money matters

Qualifying without perfect credit: Steps you can take to make your scorestronger

Most of us don't have perfect credit. Fortunately it doesn't take perfect credit to qualify for a mortgage. This week we're going to look at factors that affect your credit score and how negative items on your credit report can affect your credit score.

Your credit score is a statistical calculation designed to reflect your likelihood to repay your debts. The developers of the FICO score haven't revealed the exact formula used to compute the score, but they have identified factors that affect your score. They also have provided the relative weights of these factors:

35%: Whether you pay your bills on time
30%: How much of your available credit you are using ("credit utilization")
15%: Age of your credit accounts
10%: Types of credit used
10%: Recent credit inquiries

Based on the list above, you can see that the most influential factor is paying your bills on time. The FICO creators performed a simulation last year to determine the effect of "failure to pay" on a credit score. While the effect depends on one's starting score, the simulation showed that paying your mortgage 30 days late can drop your score between 80 and 110 points. A foreclosure may drop your score up to 160 points, and a bankruptcy a whopping 240 points.

It is important to note that once a negative item appears on your credit report, it stays there for seven years, 10 years for a bankruptcy. However, over time, the effects of negative items wane. The time to recover depends on the significance of the negative mark. In the FICO simulation, researchers found it took 9 months to 3 years for your score to recover from a mortgage late payment.

Even if your score is okay, it's important to recognize that certain negative items may disqualify you for some loan programs. After a Chapter 7 bankruptcy, you typically are ineligible for a government loan (FHA, VA, USDA) for two years and for a conventional loan for four years. For a Chapter 11 bankruptcy two years must elapse from the discharge or dismissal date to qualify for a conventional loan. A foreclosure or deed-in-lieu of foreclosure will sideline you for three years for government loans and two to seven years for conventional loans.

It is important to note that once a negative item appears on your credit report, it stays there for seven years, 10 years for a bankruptcy.

These are extreme financial events. A more common negative item is a collection, and here the news is better. You generally can qualify for a conventional loan with outstanding collections as long as they don't affect the mortgage lender's rights. Collections on medical and utility bills usually fall in this category.

FHA recently changed its guidelines regarding collections. If you have collections totaling $1000 or more, you must pay them in full or have established a payment plan to qualify for an FHA loan. (This is a huge change from previous guidelines, and FHA seems to be backtracking a little. In fact, FHA just delayed implementation of the change until July 1st.)

Another common negative item is a late payment. I have fielded many a call from consumers concerned that they've done irreparable harm to their credit scores because they paid their car loan a couple days late. While you need to understand that a payment is late when not paid by the due date, creditors typically do not report accounts as late unless a payment is not received by the next due date. Thus, while forgetting to pay the credit card bill for a week will cost you a late fee, it probably won't ding your credit score.

A single late payment probably won't keep you from qualifying for a mortgage. However, if your credit report shows numerous recent late payments, you will find qualifying difficult. You generally will not be eligible for a conventional loan if your mortgage has been late by more than 60 days within the past year.

Government guidelines are a little more foregiving. However, multiple late payments on any accounts in the last year or a single payment that was late by 90 days or more may disqualify you.

This is a necessarily brief summary of the effects of negative items. If your credit report contains negative items, check with a mortgage professional to analyze your specific situation. Don't assume you won't qualify.

Note that the last factor in the list above is recent credit inquiries. Many consumers have expressed concern that this prevents them from shopping lenders for the best rate because each lender will make a credit inquiry. The FICO model anticipates this and ignores mortgage company inquiries for the 30 days prior to the report. Furthermore, for inquiries older than 30 days, the model treats them as one inquiry if they occurred within a "focused period of time, such as 45 days."

Next week we'll investigate ways you can improve your credit score based on an enlightening interview with a credit repair expert.

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Preserving Texas

Protecting Texas for generations: The Texas Land Conservancy and centennialranches

Bluebonnets at Pike Davis Ranch
Terry and the river
Fox at Pike Davis Ranch
Photo by Matt Hicks
Pike Davis himself with friend Hiram Yost.

