Monthly Archive for April, 2010

If you have bad credit, chances are good that you have taken out a payday loan at least once. So new legislation introduced today may affect your bad credit and your borrowing. The Payday Lending Limitation Act of 2010, sponsored by U.S. Sen. Kay Hagan, seeks to curb practices of payday lenders considered abusive, practices that often turn short-term emergency borrowing into long-term, expensive lifestyles. The bill would modify the Truth in Lending Act to make payday loans less onerous for the people with poor credit who relay on them.

"Too many hard-working individuals have fallen victim to payday lending. Payday lenders prey upon folks who find themselves in need of a quick loan. These lenders charge astronomical interest rates and expect unrealistic repayment terms," Hagan said.

Critics like the Center for Responsible Lending (CRL) have pointed to payday lenders' pushing a short-term product, the payday cash advance, in order to trap customers into repeatedly incurring fees and high interest as they are forced to renew the loan over and over. This happens because payment on many loans comes due in just a few days, with the addition of high interest. Borrowers who can't come up with the entire amount end up having to take out new loans, with another batch of fees, to repay the old advances.The cycle continues as the balances get bigger each week and the borrowers have no way out.

When high fees are piled on and short-term advances become long-term loans, borrowers may pay as much as 400% interest on payday loans. A tough economy makes it even harder to break free. Over 60% of payday loans are taken by borrowers with 12 or more transactions per year, and 24% go to people with 21 or more annual transactions.? Transaction costs average about $50, so you can see where paying $50 a dozen times, plus interest, to borrow $500 for twelve one-week periods would come to a cost of more than $600. Annualized, you get over 400%. Payday borrowers generally choose loans of $300 to $500, secured with a post-dated check or debit authorization dated on their next payday.

The bill would make the following changes to the Truth In Lending Act:

1. Borrowers with six loans over the previous 12 months or 90 days of indebtedness would be prohibited from getting new payday loans--this is the same standard federally-regulated banks have adhered to since 2005.

2. Borrowers must be offered an option to repay their loans over longer terms.

3. The Federal Reserve will be able to require licensing and bonding of payday lenders.

These kinds of loans can be obstacles to financial security and to getting rid of bad credit. Wean yourself off of payday loans and other bad credit financing; it will cost less to borrow and your credit can improve dramatically.

What Is a Mortgage Revenue Bond Program?

Mortgage Revenue Bonds (MRBs) are tax-exempt bonds that state and local governments issue through housing finance agencies (HFAs) to help fund below-market-interest-rate home loans and / or down payment assistance for qualifying home buyers. To be eligible, you must be a first-time home buyer, and your household income must not exceed 115% of the median family income in your area.

How MRBs Benefit You

1. The program makes it easier for you to qualify if your income is not high. Because your interest rate is one to two percent lower than the market mortgage interest rates, your home will cost less to own, so you have a better shot at qualifying.

2. Programs like Freddie Mac's Home Possible mortgages for low- and moderate-income borrowers works in combination with local programs that offer down payment assistance and secondary financing to qualify more borrowers. So you can combine the advantages of down payment assistance with subsidized mortgage interest. That makes it easier for you to achieve home ownership.

Important Points

1. To find out if you qualify income-wise, you can look up the median household income in your area. Multiply by 1.15 and see if your gross (before tax) household income doesn't exceed that figure. Fannie Mae has a site that lets you look up the income for your town or county. Click HERE to find yours.

2. To find MRB programs in your area, search on "(your state) mortgage bond program" and you should be able to get information on available programs.

3. For example, Nevada's Home at Last bond program today offers either a 4.875% 30-year fixed rate mortgage or a 3% down payment grant, and allows home purchases up to limits ranging from $258,690 to $409,587, depending on the county. Qualifying income for a household of three or more ranges from $76,820 to $103,320, depending on the county. Your state's program will differ, depending on its housing prices and income levels.

4. When shopping for a home loan, ask lenders if they fund MRB mortgages. A loan officer who works with these special loans can fill you in about the particulars of your state's programs.

