By Dean Calbreath
UNION-TRIBUNE STAFF WRITER
Excerpted

As politicians struggle to patch up the nation’s ailing financial system, credit – the grease that keeps the global economic machine running – has been drying up to a dangerous extent.

Over the past two weeks, many banks have ceased lending money to one another – or to corporate clients that need loans to cover their cash flow.

It was paralysis in the credit market that prompted the Treasury Department and the Federal Reserve to propose a $700 billion plan to take over mortgage-backed assets.

How did this credit crunch happen? How dire is it? And how could a squeeze in lending between banks on Wall Street evolve into a recession – or worse – in the broader economy?

The heart of the crisis lies in the interbank lending network, which allows banks to borrow from each other to guard against fluctuations in cash flow.

“On any given day, banks are borrowing money,” said John Eggemeyer, president of Castle Creek Capital, a private equity firm in Rancho Santa Fe. “Your inflows and outflows of cash never match up; the money you loan is sometimes in excess of the money that’s coming in. So you need to balance that off by borrowing money yourself.”

Similarly, corporations rely on “commercial paper” to help make up for similar fluctuations. They essentially print IOUs and sell them in the interbank market, where the loans between banks also take place.

That system has fallen into a shambles because of the U.S. mortgage crisis.

Hundreds of billions of dollars in the interbank system are instruments tied to mortgage-backed securities, which have plummeted in value. Because of the faulty way in which Wall Street packaged those securities, it is impossible to know how much they are worth.

“That can lead to a real domino effect that starts feeding on itself,” said David Ely, a finance specialist at San Diego State University.

If banks can’t borrow from one another, it becomes harder for them to lend money. Companies that can’t raise money through loans or commercial paper might have to scale back operations by cutting workers or freezing wages.

In areas such as San Diego County, which has been hit hard by the bursting of the bubble in home prices, credit is already getting tighter. The days of the no-down-payment, interest-only adjustable-rate mortgages or “zero interest, zero credit history” auto loans are largely gone.

Lenders are increasingly asking would-be collegians to get cosigners for their student loans. And credit card issuers have sharply cut back on telemarketing calls, direct mailings and TV commercials offering cheap and easy credit.

Arguably, the tighter credit reflects a return to rationality in a marketplace that went off the tracks during the early half of this decade. Many healthy banks and credit unions are still making loans to worthy customers.

“If you have good credit, a good job and you’re willing to make a 20 percent down payment, you can still get a loan,” said David McDonald, president of the local chapter of the California Association of Mortgage Brokers.

But McDonald stresses that lenders are much more conservative than they used to be. “The credit scores the lenders ask for keep increasing,” he said. “One day they ask for a score of 620; the next it’s 680.”

Dean Calbreath: (619) 293-1891; dean.calbreath@uniontrib.com

Source: San Diego Union-Tribune

By ROSEMARY CALIGIURI
Staff Writer
Part 2 of 2

The newspaper asked five financial advisers to answer some of the most frequently asked questions about what’s happening in the markets. The advisers include: Jeff Broadhurst with Broadhurst Financial in Lansdale, Rosemary Caligiuri with Harvest Group Financial Services Corp. in Middletown, Michael Garry with Yardley Wealth Management in Newtown Township, Tony Petsis with Anthony Petsis & Associates in Newtown and Robert Wilgos with Laurel Financial in Middletown.

All cautioned that their answers are general and investors should talk with their own financial planners before making any decisions on their portfolios.

Q: What impact, if any, will the government takeover of Fannie Mae and Freddie Mac have on mortgage rates?

A: Seriously, nobody really knows what the effect will be on rates. Initially, mortgage rates decreased when Fannie Mae and Freddie Mac were taken over, and now they’re fluctuating — up and down.

I know this isn’t the answer you want to hear, but it’s a truthful one. I think the mandate of Fannie and Freddie is to make housing more affordable for more Americans. To do that effectively, rates need to be reasonable. As of Friday, the average 30-year fixed mortgage rate was 5.86 percent. Historically, this is a very good rate.

Investors who buy Freddie Mac and Fannie Mae bonds will have the implied backing of the U.S. government, so in return for this safety, investors will settle for less interest. That will hopefully translate into good and reasonable rates. Bottom line: I think rates are good now and wouldn’t wait to decide on either re-financing or purchasing new real estate in anticipation of a huge rate drop.

