Loans Answers

Cleaning Up Credit Reports

Question: So that’s it…A somewhat damaged and weak credit history, and the desire and need to purchase a home. My income over the past 5 years has been near and now finally over six figures with the potential for doubling with bonuses. I have moved from managing contracts to a position of acquiring contracts with the corporate office, so the potential is enormous. My wife and I want to remain here to realize that income potential yet the average cost for a home is around $350K, with townhouses and condos a little better, but not much. While it is true we have been helping with my in-laws mortgage for the past several years, I would dare not claim I am owed anything from that – they took us in when we were desparate and needed the mroale support. There was talk that when they relocate and we went with them, we would immediately look for a nearby house and they would give us the down payment, so even though we will not go, I do have the ability to get that…and it will be on a personal loan basis.

So questions: The IRS Tax Lein??? I am reading that they have ten years to collect from the time the debt was established unless we enter into an offer of comprimise and other such items, including payment arrangements I think. I know you are going to think badly of me, but I did receive notices from the IRS after the baby was born at least twice a year indicating I owed those taxes plus penalties taking it to $45k, but things were crazy, I talked about hiring a tax attorney, etc…but bottom line, I never responded to the letters. I have not received one for over a year now, but I know they kept my return from last year, and trust me, I have no desire to file this year until April 14th, so I do not know the outcome there. It has been 11 years since the payroll deductions have stopped, but I wonder if keeping my returns constitutes a continuation of payment agreements or canit be considered as falling under the statute of limitations? If that is the case, can the CRAs be forced to remove the Tax Lein from my records?

If there is any insight into actions I can take to clear up or remove the Charge Offs from the two bottom feeder credit card companies, I would be very appreciative. The last activities on the cards was in 1999 with the charge-offs taking place in early 2000. I know I had some immature failures in responsibility there by allowing them to take advantage of me in a very stressful time, but I would like to get away from that…and If I cannot get them removed, would the addition of the 100 words in my statement help any? I know reputable lenders would have to know these card compnaies are sharks and hustlers, but I would have to get them beyond looking at my FICA score for this to have any impact.

Generally, I am really trying to take action now, and the first part of that is gathering knowledge and practical advice …if you have any, and do not mind taking a few moments, please let me know!!!!

Best to you all

Answer: You’re in a mess. There is no easy way out. But there is a way out. First, you need to hire a lawyer to deal with the IRS issues and any issues on your credit report that you think you can iron out. Nothing less than legal action will work, at this point. AFTER the IRS and charge-offs are dealt with, you need to wait at least a couple of months, then re-check all three of your credit reports to make sure that all the negative information is gone.

You also need to come up with about $20,000 cash ON YOUR OWN, somehow. Not for a down payment on a house, but for CLOSING COSTS on a mortgage to buy a house. The only good news is that, because you are a vet, you should be able to get a zero down VA loan. But that zero down VA loan is still going to be QUITE expensive, in terms of up-front money. That’s what the $20K is for. You might not need all of $20K, but aim for that figure and get as close to it as you can, in terms of liquid cash money (or in a passbook savings account or something else that is secure and can be liquidated FAST). Also, KEEP PAPER RECORDS of how you aquired this money. In applying for the loan, the VA (and/or underwriter) is going to want to know where the money came from, and you will need to provide documentation to back up your story. With a six-figure income, you should be able to toss significant percentage of your paycheck to savings, maybe even set up direct deposit. But for each deposit that you make, keep the receipt AND NOTE THE SOURCE. (“direct deposit from paycheck, pay period ending 2/27″, for example) If you use direct deposit, make sure to keep hardcopy bank statements, or print them, to show the deposits.

OH, something you need to do immediately (almost forgot) is apply for a VA loan certificate. This is not a loan, just a document from the VA stating that YES, you are eligible to apply for a VA loan to buy a house. You just need to fill out the proper form with information on your active duty status, I hope you have a copy of your DD214.

Right now, because you haven’t applied for a mortgage yet, you might be wondering why you have to come up with $20,000 on your own, with no outside help. This is why. Simply stated, to get any significant loan (like a mortgage), you pretty much have to prove that you don’t need the loan. That’s kind of bizarre, twisted logic, but that’s the way it is. Underwriters want to know that you COULD buy a house, without a mortgage, if you had enough time to save up the money. If you can prove that, then you qualify for a mortgage to buy a house. (!) Right now, if you apply for a mortgage with bad credit, no liquid assets and no other factors (such as VA loan guarantee), you will get rejected. Liquid assets are needed to qualify for the loan, PERIOD. Usually about 20% down payment on the house is required. Closing costs are always paid by the buyer, up front in cash. So that’s about 30% total that YOU have to come up with, in cash, up front. Or, if $300K property, about $90K that you have to come up with before you apply for the mortgage. OUCH. Yeah, I know, that can be kind of discouraging to someone in your financial situation.

The workaround: VA loan, if you qualify (which you do, if you were active duty in the marines, honorably discharged) qualifies you for zero down programs at most lenders. Zero down conventional mortgage: Probably not applicable, as usually reserved for people with good credit. But if you could get it, it is essentially a 2nd mortgage to help you qualify for a 1st mortgage, which is a really bad idea. The bank loans you the money to qualify for the primary mortgage and at the same time rolls what you owe into a 2nd mortgage. Ouch.

EITHER WAY, still need to come up with closing costs. The lender can give you a more reasonable estimate of closing costs, but for now, figure 10% of sale price of whatever property you want to buy.

Another thing, as the houses are about $350K in your area, you will need to shop elsewhere and commute. Either that, or spend several years trying to save up about $35K minimum to qualify for the mortgage (closing). A more reasonable goal would be to save up about $20K for closing costs and set your sights lower by moving a half-hour or more away from the area, to an area with more reasonably priced homes.

Now if someone is willing to help you with down payment, that’s WONDERFUL. Unfortunately, it won’t help you at all. Theoretically, if your parents (or your wife’s parents) give you a $50K loan to use as a down payment, the mortgage application WILL be REJECTED. See, the underwriter wants to know that you can come up with that $50K (or whatever) on your own. If someone loaned it to you, you are back to ZERO. You haven’t proven that you don’t need the money. Someone loaning you the money has proven that you DO NEED the money.

The workaround to this? IF you can get someone to give you money as a gift, with no re-payment expected, and document that the money IS a gift with no re-payment expected, then that (ironically) is OK with lending institutions. You obtained the money legally, from a verifiable source (it was a gift, and documented as a gift). Now if your parents (or in-laws) are willing to give you a “gift” (wink wink) and expect you to pay it back as a loan, don’t get caught. That’s called fraud, and your whole family could end up in prison that way.

In short: – Apply for VA loan certificate – Lawyer to clear up IRS and charge-off issues – Verify credit reports are clean – Save up at least $20K somehow that you can document, without getting the money from someone else – Set your sights lower, by moving to a less expensive area. – Keep in mind that even IF you buy a cheaper house in another area (commute), the $20K (figuring a property worth $200K) will only cover closing costs – Use your VA loan to get a zero down mortgage

Other thoughts: Be aware that applying for a mortgage is the single most stressful thing you will do in your life, even if you have significant liquid assets and GOOD credit. After closing, you will want to throw a party. Really.

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Filed under: Bad Credit Loan