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Beware of Auto Defaults on Private Student Loans

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When a tragedy befalls a loved one, the last thing you want to hear is more bad news. But unfortunately, some private student loan lenders have a policy called “auto default” that can turn bad news even worse.

According to the Consumer Finance Protection Bureau (CFPB), a private student loan can go into default if a responsible borrower’s cosigner undergoes bankruptcy or dies. The borrower may wind up with the shocking revelation that they need to pay the entire balance of the loan within 30 days or risk having a defaulted private student loan. This is known as auto default.

Like all loan defaults, auto default can destroy your credit and make it difficult to access loans, rent an apartment or even get a new job.

Such a lending policy seems arbitrary and unprofitable, but it exists. In March 2016, the CFPB reported that their examiners put a stop to unfair auto defaults from one or more servicers because their loan contracts were ambiguous.

If you’re a borrower with private loans, these are the facts about auto default that you need to know.

How private student loans enter auto default

More than 90% of private student loans require a cosigner to back the loan, according to a 2017 CFPB report. Cosigners enable you to access lower interest rates and greater amounts, since the cosigners promise to pay back the loan if you default.

Because private loans are contingent upon cosigner creditworthiness, many lenders retain clauses that allow banks to call a loan in full if the cosigner goes into bankruptcy or dies. Although some banks say they do not intend to trigger this option, the CFPB reports that many exercise this option when the loan has been sold or is part of a securitization trust.

Depending on the circumstances, however, calling the loan may be illegal. However, you may feel there’s little recourse when you’re told your loans must be paid within 30 days.

How to prevent auto default

The best way to prevent an auto default on your private student loan is to release your cosigner as soon as you are able to do so. Many student loan servicers allow cosigners to be released from a loan after a certain number of on-time payments or with a qualifying credit score. But unfortunately, the Consumer Federal Protection Board found in 2015 that more than 90% of all attempts to release private student loan cosigners were rejected.

As a result, the CFPB recommends using its sample letter to write to your lender and ensure that you receive complete information about your eligibility to release your cosigner. In particular, if your cosigner is in poor health or has financial trouble, you should double down on your efforts to release them.

If you are ineligible for a cosigner release, you should have the option to change cosigners if you believe that your current cosigner puts your credit score or payment schedule at risk. But note that eligibility requirements for changing cosigners vary from lender to lender and even from contract to contract.

Often, the best way to release a cosigner from a private student loan is to modify the loan or refinance it. Private student loans are notoriously difficult to modify, but refinancing with a different company may be possible for people with good to excellent credit.

What to do if you enter auto default on your private student loans

Though the CFPB has proposed legislation to make lending practices more transparent, you must act quickly if your private student loan is in default, lest it destroy your credit.

If a collections agent informs you that your loan is in default, you should request a verification of debt. The collector must provide information about the loan balance and the original lender, and you can then use that information to reach out to the lender directly. Do not attempt to negotiate with the collector, unless you’re prepared to pay the sum since they cannot restore your credit.

If the bank informs you about the auto default, then you should contact them to attempt to reverse the default and modify the loan. Under many circumstances, both the borrower and the bank are likely to come to the conclusion that modifying the loan may be in the best interest of both parties.

Once you are in contact with a bank, then you should propose mutually beneficial solutions like modifying a loan to include a cosigner release option, allowing for a period of time to find a new cosigner or enabling a refinance.

If you cannot convince the private lender to modify a loan and reverse a default, then you should submit a complaint to the CFPB. The bureau is tasked at working on behalf of consumers to ensure prompt responses and resolution.

In some cases, the CFPB can work quickly enough for you to avoid default. However, if you are put into auto default, then you will need to clean up your credit. To determine whether anything needs to be done, first check your credit score, and then access your full credit report (available for free at AnnualCreditReport.com) to see if there are any negative marks on there. If the student loan entered default, then that will be present on the credit report, and the CFPB can work with you and the lender to be sure that the negative information is removed.

Will auto defaults stop?

Even with proposed reforms in the private student lending market, you remain at risk for auto defaults as long as you have a cosigner on your loan. The best way you can protect yourself from an auto default is by removing your cosigner or refinancing your loans without a cosigner.

The CFPB works to protect consumers through action and reform, but you put yourself in a stronger position when you proactively work to avoid lending practices such as auto default.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah here

Sarah Li Cain
Sarah Li Cain |

Sarah Li Cain is a writer at MagnifyMoney. You can email Sarah Li here

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How to Successfully Repair Your Credit All By Yourself

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Digging yourself out of a bad credit hole is something you can get professional assistance with, but you can also make significant improvements on your own. This guide provides helpful tips on how to spot credit repair scams, how to fix bad information on your credit report, how to boost your credit score and more.

