Monthly Archive for January, 2009

Foreclosure: Kiss Your Next Mortgage Good-bye
Lenders consider bankruptcy a serious credit issue, but not as bad as home foreclosure. Just being late with mortgage payments is counted heavily against you, worse than having a collection account. Those who skip their mortgage payment to pay other bills are doing their credit serious harm. According to debtworkout.com, "foreclosures can be viewed as one of the worst things ever on a credit report. Even so, some banks will make you a loan very soon after a foreclosure. Be prepared for very large down payments and high interest rates. Most often the terms of these loans prevent people from buying another house..."

FHA lenders won't consider making a loan to an applicant with a foreclosure for AT LEAST THREE YEARS, while those who file for bankruptcy only have to wait two, and only one year with mitigating circumstances. Once you prove your willingness to walk away from your home to avoid your obligation, few mortgage lenders will want to put themselves in the role of "sucker" the next time you need a loan.

Lenders More Forgiving
While lenders won't be throwing you hearts and flowers following a bankruptcy, they are a lot more forgiving than if you let your home go into foreclosure. In fact, homeowners who paid their bills on time right up to the day they filed for bankruptcy take a minimal credit score hit -- I have seen borrowers six months out from a BK with credit scores over 700. Your score down the road depends on how you go about bankruptcy. Make payments on time while you consult a bankruptcy attorney or credit counseling service. If you let your bills go for six months and then get around to filing things go worse for you.

Bankruptcy vs Foreclosure
First, filing for bankruptcy will temporarily halt any pending foreclosure proceedings on your home -- giving you a chance to sell it or work out a resolution with your lender. Second, bankruptcy may relieve you of other monthly obligations, making it easier to meet your housing expenses. Foreclosure only gets rid of your mortgage, and then you still have to find a place to live and pay for it. So your finances might not improve all that much. And finally, in most states your lender may be able to force you to pay what is called a "deficiency" when your foreclosed home is sold, meaning they can hit you up for the difference in what you owed and what they were able to get from selling your property. If this happens you might have to file for bankruptcy protection anyway.

Last Resorts
Blowing off your mortgage just because your home value has decreased is plain stupid; in addition to legal fees, interest, and deficiencies, you will pay a lot more for credit for a very long time. And as long as you remain in your home its value is not much of an issue. Real estate markets are famous for their ability to bounce back -- but you won't bounce back so quickly if trash your credit with a foreclosure. By letting the house go you could be forced into paying thousands out of pocket for a temporary decrease in value; when the lender has to sell your house cheaply and forces you to pay a deficiency, you will have turned a "paper" loss into a real one.

Foreclosure is appropriate only when your lender is unwilling to modify your mortgage in a helpful way, AND there is no way for you to pay your mortgage, even if you discharge your other obligations (or you don't qualify to file bankruptcy). In addition, some don't qualify for a bankruptcy filing; if yours gets dismissed, foreclosure may be the only way out.When financial problems hit, there's no easy way out. But bankruptcy may be an easier way out than others.

The U.S. Department of Agriculture Rural Development agency is reducing its interest rates on direct home loans to 4.375 percent. The change is effective on February 1st.

USDA Rural Development is committed to increasing home ownership in rural areas and is reducing the interest rate on home loans. Click here for more information about how you can qualify for this ZERO-DOWN program.

Under the direct home loan program, low- and very-low income families and individuals receive a loan directly from USDA Rural Development to buy, build or improve homes in rural areas. The loans require no down payment and the standard term is 33 years. Payment assistance, which can reduce monthly mortgage payments, is also available for those who qualify. Credit underwriting requirements are similar to those for FHA programs. Income must be documented.

Drop any questions about this or other topics in the "Comments" for this blog and I'll get them answered.

Before everyone reading this just says, "of course you need a job to get a mortgage, duh," give me a couple of seconds. You need income to get a mortgage loan. It has to be verifiable. It needs to be reliable (expected to continue for at least three years). And it has to be sufficient. What it does NOT have to be is from a job.

Here's an example:

Mr. and Mrs. Smith are retired. They would like to stop renting their third floor apartment and get a house with their daughter, who can help them around the house a bit. The Smiths have no bills and get about $2400 a month in Social Security. They also loaned money to their son and have a note receivable for $40,000. He faithfully pays them $1,000 a month and will continue to for about 5 more years. Their daughter, Sara, works part time from home and earns about $500 a month. She gets another $800 in public assistance and $500 more from her ex-husband to support her small son. She has a $200 a month car payment and a $35 a month credit card payment.

