Flipping Houses For Dummies. Ralph R. Roberts

that you’re the lender — in that position, would you loan yourself the money?

      The following sections take a snapshot of your financial picture and highlight the details that lenders commonly consider before approving a loan. By identifying areas of improvement, you can airbrush out any imperfections to make yourself look as good as possible to prospective lenders.

      Determining what you’re worth in dollars and cents: Net worth

      

Net worth is simply whatever money you would have if you sold all your stuff and paid off all your debts. Officially, the equation goes like this:

      Net Worth equals Assets minus Liabilities

      A strong positive net worth indicates that you

       Own more than you owe

       Don’t borrow more than you can pay for

       Can pay off a loan by liquidating assets, if necessary

       Probably know more about net worth than you realize

      To prove to a lender that you’re net worthy, type up a page that lists your assets and liabilities and presents your net worth. If you have a spreadsheet program or a personal finance program, such as Quicken, use the Reports feature to generate a net worth report.

      

A strong net worth can help you borrow money at competitive interest rates, but a low or even a negative net worth isn’t a death knell. If you have a solid investment strategy and the energy and commitment to implement it, you can secure the capital you need to get started.

      Checking and correcting your credit report

      Good credit is gold. Without it, you have access only to your own money. With it, you can put other people’s money to work for you. Whenever you apply for a loan, the lending institution performs a credit check — sort of a background check to make sure that you’re not up to your gills in debt, that your income covers expenses, and that you pay your bills on time.

      

To ensure success at obtaining loans, become proactive. Check your credit report every three months or so, correct any errors, and take steps to improve your credit rating, as instructed in the following sections. No irregularity is too small to correct.

      The following sections show you how to obtain, review, and correct your credit report. I also explain how to improve your credit score.

      Obtaining a credit report

      The Federal Trade Commission (FTC) has made it mandatory for the three major credit reporting companies to provide you with a free credit report once every 12 months. To obtain your free credit report, submit your request online at www.annualcreditreport.com.

      If you already obtained a free credit report this year and want something more recent, you can order a credit report from any or all of the following three credit reporting agencies (prices and terms vary):

       Equifax: www.equifax.com

       Experian: www.experian.com

       TransUnion: www.transunion.com

      Inspecting your credit report

      When you receive your credit report, inspect it carefully for the following red flags:

       Addresses of places you’ve never lived

       Aliases you’ve never used, which may indicate that someone else is using your social security number or that the credit reporting agency has mixed someone else’s data into yours

       Two or more social security numbers, flagging the possibility that information for someone with the same name has made it into your credit report

       Wrong date of birth (DOB)

       Credit cards you don’t have

       Loans you haven’t taken out

       Records of unpaid bills that you either know you paid or have good reason for not paying

       Records of delinquent payments that you either know you paid on time or have a good excuse for not paying on time

       Inquiries from companies with whom you’ve never done business (when you apply for a loan, the lender typically runs an inquiry on your credit report, and that shows up on the report)

      Check your credit report once a year to keep track of your creditworthiness over time and to stay on top of any false information or signs of financial fraud.

      

An address of a place you’ve never lived or records of accounts, loans, and credit cards you never had may be a sign that somebody has stolen your identity. Yikes! Contact the credit reporting company immediately and request that a fraud alert be placed on your credit report. For tips on protecting yourself against identity theft and recovering from it, check out Identity Theft For Dummies, by Michael J. Arata, Jr. (Wiley).

      Understanding what your credit score means

      To give your credit rating an air of objectivity, credit reporting agencies often assign you a credit score that ranges roughly between 300 (you have never paid a bill in your life) and 900 (you borrow often, always pay your bills on time, and carry no huge balances on your credit cards).

      

Your credit score determines not only whether you qualify for a loan but also how much you’re qualified to borrow and at what interest rate. A high credit score lets you borrow more and pay less interest on it. A high score can also lower your home insurance, auto insurance, and life insurance rates.

      CREDIT SCORE STATS

      Credit reporting agencies rely on one or more statistical models to determine your credit score. One of the most popular models is the Fair Isaac Company (FICO) rating system. The credit company assigns numerical values to particular pieces of data in your credit history, such as the length of your credit history and the various types of interest you’re paying. They then plug these numbers into the statistical model, which spits out your credit score. It’s basically a numbers game that weighs the data on your credit report in the following manner:

       35 percent of the score is based on payment history.

       30 percent is based on outstanding debt or how much you currently owe.

       15 percent is based on the length of your credit history or how long you’ve been borrowing.

       10 percent is based on recent inquiries on your report (whenever a lending institution requests a report).

       10 percent is based on the types of credit, such as mortgage or credit card interest.

      Cranking up your credit score

      If you have a credit score of 700 or higher, pat yourself on the back. You’re above average and certainly qualified to borrow