In this guide

What is negative credit information?

Negative credit information is anything that causes creditors to consider you a riskier borrower, including late payments, accounts in collections, foreclosures, bankruptcy and tax liens. Once negative credit information is introduced into your credit history, you cannot remove it on your own. However, time heals all wounds. The longer it’s been since the negative information was introduced, the less it will affect your credit score. In time, negative information falls off your credit history.

This list details the length of time that negative credit information affects your credit score:

Late payments: Seven years
Bankruptcies: Seven years for completed Chapter 13 bankruptcies and 10 years for Chapter 7 bankruptcies
Foreclosures: Seven years
Collections: Generally, about Seven years, depending upon the age of the debt being collected
Public record: Generally, about Seven years, although unpaid tax liens can remain indefinitely (always pay the tax man first!)

Rather than despair over negative information, take action to improve your score.

The best way to improve your score is to have good behavior reported every  month. For example, you can apply for a secured credit card, which requires that you make a refundable deposit in exchange for a credit limit, typically at least $200. Then, use the card monthly. Charge no more than 10% of the available credit limit, and pay the balance in full and on time every month. Your credit score should improve as your negative information ages and your credit report fills with positive information.

How to spot a credit repair scam

Credit repair scammers prey on people who are desperate to remove negative credit information and improve their credit score. Engaging with these scammers won’t improve your credit and may also lead you into legal hot water.

The signs below indicate that a credit repair company is a scam:

  • The company wants you to pay before it provides a service.
  • The company recommends that you don’t contact any credit reporting agencies directly.
  • The company tells you it can get rid of negative credit information in your credit report, even if that information is accurate.
  • The company advises you to dispute all information in your credit report, regardless of its accuracy or timeliness.
  • The company suggests you create a new credit identity.

Companies that want you to lie about credit history or create a new credit identity can get you into legal trouble. Companies that provide “new” identifying information may use stolen Social Security numbers, and if you use this number, then you are committing fraud. Likewise, using an Employee Identification Number or Credit Profile Number provided by these companies is a crime. Rather than committing fraud, take the steps below to improve credit on your own.

Assess your credit history for free

You are entitled to receive one free credit report from each of the three major credit reporting bureaus (Experian, Equifax and TransUnion) every year. These credit reporting agencies keep detailed records of your credit history. Assessing your credit involves three simple steps:

  1. Download a free copy of all three credit reports.
  2. Review the credit report to find errors.
  3. Prepare a list of items you need to dispute.

Download free credit reports

AnnualCreditReport.com is a website sponsored by the three major credit reporting bureaus, and they are required to provide you with a full credit report every year. The first time that you assess your credit history, download a report from each of the major credit bureaus by following these steps.

Step one: Visit AnnualCreditReport.com and click on the “Request yours now!” link at the top of the page (in red) or the “Request your free credit reports” red box at the bottom of the page.

Step two: Follow the three-step instructions on the website. Download credit reports from all three bureaus, because a mistake may be listed only at one bureau.

Once you’ve filled out the form and requested reports from all three bureaus, you’ll answer some security questions and be directed to your report, one agency at a time. If the security questions trip you up, the website will lock you out of your report, but it will offer a phone number you can call to get your credit report via mail.

Keep in mind that you do not have to access all three credit bureau reports at the same time. If you prefer, you can space out this access over the year. So, for example, you can request a report from Experian in March, then TransUnion in June and Equifax in September.

After the bureau authenticates you, you’ll be directed to your credit report. In the next step, we’ll show you what you need to review.

Review your credit report

Review every credit reporting agency’s credit report in detail. Each report has the following sections: Credit Summary, Accounts (includes payment history), Inquiries and Negative Information. Reviewing each section can help you understand the source of a poor credit score, and if your report contains errors.

When you review your credit report, you will need to visit each section of your credit report, and keep notes about erroneous information. Remember, there are three bureaus, so you need to repeat this process for all three reports.

The next section details what you should should note.

Take notes

Accounts section
The accounts section contains a detailed history of all accounts (open and closed), your balance and your payment history associated with each account. You should be able to see month-by-month payment information for seven years of history. Each month will have a symbol next to it that indicates whether the account was paid as expected or if it was late.

