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Monthly Archive for May, 2008

One More Reason to Shop for Mortgages Online

Published
by
Gina Pogol
on May 30, 2008
in New Home Loan
. 5 Comments

According to the New York Times, a recent study found that minority borrowers and those with less education paid higher fees for their loans. The 270 page report, which was compiled for the US Department of Housing and Urban Development (HUD), studied nearly 8,000 mortgage loans and concluded that college-educated borrowers paid over $1,000 less than those without a college education.

The study’s author, former HUD economist Sarah E. Woodward, guessed that lenders quoted lower fees to better-educated borrowers because they believed that these prospective borrowers were more likely to shop around or had a better idea of what fees they should be paying for the kind of loan they were getting.

So how does this information benefit you? That’s easy. By shopping online you maintain some privacy — your quote can’t be swayed by any impression of your education, race, gender, or other factors. And the fact that you are online in the first place means it’s likely that you have a certain level of savvy and that you are clearly shopping; both are factors which should motivate your lenders to give you a fair and competitive quote.

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Bad Credit Mortgages: How to Refinance Out of a Subprime Loan

Published
by
Gina Pogol
on May 28, 2008
in Mortgage Refinance
. 7 Comments

A major contributor to the crisis in subprime lending was the loss of home values in many markets. As home values soared, borrowers with bad credit became afraid of being priced out of the market before they could get their credit cleaned up. So they took out subprime mortgages that gave them a 2 or 3 year window to clean up their credit and refinance to a better loan — before the loan converted to an ARM and the rate spiked. The problem is that even those borrowers who did the right thing and got their credit up to snuff ended up being stuck with their bad credit loans because they didn’t have any equity. And now their rates and payments are being yanked up and if this keeps up they may end up with bad credit again — unable to pay their mortgage. Seems very unfair. So if this is you, what can you do about it?

First, have a talk with your lender. One nice thing about having no equity is that there is nothing to take from you, so the lender will probably not be falling over itself to take away your home. Document your income and your improved credit and prove that you can continue to make your old payment but not a higher one. Remind them that your better credit means that you are not the same grade that you were and ask for a better deal — either keeping the loan at its introductory rate or refinancing into a new one at a higher credit grade and presumably a better rate.

Second, look at the FHA Secure program. Take advantage of your improved credit performance and use it to get into a better loan. You need to meet these criteria for eligibility:

  1. A history of on-time mortgage payments before the initial rates expired and loans reset;
  2. Interest rates must have or will reset between June 2005 and December 2009;
  3. A small amount of cash or equity in the home (depending on the loan amount and property location)
  4. A sustained history of employment; and
  5. Sufficient income to make the mortgage payment.

If you don’t have the equity try to come up with cash by borrowing against a 401(k) account, cashing out some investments, or borrowing from family members.

If you owe more than the home is worth you may still be able to get an FHA Secure loan if your current lender is willing to take a second mortgage for the excess or write the loan down to a manageable amount — many lenders will see this as preferable to starting foreclosure proceedings. Your first step in any event is to call your lender’s workout or resolution department and begin a dialog.

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Understanding Prepayment Penalties

Published
by
Gina Pogol
on May 23, 2008
in New Home Loan
. 5 Comments

One thing you read about in connection with subprime and other loans is to beware of prepayment penalties. Maybe it’s the word ‘penalty’ that makes this feature seem sinister. However, lenders don’t expect something for nothing — by agreeing to refrain from retiring your mortgage for a certain number of years you make lending to you a safer investment for the lender — and there can be substantial rewards involved.

For example, you may be offered a lower rate. Or a discount on the loan fees. To determine if accepting a prepayment penalty is a smart move, consider the following:

1. The type of penalty. Prepayment penalties come in two forms, “hard” or “soft.” “Hard” prepays are assessed whenever the loan is paid off before the penalty period expires — this means if the property is sold, if you refinance, or sometimes even if you make a substantial principal reduction (lump sum payment), often anything exceeding twenty percent of the original balance. “Soft” prepayment penalties come into play only in the event of a refinance or substantial repayment — if you sell the home you don’t have to pay it. So if you think you might sell within the penalty period you wouldn’t want to have a hard prepayment penalty but a soft one would be okay.

