WASHINGTON – July 23, 2013 – By now, most of us understand the importance of a credit score. Mortgage lenders, credit card issuers and, in some cases, insurance companies use this measure of creditworthiness to determine availability and cost of their products. Some employers factor credit scores into hiring decisions.

But the one aspect that has eluded even savvy consumers is how to get their credit scores. For advice, I contacted the woman known as the guru of credit scores, Linda Ferrari, author of “The Big Score: Getting it and Keeping it –7 Buying Power for Life,” (Consumer Power Press, $25).

In her book, she explains that while credit scoring has been around since the 1950’s, it only became mainstream in the 1980s. The three rulers of the industry – Experian, Equifax and TransUnion – are for-profit companies that make money by collecting information about you from your creditors and reselling it to anyone who may want it … including you.

In 1956, Fair Isaac & Co. created an objective scoring system to analyze consumer data. By 1991, all three credit-reporting agencies were using a FICO model to generate a number between 300-850 that quantifies an individual’s ability to pay back money borrowed.

But you do not have just one credit score. Each reporting agency generates a different score using their data and their model. Lenders will typically pull scores from all three agencies, then choose the middle score on which to base their decisions. These scores can vary by as much as 100 points or more, says Ferrari.

So how can you, the consumer, find out your score? “That is a question that is really complex to answer,” Ferrari says.

Hundreds of versions of the three bureau-generated scores are sold to consumers and lenders by hundreds of different credit score vendors, Ferrari says. When you apply for a loan, you have no way of knowing which score is being used.

Here Ferrari explains the four ways to access your score and how each one may be different:

FICO score: Even though credit scores are referred to as FICO scores, you cannot get a true FICO score. You get a score generated from a modified version of a true FICO score. If you go to myFico.com or order your score from Equifax (which is 100 percent true to the FICO model) you can get the most realistic approximation of the score that most lenders use to make decisions. However, scores on myFico.com cost more than scores sold by many other vendors.

Credit bureau score: All three credit bureaus sell credit scores to consumers, but in order to get a similar picture as lenders get, you would have to purchase your score from each of the three bureaus. Each bureau may offer to sell you scores from the other two, but know that Experian, for example, cannot sell you a real Equifax or TransUnion score because they are using their version of the FICO model to calculate it.

Online score: Hundreds of online companies offer credit scores to consumers, but while the data comes from the same three credit reporting agencies, it often applies general criteria not designed for any specific use and therefore isn’t a good source to determine how a certain type of lender may view you. These scores are often most affordable, but they can give an incomplete picture.

Lender scores: When you apply for any type of loan or credit, most lenders purchase scores from third-party vendors. When a lender requests your information, data is sent from the credit bureaus to the third-party vendor’s system which generates a score from each bureau. The scoring is based on whatever criteria the lender thinks is most important to their program. These scores are not available to consumers, but you can ask the lender to show you the score on which they are basing their lending decisions.

© 2013 The Atlanta Journal-Constitution (Atlanta, Ga.) Distributed by MCT Information Services

 

NEW YORK – July 8, 2013 – Want to invest in real estate through a retirement account? It’s possible, but it’s also far more difficult than simply buying and selling investment property.

“Given the combination of bottomed-out home prices and a still-tight lending environment, utilizing funds from a retirement account to purchase investment homes with cash, or at least with a large downpayment, can give individual buyers a better chance of competing in this tight housing market,” says Daren Blomquist, vice president at RealtyTrac.

Blomquist says investing with retirement money “gives consumers a path to more quickly build their nest egg since all proceeds from the real estate investment – whether that be from rental cash flow or from selling the property – go directly back into the retirement account.”

However, he also says retirement investors should conduct thorough research first.

Look before you leap
Retirement funds can be a good fit for some investors but it’s not for everyone. “It depends on the person’s age and the type of property,” says Sheldon Detrick, CEO of Prudential Alliance Realty in Oklahoma City, Okla. “Rental property, especially on the lower end, can be a good investment at any age. It’s usually profitable and easy to sell. On the other hand, buying land in outlying areas in anticipation of population growth is something only those under 50 should consider.”