Tony Petsis

Q: Will I still be able to get a mortgage, credit card or other loan?

A: Yes, if you have good credit history, verifiable sources of income, and a history of making timely payments.

Most banks will be tightening their lending standards, if they haven’t already. The idea of a credit crunch is banks become afraid to lend money because all of a sudden they see risk everywhere, where just recently they saw none. That said, banks are primarily in the business of lending money and need to lend money to make money. So they’ll make loans and approve credit cards — just not to everybody who applies any more.

My guess is that getting a mortgage, credit card or other loan will become more like it used to be, when the standards were a little higher. That’ll make it harder for young people and first-time homebuyers to establish credit and make their first home purchase.

It’s always important to monitor your credit report and keep your credit score high so you get approved for the mortgage, credit card or loan you apply for, and at the most favorable rates.

Michael Garry

Q: In light of tighter lending practices by banks and mortgage companies, what can I do to improve my credit score?

A: Many different factors are used to determine your credit score. Some carry more weight than others. Significant weight is given to factors describing:

 Your payment history, including whether you’ve paid your obligations on time, and how long any delinquencies have lasted;

 Your outstanding debt, including the amounts you owe on your accounts, the different types of accounts you have (e.g., credit cards, installment loans), and how close your balances are to the account limits;

 Your credit history, including how long you’ve had credit, how long specific accounts have been open and how long it has been since you’ve used each account;

 New credit, including how many inquires or credit applications you’ve made, and how recently you’ve made them.

Always make your loan payments on time. If you can’t make all your payments, don’t ignore them. Negotiate with credit card companies to get on a repayment schedule you can afford. Otherwise, your credit score will be negatively affected. To improve your credit score, it’s also important to make sure that any positive repayment history is correctly reported by all three credit bureaus.

Robert Wilgos

Q: How often should you look at your retirement account statements or portfolio?

A: You can look at them as often as you like. You may want to rebalance once per year, twice at most.

If you think that by looking at the account statement you can discern some trading strategy in the short term, you’re very mistaken. A simple buy, hold and rebalance strategy will outperform the vast majority of professional money managers. An amateur is not likely going to do any better by trading in and out of funds or securities.

It’s more appropriate to set a rational allocation and relax.The critical thing to do is to determine your capacity for risk. That depends upon your time horizon, investment knowledge, income, net worth and comfort with risk. Once you have an understanding of your capacity for risk (take the risk assessment survey at www.ifa.com) then you invest in a risk-appropriate, globally-diversified (tax-efficient) portfolio of low cost funds. That will allow you to buy, hold, rebalance and RELAX.

Jeff Broadhurst

Q: Where is the safest place for my money right now?

A: Safe is a relative term. One definition of a safe money place is where you’re highly unlikely to lose principal if you follow the rules:

 U.S. treasuries: Nothing is safer than a U.S. Treasury-issued or insured obligation. If you hold a U.S. government security until maturity, you will get your entire face value.

 Banks: Make sure your bank is FDIC-insured. All non-IRA bank deposits are insured up to $100,000 per depositor per bank or $200,000 per joint account total per bank. Certain retirement IRA deposits are guaranteed up to $250,000 per owner, per insured bank. Research the safety rating of your bank. Just to be safe, keep total deposits below $100,000 per person per bank. Money market mutual funds through brokerages have no such guarantees. See Bankrate.com for ratings and FDIC.gov for insured guidelines.

 Annuities: Fixed annuities are only issued by insurance companies. Insurance companies are examined by independent rating agencies and also have safety ratings based on their financial strength. The National Association of Insurance Commissioners regulates products and financial safety standards of companies. It’s a highly regulated industry. In the final event of an insurance company failure, the policy holders would be protected by the State Guaranty Association.

Courier Times

Glenn Curtis, Investopedia 09.22.08, 1:15 PM ET

Individuals who have racked up excessive debt are sometimes left to ponder whether it makes sense to file for bankruptcy. There are several reasons why it might make sense to take the plunge and file for Chapter 7 bankruptcy or Chapter 13 bankruptcy, but making this decision is not without consequence.