2. The terms of your loan. Many subprime loans involve a period in which the rate is fixed, then the mortgage converts to an adjustable rate mortgage. Bad credit ARM terms might not be favorable so you should avoid a prepayment penalty period that exceed the fixed rate part of the loan. For example, if the rate is fixed for the first two years of the mortgage, don’t take on a 3-year prepayment penalty.

3. The size of the reward. If taking on a prepayment penalty gets you a lower rate, a mortgage calculator can show you the difference in monthly payment and how much you would save during the time you expect to keep your mortgage. If the lender offers you a few hundred dollars in exchange for a 5 year prepayment penalty it’s probably not enough.

Like most mortgage loan products and features, prepayment penalties are not inherently good or evil. They can save you money when taken at the right time and for the right reasons.

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Time Is Money and Information Is Power– Use Yours Wisely

Published
by
Gina Pogol
on May 20, 2008
in Mortgage Refinance
. 10 Comments

What’s the Truth about Bad Credit Mortgage Lending?

Here’s a taste of what elected officials and the media are saying in the wake of the mortgage crisis, which first became apparent when sub-prime loans began to go bad: “Sub-prime or bad credit mortgages are evil!” “Borrowers were unable to understand (read: too stupid to figure out) what they were signing.” “Home buyers were given attractive rates and then after 2 or 3 years the horrible lenders pulled the rug out from under them.” “This must be stopped!”

Consider the Purpose of a Bad Credit Mortgage

Okay, so what are our leaders really saying? That it was BAD for lenders to give a decent starting interest rate to borrowers with credit blemishes? Think about it. Borrowers had two to three YEARS to clean up their credit and refinance before their rates increased. And if they didn’t do it with that much time (you can get an FHA loan 2 years after a bankruptcy or 3 years after a foreclosure if you can show that you’ve cleaned up your act) then it seems a bit unfair to blame the lender who did after all give these buyers a chance. Subprime loans aren’t meant to be a way of life; they are supposed to be a way to rebuild credit and get a home while doing it. By taking these loans away, our legislators make it harder for those who are motivated to turn their credit history around and make a housing investment to do so. And most of the people with those loans did successfully pay them — why hurt those who are after all in the majority?

It’s also unfair to the rest of sub-prime, bad credit, or Alt-A borrowers to say that the government has to protect them from themselves. Kind of insulting, like if you had a financial setback it must mean that you’re stupid, greedy, or lazy. But now the government wants to add even more pages to your loan packages. Not a problem except that it increases paperwork and expense in an already burdensome process.

Make a Sub-prime or Bad Credit Mortgage Work for You

You probably don’t need your hand held while getting a sub-prime mortgage. However, by following these guidelines you may be able to take advantage of a great real estate investment while prices are lower:

1. Work with a federally regulated lender. One big problem associated with bad credit mortgages is that about half of the lenders aren’t subject to federal regulation or scrutiny. A reputable lender is your first defense against being ripped off.

2. Shop for your mortgage and read your documents thoroughly. Make sure that if you have a prepayment penalty it isn’t longer than the fixed rate period of your loan — you don’t want to be stuck with a high rate when your loan begins adjusting. By checking with several lenders you can be more certain of getting a fair deal because subprime loans are underwritten and priced differently from traditional mortgages. It pays to have a number of lenders look at your application and see what they can come up with.

3. Use your time wisely. If you have two years to clean up your credit before a rate increase make sure you start immediately. Pay your bills on time, close any open collections, and take care of judgments or tax liens. If you don’t have the discipline and the means to get this done then home ownership is probably not a good idea for you yet.

4. Try FHA first. If you are borderline-bad you might be able to squeak into an FHA program. Even if you can’t, get the guidelines for approval so you know what you will have to do to be approved when you are able to refinance out of your bad credit home loan.

5. Ask for advice. That’s what this blog is for — we’re here to help you with your bad credit mortgage questions.

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