Know the ground rules
Lorraine and Richard Walls, a couple in Midlothian, Va., decided to use their retirement accounts to buy investment properties in Southwest Florida. But before making the plunge, the Walls spent a full year researching how self-directed real estate IRAs work, learning the basic ground rules every investor should know before they get started. Those ground rules include:

• Title: Any property purchased by an IRA is owned by the IRA – not an individual.
• Purchase money: any money used to purchase a property with an IRA has to come directly from your IRA, not you individually, and you can’t be reimbursed by your IRA. This includes earnest money and closing.
• Rehab and carrying costs: similar to purchase money, any costs associated with rehabbing or carrying the property must be paid directly by the IRA. An IRA custodian can help with this.
• Income: any income generated from the property has to flow back into the IRA.
• Prohibited transactions: purchases made with an IRA need to be for investment, not personal use. Also an IRA cannot do business with family members of “lineal descent,” which includes you, a spouse, parents, children, grandparents, grandchildren and great-grandchildren. In addition, you cannot borrow money from a self-directed IRA or use it as security for a loan.

Use a Roth IRA to “pay taxes on the seed, not the crop”
According to Jeff Desich, chief executive of Equity Trust Company, choosing a Roth IRA over a traditional IRA is a “no brainer” for most real estate investors because although a traditional IRA allows for tax-free contributions, the earnings are taxed when pulled out for retirement down the road. “My dad would always say would you rather pay tax on the seed or on the crop,” Desich says.

Buy in your comfort zone
“We stuck to Lehigh (Acres, Fla.), which everyone said don’t do it,” says Lorraine Walls, adding that the couple now owns a total of nine properties in Lehigh Acres, one of the nation’s hardest-hit real estate markets. “I went with what I was comfortable with. We don’t need to make millions straight away.”

Plan your exit strategy but be flexible
Although she purchased the Lehigh Acres homes primarily for the long-term cash flow, Walls said steady gains in home price appreciation have her rethinking that strategy. “Actually, I’m thinking about selling because the prices have almost doubled in the last two years,” she said, noting that her real estate agent is urging her to list one home in particular. “I paid $58,000 for this property, and he wants to list it for about $105,000.”

Consider creative investing strategies
Early in his career, veteran real estate investor Stan Brady said he focused mostly on fix-and-flip properties that he sold to owner-occupant buyers. But his strategies have evolved over time to focus on optioning investment deals that he finds and negotiates for other investors who don’t have the time to find and negotiate those deals.

“A typical transaction for me would be taking an option contract … and then turn around and resell the property to a group of investors,” says the Atlanta-based investor. “Now they have a portfolio rental and I get back the profit in my IRA.”

Set up a 401(k) under real estate investing business
While a normal employer 401(k) plan won’t allow you to invest in real estate, everyone who invests in real estate is in business for themselves, Desich says, which gives him or her the right to have a retirement plan for that business. If someone is investing in real estate and finding success, then that person can set up a 401(k) that permits real estate investments and allows contributions up to $50,000 per year plus $50,000 for a spouse.

Make it a family affair and multiply your purchasing power
Investors have the option of partnering their IRA with others, according to Desich. For example, a husband and wife might each have a Roth IRA, and both may have a 401(k). Add in two kids who each might have a Roth IRA and the family can use all six accounts to purchase a deal and share the percentage.

Pay all cash or make a large downpayment to compete with institutional buyers
Besides the tax breaks that allow investors to build their retirement nest egg, self-directed IRAs give buyers the option of paying all cash or making a sizable downpayment – helping to compete in a market where multiple bids are the norm.

“Offer a high deposit and close within two weeks,” Walls says is her rule of thumb. “Offer them 50 percent, and bingo you’ll get it.”

Build a strong team around you
“You want to choose your partners wisely,” says Desich. “Biggest point outside the IRA, we help to connect the dots. Whoever you use, you need to have an attorney or accountant you work with who can help you; or find a custodian who can help you answer questions. We’re not all created the same.”

© 2013 Florida Realtors®