There are a few circumstances in which filing for bankruptcy can be beneficial:

You’ve Already Tried to Negotiate.
Your Liabilities Exceed Your Assets.
You Want to Keep Your IRA.
There May Be a Personal/Mental Impact.
You Won’t Be Able to Borrow.
Your Credit Will Be Shot

Read more…

Forbes.com

BY JOE RUFF
WORLD-HERALD STAFF WRITER

For you and me and Main Street, one major implication of recent financial events is that it’s harder than ever to borrow money for a house, a car or even for a restaurant dinner you might want to put on a credit card.

The freewheeling days of escalating housing prices and loose lending requirements are gone. From now on, a person’s credit score will play a big role in whether he or she gets a loan, a credit card, even a job.

“Now, a credit score is like a pickup line - if your credit is 700, you get a date,” said Julia Craig of Family Housing Advisory Services in Omaha.

Three national companies compile information on you, produce credit reports and sell them to banks, insurance companies, landlords and other parties interested in potential customers’ creditworthiness. The reports affect a person’s ability to obtain loans and how much he or she has to pay to borrow money.

The most commonly used credit score ranges from 300 to 850. The higher the score, the lower the risk.

Source of credit scores

Consumers have three FICO scores, produced by the three national credit reporting companies: Experian, TransUnion and Equifax. FICO scores range from 300 to 850. The higher the score, the lower the risk. As information changes, credit scores tend to change as well.

Last week’s bankruptcy of Lehman Brothers and sale of Merrill Lynch, which were unable to borrow money to keep operating because they held too many worthless or questionable mortgage-backed securities on their books, were stark examples of tightened lending standards for businesses.

On an individual level, one example of a stingier approach to credit is American Express’ recent reduction in the maximum some cardholders can charge, spokeswoman Kim Forde said.

More significantly, the mortgage industry has tightened its standards.

Before the housing crisis - rising foreclosures, declining sales and falling home values - people with relatively poor credit scores could get mortgages, though at higher interest rates, Craig said.

But no more.

“The mortgage industry is being a lot more careful with their approval,” Craig said.

Lenders demand better credit scores and larger down payments, she said.

People have been hurt by past practices, Craig said.

She cited one real-life example:

Four years ago, a 72-year-old Omahan facing high-interest credit card debt and medical expenses obtained a $70,000 loan on the $84,000 home he owned.

He didn’t realize, though, that after two years, the adjustable rate mortgage went from monthly payments of $522 to nearly $810. The loan was too large for his income as a part-time security guard and with Social Security benefits, Craig said.

He wouldn’t get that kind of loan today, Craig said. The mortgage company would demand more information about his income and debts instead of relying on his credit score and verbal income estimate.

His credit score, by the way, has dropped from 720 to 545 because he is behind on his payments, Craig said.

A poor credit score can even keep a person from getting a job, Craig said, because some employers believe workers who are worried about their financial situations won’t be as productive, or will be bothered at work by creditors.

“The bottom line is, we want to lend money to someone who is able to pay it back,” said Kirk Kellner, regional president for Wells Fargo in Nebraska. “A credit score is part of that.”

But a lender considers other factors, as well, including income and expenses, he said.

Bret Huber, manager at Huber Automotive in Omaha, said at the height of the housing boom and loose-credit era, companies that made car loans didn’t personally review or analyze loan applications to determine if the customer was a good risk. Computers scanned applications and judgments were made based largely on credit scores alone, he said.

Now, lenders examine debt-to-income ratio and other factors, Huber said. Deals have to be structured more carefully to make certain that buyers aren’t trying to purchase cars that are out of their price range, he said.

“They’re looking a lot closer at the loans than they did previously.”

Even conventional home loans have tighter requirements, said Michael Jacobson, president of NebraskaLand National Bank in North Platte and chairman-elect of the Nebraska Bankers Association.

During the housing boom, a conventional loan - 20 percent down and a relatively low, fixed interest rate - likely would have been offered to people with a credit score of 620, Jacobson said.

Today, people generally need a score of 720 to get a comparable loan, Jacobson said.

Someone with a score of 680 might get a loan at 20 percent down, but with a higher interest rate, he said.