Review each account, the balance and the payment history, and ask these questions:

  • Do you recognize all of the accounts on your credit report?
  • Are all your closed accounts noted as closed?
  • Does each account have the appropriate account balance listed?
  • Is your payment history accurate?

If you see missed payments that shouldn’t have been there, write them down. Your credit score is negatively impacted when you are 30 days or more past due. If you see a balance on a card that you haven’t used in years, it could be because the account has been stolen. Misinformation in the accounts section harms your credit score, so make a note of all of it.

For your own records, you should also take note of the following:

  • What is my current balance relative to my available credit (credit utilization)?
  • Do I have any open accounts that have associated late payments?

Resolving these issues can help you improve your credit score moving forward.

Credit inquiries

Credit inquiries are records of new credit for which you’ve applied. For example, if you apply for a new credit card, a car loan or a mortgage, you will see records of credit inquiries.

  • Do you recognize all the inquiries on your credit report?

If someone steals your identity and tries to apply for new credit in your name, an unrecognizable credit inquiry is usually the first sign of a problem. Make a note of any unrecognizable credit inquiries.

You will also want to take note if you see many credit inquiries where you did not receive the line of credit you wanted. Credit inquiries have a slight negative effect on your credit score, so if you’re applying for a lot of credit, you may need to slow down until your credit score improves.

Negative information

Negative information includes negative accounts, collections or public records. Negative information has the biggest impact on your credit score.

  • Do you recognize all of the negative information on your credit report?

If the negative information in your account is not accurate, you will need to contact the credit bureaus to correct it.

Negative information hurts your credit score, but as it gets older, the effect lessens. Take note of all accurate negative information, so you can follow our strategy to avoid it in the future.

Next steps

If all the information in your credit report is correct, learn how to monitor your credit score for free and how to improve your score.

On the other hand, if you don’t recognize all the information, you will need to take steps to remove incorrect information. And if your identity has been stolen, there will be even more steps required.

Resolve incorrect information on your report

Incorrect information appears on your report for four reasons:

  • Someone stole your identity and opened new accounts in your name.
  • Someone stole one of your existing accounts, and started using it.
  • The bank made an error and reported a delinquency or default that never happened.
  • A collection agency made an error and reported a collection item on debt that was never yours.

If someone stole your identity

Incorrect information due to identity theft is a serious issue that you need to resolve as soon as possible. These are some common signs of identity theft:

  • You don’t get your bills or other mail because someone has changed the mailing address on your accounts.
  • Debt collectors call you about debts that aren’t yours.
  • Medical providers bill you for services you didn’t use.
  • Your health plan rejects your legitimate medical claims because records show you’ve reached your benefits limit.
  • The IRS notifies you that more than one tax return was filed in your name.
  • You are arrested for a crime someone else allegedly committed in your name.

Warning: A common form of identity theft is when a family member steals your Social Security number and uses it to apply for credit.

You can start to resolve identity theft issues by visiting www.identitytheft.gov to report identity theft and get a recovery plan. This is an excellent, free website created by the Federal Trade Commission. In addition to reporting identity theft, you will receive a free action plan, and you’ll gain access to people who can guide you through the identity resolution process.

Below we detail some important action items you can take.

  1. Place a fraud alert on your account with the credit reporting agencies by calling each credit bureau (numbers below).
    • Equifax: 1-800-525-6285
    • Experian: 1-888-397-3742
    • TransUnion: 1-800-680-7289
  2. Put a freeze on your credit reports. A freeze blocks potential creditors from getting access to your credit report, making it less likely an identity thief can open new accounts in your name.
  3. Create an Identity Theft Report by submitting a complaint about the theft to the FTC and filing a police report.

If someone stole your account

If someone stole the account information of an existing account, you should immediately contact your bank or credit card company. Once you report your card as lost or stolen, the bank will typically reissue a new card and correct information on the credit report directly.

Dispute credit report errors

If you do not think you were the victim of identity theft, but believe there is incorrect information on your credit report, you can dispute the information directly with the credit reporting agencies. We will explain how.

Disputing incorrect information involves three steps:

  • Dispute the item online with each credit reporting agency.
  • Write a letter to each credit reporting agency, and keep copies of your correspondence.
  • Write a letter to each organization (bank, collection agency, credit union, etc.) that submitted incorrect information, and keep copies of those letters.

When you dispute incorrect information, you must keep a copy of your mailed correspondence in case the issue does not get resolved right away. Keeping copies of your correspondence will allow you to get help from the Consumer Federal Protection Bureau if necessary. Your dispute should include all of the following:

  • A copy of your report.
  • Specific information about what is incorrect.
  • Any documents that support your position.
  • An explicit request to remove or correct incorrect information.