So altogether we have $5,300 a month in income and $235 a month in expenses. If all of this income accepted by the lender, this family qualifies for a purchase of $220,000 with a $216,000 mortgage. Now here's what you have to do to prove the income is viable.

* Social Security: This is the easy one. Provide tax returns and supporting documents. If just starting to receive it, provide a copy of your award letter and a recent check or bank statement showing an automatic payment.

* Income from a note receivable: Provide a copy of the note receivable and copies of banks statements or checks showing that you have been receiving it for at least 12 months. For this reason it's always good to make separate copies of checks from less traditional sources and deposit them separately so they can be easily tracked and proved.

* Public assistance: Disability and welfare benefits must be verified by letters from the paying agency with the amount, frequency and duration of payment specified.

* Part time job: This one may be the toughest to get credit for. If it's a new job in a new field Sara might not be allowed to count the income when pre-qualifying for a home loan. But if it a field she has experience in, or she has been at it for some time (a year or two), or she can get a letter from her employer stating that her employment is expected to continue, she may be able to use the income for qualifying.

* Child support or alimony: This is similar to the note receivable. You need your divorce decree, showing the amounts to be paid and the duration. You also need to prove that Dad isn't a deadbeat and has been paying on time. Again, you can see the importance of making copies of each check and depositing it by itself. Otherwise the underwriter could force you to go hat in hand to the ex and beg for copies of all the canceled checks. Sounds like fun, huh?

In addition, this family (and families like them--maybe YOURS) probably qualifies for a mortgage credit certificate, allowing them to pay less in taxes, keep more income, and qualify for a bigger house. And there's the first-time buyer credit of $7,500. And in many places special programs like Rural Housing that don't even require a down payment.

So while prices are low and financing is cheap, smart families who can live together without driving each other nuts could end up with a smart investment--and the last laugh.

Okay, it's time to join the kids and play "good news, bad news." The good news is that you got a phone call from your great uncle's attorney. You have an inheritance!

The bad news is that it's a condo. In Florida. And he bought it in 2006. And it's mortgaged to the hilt. Oh, yeah, with a sub-prime loan.

You can't refinance; the place is worth about half of what's owed. You don't want to move to Florida. And rental income wouldn't come close to cracking the nut on that home loan.You can't afford this.

Are you stuck with the property?

Good news. You are not. In most states, an estate's assets are sold off to repay creditors and anything left over is distributed according to the decedent's will or state law if there isn't a will. Unless you are listed as a co-borrower or co-signer on a loan, you as an heir cannot be held responsible for its repayment.

Bad news. We die.

Good news. Our debts die with us.

A recent study by the Center for Responsible Lending found that taking a loan with a prepayment penalty can be hazardous to your fiscal health. In fact, subprime borrowers with prepayment penalties were up to 20% more likely to end up in foreclosure than those who didn't opt for one.

Does that mean you should always avoid prepayment penalties? No. Commiting to holding your mortgage for a certain period of time can get you a significantly lower interest rate. Just make sure that you can safely assume you will be in the home for at least as long as the duration of your penalty phase. And, especially important with subprime loans, make sure that the prepayment penalty phase won't exceed the time that your rate is fixed.

Many subprime loans that went belly up were adjustable rate mortgages (ARMs). Add the risk of an ARM to the risk of a prepayment penalty and you get foreclosure. Big time. So if your penalty is in force for three years, make sure your rate won't adjust before then.

In the last decade, mortgage lenders increasingly relied on credit scoring by the three biggest reporting agencies--Experian, Equifax, and Trans Union--to determine who they would loan to. This policy made underwriting cheaper and faster. And software like Fannie Mae's Desktop Underwriter and Freddie Mac's Loan Prospector pulled these scores from the bureaus, combined them with ...

If you have never heard of the Mortgage Credit Certificate (MCC) programs, you're not alone. Most loan officers haven't either. Yet this deal has been made available to qualifying home buyers since the Tax Reform Act of 1984! Not only does this program put money in your pocket for the entire life of your loan, ...