Scores of 520 were the cutoff for a conventional mortgage during the boom, Jacobson said. But now people whose scores are less than 620 probably won’t be able to get a conventional loan.

And those “conventional loans” that Jacobson cites are about all that remain.

The more liberal and exotic mortgages that allowed people with no down payment and questionable income to purchase homes have dropped from as high as 50 percent of new mortgages written to less than 5 percent, Jacobson estimated.

People who cannot qualify for a conventional loan can try for a federally insured loan through the Federal Housing Administration, or turn to a broker to arrange a loan with a high interest rate, Jacobson said.

But mortgage companies that acted as brokers and helped fuel the housing boom with unconventional loans at zero down payments are now few and far between, Jacobson said.

Rod Griffin, director of public education at credit reporting company Experian, said people looking at their credit scores need to look at the credit reports that accompany them, so they can understand what has affected their scores and, if necessary, determine ways to improve them.

Bob Batt, vice president of Nebraska Furniture Mart, said some people want more credit than they can handle. The Mart can check someone’s credit in seconds, quickly identify any risk and refer someone to a credit supervisor if there are questions.

Rarely is someone turned away entirely, though a smaller loan might be necessary, Batt said.

“We don’t want to burden people with debt, but we want to sell items.”

• Contact the writer: 444-1117, joe.ruff@owh.com
Omaha World-Herald

By Ellen James Martin
Smart Moves
Article Launched: 09/21/2008 12:00:00 AM PDT

By now, many economists had projected that the “credit crunch” would have eased. But prospective home buyers — including those with stable jobs and decent credit — still confront unusually high hurdles to gain approval on their home-loan applications.

“People in the mortgage industry are extremely hungry for business. But they’re also extremely picky who they lend to. The last thing they want are more foreclosures coming back to haunt them,” says Blaine Rickford, president of an independent mortgage firm.

Mortgage officers — those who take loan applications and deal with the public — prepare files on would-be borrowers. Yet no file is ever approved by a bank unless its underwriters give the green light.

“You never get to meet the underwriters — these loan supervisors are off-limits to borrowers. But mortgage officers talk to them directly and can plead your case if they think you’re a good bet,” says Rickford, who’s worked in the mortgage field since 1978.

Develop a positive rapport with your mortgage lender and you’re more likely to reach your home-buying goal, says Leo Berard, charter president of the National Association of Exclusive Buyer Agents (www.naeba.org).

“You don’t want to torpedo your chances of owning a home because of some financing glitch. Those who win in the mortgage process take a businesslike approach,” Berard says.

Here are pointers for home-loan applicants at a time of tight credit:

Educate yourself on the basics of mortgages before you apply.

Many home buyers, and particularly novices, are in the dark about mortgages and how lending works. Because they feel ignorant on the topic, they hesitate to pose important questions.

But as Berard says, the basic concepts of mortgage lending aren’t so complex that you can’t grasp them in a short period of time. Start with the Internet, taking a look at the “mortgage” entry in Wikipedia (www.wikipedia.org), the free online encyclopedia, and its related links. You can also go to the U.S. Department of Housing and Urban Development’s Web site at www.hud.gov.

Also, Berard encourages you to stop by your local library to check out a book or two on the topic, such as “Mortgages for Dummies,” co-authored by Ray Brown and Eric Tyson.

Knowing a bit about mortgages before you apply will help you be more adept at choosing the best possible home- loan product for your situation. You’ll also be less vulnerable to unscrupulous lenders, Berard says.

Arrange a face-to-face meeting with your mortgage lender.

Many mortgage officers are happy to entertain applications from would-be borrowers they’ve never met. Technically, there’s no reason you can’t apply for a home loan over the telephone.

“But for important business transactions, it’s always to your advantage to meet one-on-one,” says Berard, a veteran real estate broker.

A face-to-face meeting is especially important for those expecting to confront unusual barriers to loan approval, Rickford says. These include people who are self-employed, have credit scores below 720, or have limited assets — such as savings — on which to fall back if they can’t meet their mortgage payments.

“An in-person interview adds to your credibility as a borrower. You’ll be more believable when you attempt to explain your financial issues,” Rickford says.