If you need to dispute information, download the following step-by-step instructions and letter templates that will make disputing incorrect information as pain free as possible.

Download now

Reporting to debt collections agencies can be trickier, as collection agents are more aggressive in their tactics. The Consumer Federal Protection Bureau has a letter template you can use to make it clear that you do not owe the debt.

Download Letter Template Now

After you dispute the incorrect information, you will need to follow up to be sure  the information gets resolved.

If following the steps above seems daunting, some organizations specialize in paid credit repair services. Most of the services require a monthly subscription fee between $60-$100 per month, and most reviews report that the negative items are completely removed within three to five months. Despite the high cost, legitimate companies provide a valuable service if you’ve been the victim of identity theft and you want someone else to do the work for you.

Follow up on disputes

Once you register your dispute with the credit reporting agencies, they must investigate the item in question within 30 days, and they must forward all the relevant data you provide about the inaccuracy to the organization that provided the information.

If the information provider finds the disputed information is inaccurate, it must notify all three nationwide credit reporting companies so they can correct the information in your file.

When the investigation is complete, the credit reporting company must give you the results in writing and a free copy of your report if the dispute results in a change. This free report does not count as your annual free report.

If you ask, the credit reporting company must send notices of any corrections to anyone who received your report over the past six months. You can have a corrected copy of your report sent to anyone who received a copy during the past two years for employment purposes.

What if my dispute isn’t resolved?

If an investigation doesn’t resolve your dispute with the credit reporting company, you can request that a statement of the dispute be included in your file and in future reports. You can also ask the credit reporting company to provide a statement to anyone who received a copy of your report in the recent past. You can expect to pay a fee for this service, and a dispute on your credit report does not improve your credit score.

Do I have any other options?

If you are unhappy with the way your case was investigated by the credit reporting agencies, you don’t have to give up. Instead, you can complain to the Consumer Financial Protection Bureau (CFPB).

When you complain to the CFPB, you can should provide copies of all of your correspondence to prove your case. The CFPB will reach out to the credit reporting agencies on your behalf and try to help get your situation resolved. At MagnifyMoney, we have worked with many people who have had good outcomes working with the CFPB.

Monitoring your credit score

In order to catch issues, and stay on top of your credit score, you should implement a credit monitoring strategy. You can monitor your credit for free with LendingTree, MagnifyMoney’s parent company. Keep in mind that LendingTree uses VantageScore, which is slightly different than the FICO score, although it has the same score range.

If you prefer more monitoring and additional credit protection, you can pay a fee for services that provide daily three-bureau credit monitoring, resolution assistance if your identity is stolen and insurance if you have to engage in a legal battle. This guide ranks the top identity theft protection services.

Whether you choose a free or paid version, credit monitoring is a great service. As soon as you detect suspicious activity, you can take action. The sooner you work to deal with issues in your credit report, the less the damage may be.

Improve your credit score

Once you resolve issues on your credit report, it’s time to implement a strategy to start improving your credit score. The single best thing that you can do to improve your credit score is to pay current accounts on time and in full every  month. You can picture it as burying negative information under a mountain of positive credit information.

Your top priority should be keeping accounts current. Continue to pay whatever account has the most positive information.

Your next priority should be keeping accounts out of collections. If you owe late payments, work to pay them back before the item goes into collections. Once these accounts are current, they will start to work positively toward your score.

Next, work on paying down your debt to provide positive information. Paying off installment credit (such as mortgages and car loans) will  also add good information to your credit report.

If you have no current accounts, consider taking out a secured credit card and using less than 10% of the available credit each month to add positive information to your report.

The last thing you should do is attempt to resolve debts in collections. Once an item is in collections, paying it off will not improve your credit score.

Going forward, take care to avoid taking on more debt than you can handle, and implement a strategy to pay down your debt quickly. Once you start making positive changes, your credit score should improve, and within a few years, you’re likely to have good credit and be a more desirable loan applicant.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah here

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New Mexico First-Time Homebuyer Programs

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Do you want to buy your first home in New Mexico? With the state offering down payment loans and subsidized mortgages, you may be able to buy a house there sooner than you think. These are the most important first-time homebuyer programs for New Mexico’s residents.

New Mexico first-time homebuyer programs

New Mexico’s first-time homebuyer programs are administered through the New Mexico Mortgage Finance Authority (NMMFA). This is a quasi-governmental agency that was chartered by the New Mexico state government.

