Monthly Archive for February, 2010

You'd like to buy a house. You cleaned up your bad credit, for the most part, you have a good job, and you could make a monthly house payment. But how are you supposed to save up a down payment when you're paying rent? Good question. The ability to save a down payment and reserves, or an emergency fund, is seen by lenders as desirable, because it demonstrates that you have some discipline and some financial sense. But for those on the financial fringes, that's expecting a lot -- cars break down, hours get cut, kids need doctors, it's always something. And government and charitable agencies are aware of that.

Seller DPA Is Gone for Good

The problem with Nehemiah and AmeriDream assistance is that the source of down payment funds isn't a charitable organization--it's the builders and sellers of the homes involved. And when the seller is paying you to buy the home, it distorts the home's value. A study found that homes purchased under seller DPA programs sold for, no surprise, 2-3% more then comparable houses not in the program. Which made the houses a lot more likely to end up in foreclosure.

However, that doesn't mean DPA is a thing of the past. Today's DPA can take several forms, but it usually involves a no- or low-interest loan you don't have to repay until you sell the property. Or it may be a grant that you don't have to repay at all, or some combination of the two.

HUD Allows DPA

You might have to be a first-time buyer, have low-to-moderate income, or both to be eligible. In many cases, "first-time buyer" just means that you can't have owned a home in the last three years. Check each program for details; they're all different. Many state and local governments have programs. Note, the programs can run through funding fairly quickly. Apply early and often.

Look at Idaho's program, for example. It dispenses up to $20,000 to qualifying first-time buyers through its Idaho Housing and Finance Association. You have to meet income limitations and take a home buying class. Prince Georges County in Maryland offers low income buyers up to $60,000 in assistance to buy foreclosed homes. And the city of Peoria, Illinois provides up to 20% of the purchase price of the property, up to $10,000. You have to be a first-time home buyer unless you buy in certain areas.

How Do You Find Mortgage Down Payment Assistance Programs?

• Ask the lenders. Ask the loan agents about the types of down payment assistance programs they work with. Many loan officers don't do them or don't know much about them, so be sure and get help from someone who does.
• Check with HUD. Go to HUD's State Information Web page, choose your state, then select "Learn About Homeownership."
• Call charitable organizations. There are many organizations providing down payment assistance. If you plan on using FHA financing, get its roster of approved organizations by checking with the home ownership center nearest you (Atlanta, Denver, Philadelphia, or Santa Ana).

Down payment assistance is still out there, and the demand is greater than ever. Grab it before the money runs out.

Those with subprime mortgages got caught in a trap not of their own making. Everyone, including this blogger, told you to go ahead and get the 2/28 or the 3/27 mortgage, spend the next two or three years cleaning up your credit, and then you'd be able to refinance into a prime conventional or FHA mortgage with a lower interest rate. And it was a good strategy, if home values had held.

There is absolutely no reason for anyone today to be in a bad credit mortgage. If you are, there are programs designed to get you out. First, you are probably paying more than 31% of your income for housing -- if you are, that's the first qualification for a modification. Take your gross (before tax) income, multiple that by .31. If your house payment, including principal, interest, property taxes, homeowners' insurance, and HOA dues is more than that number, you may be eligible for a mortgage modification under Making Home Affordable.

Now, here's the other end of the equation: Take your current mortgage balance and run these numbers through a mortgage calculator. Your current balance is the new loan amount, your new mortgage term is 40 years, and your new interest rate is 2%. Take that number, add in your insurance, property taxes, and HOA dues, and see if that number is less than 31% of your gross income. If it does, a modification could bring your payment to a makeable number and your lender could be fairly confident that the modification would stick if they gave you one. Keep in mind, the lender will want to verify your income -- there are no stated income modifications. But even unemployed people may qualify for mortgage help.

Most people who want a mortgage modification have to prove that they have experienced some hardship in order to qualify for one. But, because you have a yucky sub-prime loan, you can demonstrate the hardship of a sharply increasing payment. And if you can show that you cleaned up your credit with the goal of refinancing but can't because of your home's value, more power to you.

Check out the rest of the requirements for the Making Home Affordable program. But even if you don;t qualify for the program, your lender can modify your loan anyway. You have nothing to lose by asking.

According to Business Week, in 2009, consumers with FICO scores above 760 defaulted on real estate loans twice as often as they blew off their credit card companies.

Mark Greene, chief executive officer of credit scoring company FICO, said, “This used to be a problem for subprime. Now we’re starting to see at the high end of the marketplace, people with good FICO scores, having serious delinquency problems."