Also remember to dress the part when you go to the lender’s office. You needn’t wear a business suit but you should look neat. Avoid overly casual attire, such as gym clothes or sandals.

Have your documents ready when you reach the lender’s office.

Mortgage officers are working harder than ever to assemble files that meet the exacting requirements of their underwriters. They’re very appreciative of borrowers who make their jobs easier by showing up well-prepared.

Rickford says ideal loan applicants arrive at their initial appointment with extra copies of the essential documents their lender will need. These include the most recent month’s worth of pay stubs and W-2s for the past two calendar years. You’re also likely to be asked for two years’ worth of tax returns, along with statements showing the present value of your holdings — such as savings accounts, stocks, bonds and retirement funds.

Mortgage officers are also impressed by loan applicants who’ve scrutinized their credit reports in advance of a meeting. Under federal law, you’re entitled each year to one free credit report from each of the three large credit bureaus: Equifax, Experian and TransUnion. Just go to this Web site: www.annualcreditreport.com.

You’ll also want to access your credit scores. Such scores, which draw on data from the credit bureaus, provide lenders with a quantitative measure of a person’s credit risk. Most lenders use FICO scores, pioneered by the Fair Isaac Corp.

Usually you need to pay a fee to obtain your credit scores. One approach is to buy these through the Fair Isaac Web site: www.myfico.com. You can also receive credit scores through the credit bureaus. FICO scores typically range from 300 to 850.

Berard recommends you make printouts of your credit history obtained through your online search. Place these in a three-ring binder. Use a highlighter to identify any “dings” or inaccuracies that show up in your credit reports. And be prepared to tell the lender the steps you’ve taken to resolve these issues. For example, you’ve paid the dentist who reported you delinquent to the credit bureaus and have obtained a receipt to prove it.

Stay in close touch with your lender until your mortgage is approved.

Given the recent turmoil in the mortgage industry, home buyers are less likely than before to get early approval for financing on a home they’ve picked out. More questions will probably arise as you go through the application process, and some will require a written response from you.

For instance, suppose your credit reports show that you were late in making a payment on a car loan or credit card. The processing of your mortgage could be held up until you draft a justification for such credit blemishes — such as a temporary lapse in employment when you were between jobs.

Lenders appreciate loan applicants who stay in close touch and are proactive about resolving issues that surface along the way, Berard says.

“Call your lender once or twice a week. Ask politely if you can do anything to help get your mortgage through. Like anyone in a service field, lenders much prefer dealing with folks who are cooperative,” he says.

Ellen James Martin is a syndicated columnist. E-mail her at ellenjamesmartin@gmail.com.
Mercury News

Despite homeowner relief and low interest rates, many homeowners are still struggling to get mortgages today. I ran into this issue myself–11 lenders later, I found the one that was decent. It takes patience and is often frustrating. Struggling the most are those with either lower than 700 FICO scores, or those who are self-employed who were using stated income loans. Here are six tips to getting a mortgage more easily in today’s market:

Be prepared with documents! Scan your pay stubs, keep copies of your current employment records and, if you are self-employed, keep a letter from your accountant and business license copy in a PDF format. This saves tremendous time when you go to file.

Stay away from companies that will “raise your FICO.” Most of these are scams–they will take your money, but you won’t see your credit score increase. One way to do that legitimately is to pay off 50 percent of each credit card, rather than pay off your high interest cards first (which makes the most financial sense in most cases). Once your cards drop to 50 percent of their available limit, your FICO goes up because you are considered a less risky borrower. Another way to improve FICOs is to not close old loans and show them paid off. And until the end of the year, if you are an authorized user on someone else’s card, this can help improve your score, too (provided he or she is not over his or her limit!)

(Ed. If you can find a good mortgage broker who will help you raise your credit report score then take advantage of it. In many cases mortgage brokers are not any better at credit score improvement than the companies she describes. Our recommendation for credit report repair services are good as gold and that can be backed by the Better Bsuiness Bureau.)

Shop around–big time. Lenders are advertising easy loans, but the devil is in the details. Look out for origination fees (as much as 2 percent or more of the loan amount!), penalties for having a “lower than 700″ credit score, and companies that wont take your loan if you have a second mortgage.
Maximize your first mortgage. Try to get as much as you can on your primary mortgage because the cost of home equity lines of credit and seconds today behind other loans at the 75 percent combined loan-to-value rate is very high.