Eligibility for New Mexico assistance

New Mexico’s first-time homebuyer programs are designed for people with low and moderate incomes. Specific income restrictions vary by county and family size. In addition to meeting income requirements, you need at least a credit score of 620 to participate. All of New Mexico’s programs require that the potential homeowner buy a single-family home that they will use as a primary residence.

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FIRSTHome Program

What it is

The FIRSTHome loan is a 30-year fixed-interest-rate mortgage that can be combined with New Mexico’s closing cost and down payment loans.

  • No origination fees
  • Competitive interest rates (currently 4.75% to 4.85%)
  • Lower upfront cash requirements (only a $500 contribution is required from the buyer’s own funds)
  • Can be originated as Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), U.S. Department of Agriculture (USDA), Fannie Mae MyCommunity™ and HFA Preferred™ loans and the U.S. Department of Housing and Urban Development (HUD) Section 184 Indian Housing program.
  • Can be combined with down payment assistance.
  • Thirty-year fixed-rate mortgages only

Requirements

  • Minimum credit score of 620
  • Minimum $500 contribution from personal funds
  • First-time homebuyers only
  • Must earn income below program requirements ($79,179 for a two-person household in Santa Fe, for example)
  • Must occupy the home as a primary residence
  • Single-family homes only
  • Home price must fall below limits ($271,165 in all counties except in Santa Fe [$338,824] and Los Alamos [$350,471])
  • Must complete a homebuyer education course.

How to apply

Only certain lenders can originate FIRSTHome loans. To find a participating lender in your area, use the search tool on the New Mexico Mortgage Finance Authority’s website. The search tool will give you contact information, so you can reach out to the lenders. When you reach out, be sure to ask about New Mexico’s FIRSTHome mortgage and down payment assistance options.

FIRSTDown Program

What it is

The FirstDown Program offers a down payment loan with a 6% interest rate. First-time homebuyers who meet the income restrictions can borrow up to $8,000 to cover closing costs and down payment requirements.

  • Thirty-year fixed-rate mortgage
  • Six-percent interest rate
  • Lender may charge a $100 origination fee
  • Up to $8,000 loan amount

Requirements

  • Minimum credit score of 620
  • The buyer must contribute at least $500 of their own funds toward home purchase
  • Single-family homes only
  • Must meet income restrictions (which vary by household size and residential area. For example, a two-person household in Santa Fe county must earn less than $79,197.)
  • First-time homebuyers only
  • Must take out a FIRSTHome mortgage
  • Must complete a homebuyer education course
  • Home must be less than price limits ($271,165 in most parts of the state)

How to apply

To take out a FirstDown loan, you need to have a FIRSTHome mortgage. To find a lender that issues FIRSTHome loans, use the search tool on the New Mexico Mortgage Finance Authority’s website. When you speak to the lender, be sure to mention that you’re interested in a FirstHome mortgage and a FirstDown loan.

HOMENow Down Payment Assistance Program

What it is

The HOMENow loan is a forgivable down payment loan with no interest. Eligible borrowers don’t have to make any payments on this loan, which covers up to 8% of the purchase price of a home (up to $8,000). After 10 years, the loan is forgiven.

  • A loan for up to 8% of the purchase price (or $8,000)
  • The lender may charge a $100 origination fee
  • Zero-percent interest rate
  • Forgivable after 10 years
  • No monthly payments

Requirements

  • Minimum credit score of 620
  • Must be a first-time homebuyer
  • The buyer must contribute at least $500 of their own funds toward home purchase
  • Must earn less than 80% of area median income (for example, $44,400 for a-two person family in Santa Fe)
  • Must be used in conjunction with a FIRSTHome mortgage
  • Single-unit homes only
  • The home must be below price limits (for example, $322,525 for an existing home in Santa Fe County)

How to apply

People who qualify for the HomeNow loan must take it out in conjunction with New Mexico’s FIRSTHome mortgage. To find a lender that issues FIRSTHome loans, use the search tool on the New Mexico Mortgage Finance Authority’s website. When you speak to a lender, be sure to ask about the HOMENow mortgage.

National first-time homebuyer programs

New Mexico’s first-time homebuyer programs have strict income and property-value limits, so not all first-time buyers will qualify for them. However, homebuyers in New Mexico aren’t limited to just the state programs. Homebuyers can also consider some of the federal first-time homebuyer programs. These programs help New Mexico residents with limited savings or fair credit scores buy their first house.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah here

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