Q&A: How to Fix Credit Before Refinancing Second Mortgage

Lee,
I have been reading and trying to learn for 2 years now. I am wondering if you can give some insight. 
I had to do something and the only thing I could do was default on all credit cards. 
Every card we had was defaulted while we did that, I have paid my mortgage,2nd mortgage and car payment with no late pays. 

My second is an interest only loan that is due in 2018. I have to refinance or will lose our home..do you think in this case trying a pfd or settlement would be my smartest option so o can try to rebuild before the 2018 date? My sol is 6 years..

--Anonymous


Anonymous,

First of all I want to applaud you for your efforts. You wouldn't believe the number of questions I get in the comments section of a post when the answers to the question are in the post. Now, on to refinancing that second mortgage of yours.

I don't know when you defaulted on your credit cards, but those defaults alone may not derail your efforts to get your second mortgage refinanced when 2018 rolls around. Defaulted credit cards and the collection accounts that result from them can only remain on your credit report for seven years and 180 days from the day you defaulted (Remember: the credit reporting period is the amount of time an entry can remain on your credit report. The statute of limitations is the amount of time a creditor has to sue you). I don't know when you stopped making payments, but its possible that all or most of the negative information will be gone by the time you refinance. 

Attempting to settle your debts isn't likely to do you any good. Sure, the collection agency (I'm assuming those debts are in collections by now) may agree to a settlement, but nothing you pay them now is going to improve your credit scores. The only thing that paying a collection agency will do is restart the statute of limitations for a lawsuit. You don't want that. You want to sit back and fly under the radar while your state's six-year SOL times out. 

A far better idea than paying the collection agencies to settle is to put that money away, wait for the statute of limitations to expire and pay a good attorney to help you isolate violations and get these negative accounts removed from your credit report. Nothing scares collection agencies quite as much as formal statements from an attorney--especially when the debt is time-barred and the collection agency no longer has any legal leverage. 

You can always attempt a pay-for-delete, but unless you have the full amount of the debt on hand it has the potential to backfire on you. Paying only part of the debt restarts the clock on the SOL and agreeing to pay in installments (they'll demand direct bank drafts) gives the collection agency access to your bank accounts. Believe me, you do not want that. Worse still is the fact that debt collectors have no qualms about suddenly "forgetting" that they agreed to delete their tradeline in exchange for payment. If you do have the cash on hand to successfully negotiate a pay-for-delete and the collector agrees, it is absolutely vital that you get the agreement in writing, on the collection agency's letterhead and signed by an actual person before making any payments. 

Even if you can't get all of the negative information removed by the time you have to refinance your second mortgage, any collections that remain will be old. The FICO scoring formula attaches greater importance to your most recent accounts. This means that old negatives don't hurt your credit scores nearly as much as newer negatives. 

Your goal here is to make sure you spent the time from now until you refinance your second mortgage doing everything within your power to accrue only positive credit information. Always pay your current creditors on time, keep low balances on any remaining credit cards or store cards, etc. If it were me, I'd purchase my credit scores once every six months just to see where they're headed. Do NOT buy your scores from the credit bureaus. They sell Vantagescores which don't mean anything. You want your FICO scores. You can purchase those directly from Fair Isaac at MyFICO.com. 

Getting your hands on another credit card may be difficult right now, but would be extremely helpful in the long run. The FICO scoring formula takes the types of credit you carry into consideration. Balancing out credit cards (revolving debt) with loans (installment debt) is crucial to earn the highest number of points. If you're married and the defaulted credit cards were in your name only (leaving your spouse's credit unmarred) I'd recommend asking her/him to apply for a new credit card and add you on as an authorized user. The account would then appear on your credit report and help you rebuild your credit scores before you attempt to refinance that second mortgage of yours.

In the long run, the main thing your lender is going to be worried about is whether or not your unpaid creditors have the right to sue you and attach a lien to the property you're refinancing. The expiration of the statute of limitations for these defaulted credit cards will work in your favor when refinancing your second mortgage.

Best of Luck,
Lee