Countless renters became successful homeowners in the past because of two programs: FHA mortgages and down payment assistance like the Nehemiah program. The US Department of Housing and Urban Development (HUD) allowed FHA loans to be made with very small down payments (2-3%), charging borrowers insurance to cover their default risk. The program remained solvent for decades and has largely been considered a resounding success. Borrowers who couldn’t save even the tiny FHA minimum down payment could sometimes receive help through down payment assistance or community homebuyer programs, allowing them to buy a home with no down payment. And many more families became homeowners through these programs.Unfortunately, recent trends are showing that down payment assistance can have unintended results. For example, HUD discovered in a recent study that borrowers with no money of their own invested in a property are many times more likely to walk away from their homes and their mortgages than others with similar financial situations. And for the first time in its history, FHA’s insurance premiums collected from borrowers will not be enough to cover its losses from mortgage defaults–meaning perhaps a taxpayer bailout is in the future.
HUD would like to change its guidelines to prohibit down payment assistance and not allow FHA mortgages in which the buyer has not made a down payment using his / her own funds. So what does that mean to those considering a home purchase today? Urgency. If you are considering a home purchase and think you might qualify for down payment assistance you may have very little time to close that deal. So STOP reading this blog and START your online search for a lender NOW. You can thank me later when you have time.
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Outfits have sprung up all over offering desparate homeowners a way out — making promises like the following, which were copied from one firm’s Web site:
Your lender WILL NOT be able to call you in attempt to collect!
Your lender WILL NOT be able to collect any deficiency or loss they may receive by you walking away!
You WILL be able to stay in your home for up to 8 months or more without having to pay anything to your lender!
You CAN have the foreclosure REMOVED from your credit!
The catch for these extravagant claims is, “IF you qualify….” Qualifying to be able to avoid deficiency, for example, means living in one of the only 2 states in the country in which it is illegal to collect deficiency judgments — or having no money, in which case the last thing you want to do is give $1,000 to a company who does nothing you can’t do yourself for free. Time Magazine ran a story in June which stated that by and large these outfits, which charge cash-strapped homeowners about $1,000, perform services that homeowners can get for free elsewhere–and the worst ones may do nothing but “handholding” after taking your money.
And removing the foreclosure from your credit? If it sounds too good to be true….remember all those scams a few years ago involving companies promising to make bad credit histories “disappear?” Too good to be true, but a lot of people lost money, and some even found themselves in hot water for committing fraud.
So ignore the extravagant claims and avoid these sleazy companies. Your best (and cheapest) sources of help don’t cost a thousand dollars. Time suggests you first contact your lender, write a letter documenting your circumstances and asking for help, and turn to non-profit housing counselors for assistance if you need it. And if you are solicited by these companies? Remember the “weasel words” typically found in advertisements for questionable products. “Actually results will vary,” “Results not typical,” or in this case, “If you qualify….”
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Those who read the Wall Street Journal recently made acquaintence with a new real estate term - “Buy and Bail.” It involves taking advantage of an underwriting loophole long-used to help homeowners get a new home (for example if they were relocating) even if they hadn’t sold their previous residence yet. It works like this: You advertise your home for rent and get a tenant. You include that rental agreement in your mortgage loan application package when you apply to finance your new home. The underwriters add most of the rental income (75% using Fannie Mae guidelines) to your income and it helps you qualify to get a new house even if you haven’t sold the old one.
Well guess what? That option is going away, largely due to the efforts of some fraudulent-minded neighbors and their gutter-dwelling real estate agents and mortgage brokers. Just when you thought people couldn’t go any lower….See, most homeowners aren’t exactly aware of the ins-and-outs of lending, and they don’t know about this loophole–unless some greedy commission-at-all-costs dirtbag helps them out by telling them. So these creeps are getting someone to sign a rental agreement on a house they have no intention of keeping or making another payment on once they close on the new house. They have their next house (taking advantage of the drop in values) and their lender gets the old one and the mortgage. And their neighbors get another foreclosure property down the street and take another hit on their own values.
Aside from the fact that this is just plain wrong, it could (and hopefully will) bite these people where it hurts. The guy who signs the rental agreement, the real estate agent and loan broker who participates in this or actively encourages it–are all participating in a scheme that could be defined as fraud by many standards. Their intent is clear. So I hope they enjoy that new roof over their head, and that it comes with bars on the windows.