Cousins Howard Hicks and Bettie Green didn’t want their grandfather’s Hill Country ranch cut into subdivision lots and corner convenience stores.

“I had this real desire for it to continue to be a working ranch as long as possible, because I felt that what’s my granddad would have wanted,” says Green, now a grandparent herself. “We all wanted it to stay pretty much as it is.”

Hicks agrees. “It’s important to keep it where we could graze cattle on the land and make money from it. But our kids and grandkids have been coming here for years and have feelings for it and we also want to practice conservation.”

Their grandfather, Pike Davis, was one of five grandsons of Alfred Davis, who came to Texas in 1854. The earliest record of Davis owning land is in 1871, the cousins say. He accumulated an additional parcel, eventually owning 4,300 acres. Details are a bit sketchy; some records were lost when the Blanco County courthouse burned down, others when a tornado destroyed the family home in the 1920s.

“Ninety-five percent of land in Texas is privately owned, so the best chance at protecting land here is if private landowners lead the cause by electing to protect their own land in partnership with conservation organizations."

Over the years, pieces of the ranch were sold off. Today, it encompasses 1,415 acres of Llano Uplift in the Colorado River watershed, falling in both Blanco and Gillespie Counties. In 2008, Hicks, Green and other members of their extended family approached the Texas Land Conservancy (TLC), says executive director Mark Steinbach. The land conservation non-profit has been around since 1981 and preserved 108 properties totaling 80,000 acres around Texas.

“We completed a project with two adjacent properties in 2007, and the owner was so happy with the result that he recommended us to Howard Hicks,” says Steinbach. Hicks completed an easement on his individual property adjoining the Pike Davis Ranch in 2008. TLC staff spent the next four years meeting with the various owners and bringing everyone to agreement about how they wanted the preserve the ranch.

Together, these four properties protect 2,115 acres of Hill Country landscape, an area larger than Garner State Park and including frontage on the Pedernales River. It includes abundant native plants and natural habitat, water resources, and a lot of history. The latter means the most to Green. “Just to go around and say, my relatives walked here, that’s the most important thing to me.”

For TLC, one of the most important conservation values is the joining of the four properties. “It’s a tenfold outcome versus one piece of property,” Steinbach says. “Stitching together private lands in this way allows us to protect vast landscapes. With the price of land in the Hill Country, it’s nearly impossible to protect such large tracts without working in partnership with landowners.”

Conservation easements are a tool to help families with their long-term planning goals, he explains. Under a voluntary, negotiated agreement with TLC, the owners retain the right to build houses, within reason, and conduct other activities such as agriculture and hunting. “Easements protect the property from land fragmentation, and large-scale or intensive development,” Steinbach explains. “The landowner can pass it down to heirs, or sell it. The easement is perpetual and so runs with title of the land.” Tax benefits are the main takeaway for landowners, he adds. “By donating development rights to us, the owners can take a tax deduction of that value.”

Typically, the taxable value of the property is diminished by anywhere from 30 to 50 percent. “If the land is worth a million dollars, then perhaps $300,000 of that would be donated. With Hill Country land as valuable as it has become, that makes for a good enough incentive.” But even with tax benefits, the easement is not a money making strategy for landowners. Those who enter into an easement tend to have a conservation ethic in the first place.

“This will be the second centennial ranch, meaning one in the same family for more than a century, for us,” Steinbach adds. “It’s pretty significant that a family could hold land together for that amount of time, and now ensure that the next generation can hold the land. It’s a historically significant piece of property.”

The ranch will not be open to the public, which is the case with many conservation easements, but it will contribute to the public good, says TLC Outreach Coordinator Callie Thompson. “Ninety-five percent of land in Texas is privately owned, so the best chance at protecting land here is if private landowners lead the cause by electing to protect their own land in partnership with conservation organizations. Because Pike Davis will never become a shopping mall or parking lot, it will continue to be a public asset through its preservation of scenic views for everyone, protection of water quality, and conservation of native plant and animal species.”

Without the easement, the ranch most likely would be developed at some point. “Areas in Texas that are not under some kind of conservation easement, or that aren’t large properties that someone can afford to keep, are going to be developed,” Howard says.

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