While its recently been all over the news that people have flipped the traditional credit hierarchy, paying credit cards before their mortgage, it was largely seen as a strategy of cash-strapped people at the lower end of the credit food chain, that it, those who had lost jobs and needed to put groceries on the credit card to survive. Mortgages have historically been the first debt obligation consumers repay, Greene said in the interview. But now, consumers with higher credit scores are paying late on mortgages on second homes, investment property, and underwater homes. Late mortgage payments by high-scoring consumers will persist for another six months to nine months, said Greene.

Homeowners with better credit may be strategically defaulting, choosing to stop making payments on homes valued at less than their loan balances, even though they are able to afford them. Strategic defaults rose 128%t to 588,000 in 2008, according to Experian Plc, a Dublin-based credit-checking company, and Oliver Wyman, a New York-based consulting firm.

According to FICO, 39.8 percent of those studied (3.6 million consumers) had scores of 760 or higher. About 65 million U.S. consumers have FICO scores in that range.

Mortgages more than 90 days past due -- the point at which lenders generally begin loss mitigation -- increased to 5.09% in the fourth quarter, up from 4.38% the previous quarter, according a February Mortgage Bankers Association report.

Scores based on models established by FICO, formerly known as Fair Isaac Corp., are used to gauge consumers' willingness and ability to repay financial obligations. The scores, which range from 300 to 850, determine your ability to get credit and what you'll pay for it. A score of at least 750 gets you the best mortgage rates, but it doesn't look like its any guarantee of successful repayment after all.

While the mortgage crisis started as a subprime crisis, it has gone way beyond that. People with bad credit mortgages ran into trouble a couple of years ago when housing values got soft and they were then unable to refinance out of their subprime loans. I have always maintained that subprime loans are to be treated as band-aids, that is, for the purpose of getting into a home and developing a good credit history. No one should need more than two or three years to accomplish this, then they should refinance to FHA or conventional loans. But many were unable to do so due to no fault of their own.

Borrowers who expected to be able to refinance before their expensive bad credit mortgages reset to high rates got caught -- by falling home values, then by increasing credit requirements -- where 620 was once an okay score, that was increased to 640, then 680, then 700....refinancing always just out of reach.

Those with more expensive properties requiring jumbo financing had even less luck -- the secondary market dried up in nothing flat. And finally, people with prime mortgages began defaulting in droves, due to unemployment and other financial disasters -- and many who could afford their mortgage joined them. In fact, the number of borrowers in prime mortgages who defaulted on their mortgages has exceeded the number of subprime borrowers who have lost their homes.

If you are having problems with your mortgage payments, don;t be ashamed or assume that it's your fault because you are a subprime borrower. Check the www.makinghomeaffordable.com Web site and contact your loan servicer. You could find yourself with an affordable mortgage after all.

If you have bad credit, mortgage problems aren't the only thing you have to worry about. Sub-prime credit cards -- also known as fee-harvesting cards, come with itty bitty credit limits and fees that make you broke before you buy a thing.

The CARD Act, whose major provisions go into effect Feb. 22, 2010, limits the fees on cards for people with bad credit, so the card companies are scrambling to protect their profits with monstrous interest rates -- and whatever else they can get away with.

Some of the biggest fallout from the Credit CARD Act of 2009 for consumers with bad credit has already hit: Card issuers have spiked their interest rates, switched fixed rate cards to variable rate cards, slashed credit limits, and closed less profitable accounts.

Some parts ofd the CARD Act may be helpful to subprime cardholders. The law requires that the due date fall on the same day each month to make paying easier -- and it ends middle-of-the-day payment deadlines. These changes will make it easier for you to know which paycheck the payment will come from. Finally, if you pay more than the minimum payment (and you should do this whenever possible) the excess will be used to pay down the highest interest-rate balance.

Another helpful change is that your statement will show you how long it will take to get out of debt if you just make the minimum payment each month. The new law also requires issuers to direct consumers in financial trouble to legitimate nonprofit credit counseling.

For sub-prime cards, the best provision of the CARD Act is that it caps upfront fees on cards at 25% of the available credit limit for the first year. (Fees can still be assessed up to 50% of the credit limit, but they have to be spread over five billing cycles.) That sounds like a good thing for people who typically live paycheck to paycheck, but it resulted in the card issuers looking for other ways to stick it to you -- one card even comes with an APR of over 79%!

These high APR cards are roving more popular with people who have bad credit than high fee cards, probably because you don't need to pay the high APR if you pay your balance in full each month -- and because the cost of the card is more "hidden" than it is of you get clonked for a few hundred dollars up front.

The Act may push companies out of bad credit lending altogether, making credit harder to find. Atlanta-based CompuCredit, which has been called out by regulators for allegedly deceptive marketing, announced that it will no longer offer sub-prime credit cards.A number of issuers also offer secured credit cards, which are guaranteed with a deposit for the full amount of the credit limit.This at least gives you the convenience of paying online or over the phone, making bill paying easier. You also need credit cards to reserve hotel room and rent cars.

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