Don’t just take your broker’s word for it. Some brokers have access to great lenders that you don’t have access to through wholesale lending. But that doesn’t mean you shouldn’t also shop around yourself. Compare what your broker finds to what you find, and be prepared with all the documentation you can handle.

Do your own appraisal. Particularly on jumbos or in areas that are “declining markets” (each bank is different in terms of ZIP codes they consider in the declining market arena), the banks often use internal appraisals. And rather than overinflating price as many did, they’re coming in at far less than they should to be fair and accurate. Having your own appraisal can be a good baseline to see whether the banks are ripping you off. If they can show a higher loan to value, they can charge you more for the loan!

Dani Babb
Entrepreuner.com

Here are the do’s and don’ts of maintaining a favorable credit score, based on information at myfico.com, Fair Isaacs Corp.’s consumer-based Web site:

DO

Make payments on time and keep low balances on revolving credit accounts. “Generally, 50 percent or more of the maximum allowed on the account is considered a high balance,” said Fair Isaacs Corp. spokesman Craig Watts.

Eliminate cards from department stores, gasoline companies and other typically high-interest cards. “Cards issued by stores tend to have higher interest rates,” said Candy Wright of GreenPath Debt Solutions, a Michigan-based company with offices in Jericho and Hauppauge.

Consolidate but be sure terms are favorable. If you can transfer to a card with a low interest rate, that generally is good, Wright said. But Watts warned to do it with caution because transferring balances and closing accounts can have an adverse effect. “From a credit-reporting-bureau standpoint, all they can see is that someone has opened a new account and closed an old one. A lot of activity or a number of new accounts can hurt a credit score.”

DON’T

Don’t open too many new lines of credit. “Be the frugal farmer who distrusts bankers,” Watts said. “Shopping for new credit is part of the formula that brings down your score.”

Don’t apply for too many cards in a short time period. Every application shows up with FICO and “too many applications gets them nervous,” said Michael Kresh, an Islandia financial planner.

Don’t be a co-signer. If you take out a credit card with your child and they miss a payment, it shows up on your credit score, Kresh said.

Don’t take cash advances from one card to make payments on another. “That’s usually a big sign you need debt counseling,” Wright said. Plus, cash advances often have higher interest rates.

Don’t dismiss the rejection letter if you are denied credit. You are automatically entitled to a free credit report so you can see why you were turned down. Kresh advises you to check it out because incorrect information may be the culprit.

Don’t agree to a deal that seems too good to be true, like the offer of 15 percent off your purchases today if you sign up for their credit card. That’s one more application registered with FICO.

Source: myfico.com, Fair Isaacs Corp.’s consumer site

Newsday.com

By David Myers | Columnist

Q. My uncle passed away earlier this year and left his house to me. I recently sold the property and made a profit of about $77,000, which is almost enough to pay off the mortgage on my own home. If I pay my own loan off in a lump sum, will it raise my overall credit score?

A. Paying your loan off would certainly relieve you of a major monthly expense, but it probably won’t raise your credit score. In fact, it could actually lower it.

Most banks and other creditors check a consumer’s FICO score when determining whether a loan or other type of account should be approved or denied. The FICO scoring system was developed a few decades ago by California-based Fair Isaac Corp., and it’s designed to help lenders gauge an applicant’s future credit risk.

Therein lies the rub. An installment loan that you pay monthly, whether it’s a mortgage or a car payment, gradually increases your credit score because your prompt payments demonstrate that you are a reliable borrower. But if you pay the loan off in a lump sum, you’ll no longer have a credit-building account - and your FICO score may drop.

As my kids might say, “That’s kinda goofy, huh?” And I would agree.

• For a copy of the booklet “Straight Talk About Living Trusts,” send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City CA 90231-2960

© 2008, Cowles Syndicate Inc.

Daily Herald

Paying your bills on time is the single most important thing you can do to improve your credit score. Your payment credit history is weighted as 35% of your credit score. A single credit card payment that is reported to the credit bureaus more than 30 days late can lower your credit score by 100 points. The negative effect of a late payment declines with time but it can take years before becoming insignificant without your intervention.