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While bankruptcy doesn’t carry the same stigma that it used to, the idea of filing for Chapter 7 or 13 protection from creditors fills many with fear and even shame. It needn’t. In fact, in may be the best way to keep your home if you own one and inflict the least amount of damage to your credit score. The key is to act quickly when you get that pink slip or those divorce papers. Months of waiting, avoiding the mailbox and screening your calls will only make things far worse — a clean break may be the best route. For example:
Working as a loan officer, I had a recently-divorced client come in who had always had good credit. When she realized that a creditor of her ex-husband’s was coming after her for a six-figure debt, she promptly got a lawyer and filed for bankruptcy relief. She reinstated all of her own debts and continued to pay them as agreed. The bankruptcy discharged the ex-husband’s obligation and she was approved for a mortgage within months. What my client did that was so smart was that she didn’t wait until she had missed a bunch of payments on this debt — she halted it right away and her credit score remained in the 700s.
Denial results in all kinds of evils — foreclosures when you don’t want to talk to your loan servicer, late or missing payments, and credit scores that can even make it harder to get a new job after losing the old one. By facing the problem and asking for help — from your creditors, a credit counseling service, or an attorney — you can solve the problem quickly and limit the damage.
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Everyone is making guesses about the future of real estate and mortgage markets these days. Has the market reached its lowest point yet? Where are rates going to be? If I wait to buy, will I be priced out of the market? Or will I get a better deal?These are complicated enough issues — and even professionals don’t seem to offer more than educated guesses. And guess what? If you have damaged credit you have even more to consider than the future of interest rates and home values. For example:
Where is your credit now? And where is it going? Are you cleaning up your act? Paying on time? Improving your score? The difference between prime credit and subprime rates can be many percentage points and impact your monthly payment far more than a moderate increase in overall mortgage rates or home prices. For example, a prime borrower today could get a $300,000 30-year-loan and pay about 6%. The payment would equal $1,799. But a subprime borrower paying 11% would fork over $2,857 a month, over $1,000 more! If that subprime borrower cleaned up his or her credit rating before buying, even if the grade-A rates went to 7.5% and the price of the house increased by $25,000, the payment would still be nearly $600 less than buying today with a subprime loan. If you qualify only for the worst rates it makes sense to wait. But check with lenders — chances are you can do better than “worst” and with a decent bad credit loan you could make a fantastic investment.
Is your best deal available now? Recent statistics show that investors are on the move, and snapping up property again. Prices are low, and interest rates historically so. If you can get a loan with a fair rate, fixed long enough for you to clear your credit problems (at least 2 or 3 years), or even qualify for an FHA loan, today may be your best opportunity. When the market (and your credit rating) recover, you could find yourself with a fair amount of equity and some options for grade-A refinancing too.
How safe are you financially? How secure is your job? Your marriage? Do you have health insurance? One fact lost in the mortgage news is that the most common reasons for bankruptcies and mortgage foreclosures are still the classic ones — loss of income, health problems / medical bills, and divorce. So don’t walk a financial tightrope if you don’t have a good net.
How can a lender help with these decisions? You need to know where you stand today before even trying to predict tomorrow. Before buying, check with several lenders and see what rate you qualify for as your credit stands now versus what you could get once your credit is good. Run the numbers through a mortgage calculator, compare payments, and look at the extra interest paid today versus potential increases in home value tomorrow. No one can give you the cut and dried answer but by gathering as much information as you can you can make a decision you are comfortable with.
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Homeowners who experience financial hiccups can find themselves in a bind. Once the emergency’s over — you have a new job, your deadbeat cousin paid you back, business picked up — you’d like to go back to being a good financial citizen and pay your bills. Unfortunately it’s not just a matter of resuming your mortgage payments — you now have a backlog of unpaid principal, interest, fees, and maybe even attorneys’ charges and there is no way you can make good on it.
If you communicate with your lender and can show that you are able to pay your mortgage, you may be offered a chance to keep your home — in mortgage lending this is called a retention option. One kind of retention option is called a claim advance. Homeowners who have an FHA loan (which required that you pay for special insurance when you got the mortgage) or any other loan that requires them to pay mortgage insurance premiums may be able to use that insurance to get themselves out of a jam.
The deal is this: If your mortgage was to go into foreclosure, your lender would probably file a claim and the mortgage insurer would have to pay it. So it may be in everyone’s best interest if that doesn’t happen. If you qualify, the insurer may lend you the money to bring your mortgage current, interest-free, and at terms you can repay. So if there is any doubt about your ability to make your next mortgage payment, call your lender’s workout or resolution department right away — make it easy for them to make it easy on you.
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