets.

Freddie Mac
A government entity (Federal Home Loan Mortgage
Corporation {FHLMC}) designed to create a secondary
home loan market by purchasing home loans.

Good Faith Estimate

An estimate of what your closing costs will be based on a
projected purchase price given to you by your lender at
the time you are pre-approved. This form also shows
what interest rate is being used for the estimate and what
the APR is. Your lender is required by law to give this to
you.

Gross Wages
Amount of earnings before any deductions are taken
(taxes, insurance, etc.)

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HUD
The Department of Housing and Urban Development
(commonly referred to as HUD) is an agency of the
federal government of the United States.

HUD-1
A written statement you are required by law to receive 24
hours before your scheduled closing listing, in detail,
exactly how much you are being charged and for what in
the purchase of the property. Double-check all items for
accuracy prior to going to closing and signing anything.

HUD Home
A house owned by the Department of Housing and Urban
Development. Typically these are homes that were
purchased using FHA type loans that the owner defaulted
on and HUD had to buy back. Sometimes these are a
great deal…and sometimes they are not.

Income
Gross – Total income before any deductions are made.
This is the amount used to determine loan qualification
(ratios).
Net – Income received after deductions are made for taxes
and other items. Amount to use when creating budgets.

Insurance (Homeowner’s, Hazard, Fire)

If money is borrowed to buy a house, hazard (or fire or
homeowner’s) insurance is required by the lender to
protect the investment. Insurance protects the insured
against losses caused by items stipulated in the policy
(fire, theft, wind, etc.). Note: Insurance is always pre-
paid. The homeowner pays for the insurance.

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Interest Rate
Interest is a premium or fee paid for the use of borrowed
money. The rate is the fee charged by a lender. It’s
expressed as a percentage.

Judgments
Judgments appear on credit reports and indicate that the
person has been sued, lost the case and owes money. Not
good. In order to qualify for a mortgage loan, there must
be no outstanding judgments.

Junk Fees
The ‘nickel and dime’ fees that can add up to hundreds or
thousands of dollars at closing. These fees come from the
lenders, title companies and state agencies. Examples
include administrative fees, document fees, delivery fees,
guaranty fees, etc. One way to eliminate these is to ask
for receipts for everything. If they can’t produce, you
don’t pay and get these taken off of the Settlement
Statement prior to signing anything.

Long Term Debt – See Debts

Mortgage
A written document indicating you have purchased
property by borrowing money and are using the property
as collateral for the loan. (Not all states have “mortgages,”
they have “loans”.)

Mortgage Calculator
A calculator (or computer program) used to determine the
Principal and Interest monthly mortgage payments by
inputting length of loan, interest rate, down payment and
purchase price.

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Mortgage Company
A lender that specializes in loans for purchasing homes.

Negotiations
Communication between two or more parties
compromising until mutually agreeable terms and
conditions are reached.

PI
PI refers to the Principal and Interest portion of a house
payment. It does not include monies for property taxes or
hazard insurance.

PITI
PITI is a monthly loan payment that includes Principal,
Interest, Taxes and Hazard Insurance. The lender puts the
payments for taxes and insurance into an escrow account,
and when the time comes to pay them, the insurance and
taxes are paid by the lender from the funds in the Escrow
Account.

PMI
Private Mortgage Insurance protects the mortgage
company in case of loan default. This is required by the
lender when the down payment paid by buyer is less than
20%. Although the PMI only benefits the mortgage
company, Buyers are required to pay it. Once the equity
in the house reaches 20% (either through appreciation or
paying down the loan) and is verified with an updated
appraisal, the homeowner should request the PMI to be
eliminated since its purpose is obsolete. This will lower
the remaining monthly payments.

Pre-Approval
Lender determines they will extend buyer a loan to
purchase a home. This is done after a detailed process

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 verifying an applicant’s income, debt and credit history.
Borrower typically needs to supply tax returns, proof of
income, bank statements, etc. If approved, the only thing
the lender needs to finalize the loan is information related
to the house (insurance, appraisal, survey, title policy).

Pre-Approval Letter
The written document stating buyer can purchase a home
up to a certain sales price. The lender provides this to
borrower so it can be attached to offers, making the offers
stronger and more likely to be accepted.

Pre-Qualify
Quick process of determining how much money you can
borrow to buy a home. This is based on total gross
income vs. long-term debt.

Purchase Price
The agreed-upon sales price of a home.

Ratios
Front End – A percentage indicating the buyer’s gross
income versus the proposed monthly house payment.
Back End - A percentage indicating the buyer’s gross
income versus the proposed monthly house payment
combined with all long-term monthly debt payments.

Realtor®
A real estate agent is not necessarily a Realtor. A Realtor
is an agent who is also a member, in good standing, of the
National Association of REALTORS and who abides by
its Code of Ethics.

Settlement Statement – See HUD-1

Short Term Debt – See Debts

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TransUnion - See Credit Reporting Agencies

Underwriter (Mortgage)
The person at a loan company who double-checks the loan
application and documents to ensure accuracy and
eligibility of applicant.

VA Loan
Loans available to anyone who received an honorable
discharge after serving in the armed services for 90
consecutive days and has DD-214 eligibility status. To
apply, the vet must obtain the DD-214 certificate then
apply for a VA loan through any lender who is approved
by the Veteran’s Association. This information is
available by going to your nearest VA headquarters,
calling, or searching online. Also check your state for
state VA programs. The benefits are typically lower
interest rates and zero-down programs.

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76
 index
contents & tables

contents
APR Rates: 59, 67
Back Door Payment: 37-39
Back End Ratios: 51-54, 74
Bankruptcy: 37, 57, 67
Collection Account: 35-36, 57, 68
Credit Agencies: 33, 35, 68
Creditor Expenses: 12
Disputed Debt: 35-36
FICO Scores: 42, 51, 57, 68, 69
Front End Ratios: 48-50, 53-54, 74
Foreclosure: 37
Income: 13, 14, 15, 16, 47, 48, 49, 51, 71
Interest Rates: 6, 14, 17, 18, 25-26, 28-29, 42, 72
Judgment: 37, 57, 72
Junk Fees: 59, 72
Living Expenses: 13-14
Loan Programs: 6, 50-51, 53, 58, 59,70
Mortgage Calculators: 45, 47, 55, 72
Paid Debt: 32-34

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Past Due Account: 26, 35-36, 60
Pre-Approval: 46, 55-62 74

tables
Budget - Current, Blank: 16
Budget - Current Sample: 15
Budget - Revised, Blank: 24
Budget - Revised Sample: 22
Collection Account Notice (Sample Letter): 36
Down Payment Sources: 64-65
FICO Table: 42
Getting a Grip Sample: 17
Getting a Grip Updated Sample: 27
Getting a Grip Blank: 17
Getting a Grip Updated Blank: 28
Loan Table Requirements – Back End: 51
Loan Table Requirements – Front End: 49
Mortgage Calculator Reference Table: 47
Paid Debt Notice (Sample Letter): 34

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notes

79
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