Foreclosures, bankruptcies, tax liens, and charge-offs reported to the credit agencies also have a negative affect on your credit score. In most cases these kinds of things occur beyond your control. Although you were not able to prevent the negative impact on your credit score at the time there may be things you can do now to get them off your credit report and out of your credit score calculation. We cover how to do that later on.

Source: Denver Post

If done properly, these programs can help people with damaged credit get their foot in the door.

By Tom LaRocque
Special to The Denver Post

Traumatic as it may be, foreclosure “doesn’t have to be the end of the world,” according to Terry Greene, who helps clients clean up damaged credit in his Northglenn office.

“It can ding you 75 or 100 points,” he said, referring to the expected drop in a foreclosed borrower’s credit score, which, in many cases, has already been damaged by late payments and other related financial trouble.

An average American’s score at present is around 580, Greene estimated.

One route to redemption advocated often by Greene is to lease a home with an option to buy it. Also known as “rent to own,” the lease option is a time-tested concept in real estate that can benefit both property owners and renters.

For renters, it provides a housing option that includes both time and incentive to improve their credit score. For landlords, it brings in people motivated to pay more per month and take better care of the property.

In a typical lease-option contract, the landlord sets aside 20 percent or 30 percent of each month’s rent in escrow, earmarked to help the homeowner eventually purchase the property. The extra cash may be applied as a down payment, which may be eyed more favorably by the lender, or as a price reduction.

If the tenant doesn’t buy, however, the extra funds are forfeited.

Lori Jake manages 80 residential properties for Swiftcurrent Investment Group in Colorado Springs. Her company, like many lease-option landlords, also stipulates an upfront, nonrefundable “option fee.”

Rent-to-own tenants can elect to pay 3 percent of the home’s specified purchase price and then pay monthly rents $50 to $100 higher than normal rentals. Or they can skip the fee and live with payments $150 to $200 higher than standard rents, she said. In either case, the rent “premiums” go toward eventual purchase of the home.

Are the added costs of a purchase option worth it?

“I’m not able to say,” said Michelle Mitchell, president of the Colorado Housing Assistance Corp. The Denver-based nonprofit counsels low-income buyers in matters of homeownership and budgeting. “As a purely financial matter, my question is, why would anyone pay much to lock in a purchase price two years down the road? It may be beneficial if home prices rise, but certainly not if they drop,” Mitchell said, adding that life changes also can determine whether a home is still appropriate a few years down the line.

“Babies come along and so on. You may want to buy a certain home today but not two years from now,” she warned.

More than in a conventional lease, Greene said, a lease-option landlord has a strong incentive to help tenants improve their credit scores. Ultimately, the goal is to see them qualify for home loans and become owners of the properties they rent. A landlord can help with a letter of recommendation to lenders and credit-reporting agencies.

But beyond that, he admits, most rental landlords cannot directly affect a credit score.

Unless they are registered as creditors with the big three reporting agencies — Experian, Equifax and TransUnion — they can’t communicate directly with those agencies.

Damaging information such as missed rental payments does not go onto a credit report. It does often go onto a rental history maintained by the landlord or apartment complex. When a bad renter tries to buy a home or rent again, the history is likely to be an obstacle.

“I’ve seen good lease-option arrangements, and I’ve seen terrible ones,” said Greene. In the worst cases, landlords push vulnerable people to rent rundown properties at exorbitant rates. “They say, ‘Look what you’ve done to your credit. What other options do you have?’ ”

The best rent-to-own programs offer renovated homes at fair prices. They put promises in writing, including, importantly, the percentage of each month’s rent to be credited to the eventual purchase as well as the specific purchase price. Some guarantee repairs, at least for 30 days. Some offer free enrollment in credit-repair programs.

A former compliance officer with TransUnion, Greene counsels clients individually in credit repair. The strategies are multipronged, involving credit-card payments and household budget planning. Using those tools, he said, a young couple he counseled raised their FICO score from 523 to 618. Three years after foreclosure of their home in Aurora, they are about to buy another home.

There’s one more benefit of a rent-to-own arrangement, noted Greene. “If you buy the home you’re in, you don’t have to move again.”