If you lost your home through a short sale or deed-in-lieu of foreclosure, you may not have to wait five years before you are eligible to finance your next home.

Fannie Mae is directing its lenders to relax rules making mortgage applicants who have done short sales or given up their homes with deeds in lieu of foreclosure ineligible for a new mortgage for many years. Instead, you could be eligible for Fannie Mae financing in as few as two years. The new standards go into effect July 1st.

Homeowners who have done short sales -- for example under the Home Affordable Foreclosure Alternatives program (HAFA) -- may be able to qualify for a mortgage in just a couple of years. The purpose of this is to push troubled homeowners to work with lenders and avoid costly foreclosures. While the hit to your credit score is the same whether you do a short sale, deed-in-lieu, or get foreclosed on, the new rule means you gain an advantage if you avoid foreclosure.

There are catches, however. To qualify for a new loan in two years, you'll probably have to put at down least 20% down. With 10%, you have to wait four years, and with less than that it may take even longer.

But, wait, there's more. If you can prove that your mortgage credit problems stemmed from extenuating circumstances, like job loss, medical expenses, or divorce, you might get a loan approval in two years and put only 10%.

Freddie Mac, Fannie's counterpart, works a bit differently. If you can't cannot that extenuating circumstances caused your financial problems, Freddie Mac won't approve a new mortgage in under four years. If you lost your home because you bought too many toys or took too many vacations, Freddie makes you wait five years.

How much does bad credit cost when you get a mortgage? You probably have an idea. A closer look may motivate you to pay a little more attention to getting your obligations taken care of on time.

According to Freddie Mac, the average mortgage size in 2008 was $167,960. A homeowner with that mortgage and a 520 credit score will pay $185,302 more in interest charges over the life of a 30-year mortgage than a borrower with the same mortgage and a credit score of 720, according to a formula devised by Consumer Credit Counseling Service. That works out to an extra $516 a month.

You'd like to have that extra cash for something more fun than paying for old bad habits, wouldn't you? Well, you could. Consumer Credit Counseling's calculation assumes that bad credit is forever. But there's no reason to stick with a bad credit mortgage any longer than you need to. In a year or two, you could have a good credit score and refinance. Use that extra cash to get rid of more debt, and you could be on your way to exceptional financial health.

Credit scores can be improved five ways:

Payment history is 35% of your score. Pay everything on time for the next six months and see what happens.

Amounts owed equals 30% of your score. Ideally, you want to have access to a fair amount of credit (without being silly) but you should use it sparingly. So improving this part means putting the credit cards on ice and paying down your balances. Again, just try it for six months and see what it gets you.

Length of credit history is 15% of your score. Don't close accounts that you have had for a long time. Keep them open even if you don't use them.

Getting new credit hits 10% of your score. Lay off opening new accounts for a while.

Types of credit is 10% of your score. A mortgage, a car payment, two or three national credit cards--that's a good mix. Thirty department store credit cards is not. Installment and mortgage debt is weighted more heavily, that is, granted more importance, than revolving credit.

You can request a free copy of your report online at annualcreditreport.com. For a nominal fee, you can also get your scores. Keep your nose clean, then check again six to twelve months from now. Your progress should be all the motivation you need.

If you're experiencing mortgage credit problems, have missed home loan payments, and are perhaps delinquent on other credit accounts as well, it may be tempting to give up. The stress can be debilitating, the balances pile up, and you think you will be in bad-credit Hell forever. A recent study by VantageScore shows that's not necessarily the case.

It's true that missing a mortgage payment does a lot more damage to your credit score than being late on a credit card account. And getting into default can drop your score by as much as another 120 points. But a talk with your lender, preferably as soon as you get into trouble, can help you stop the bleeding. The study found that borrowers whose lenders were willing to capitalize their late payments, that is, bring the mortgage current and roll the arrearages into the loan, improved their credit scores. The mortgage was no longer delinquent and there was no foreclosure.

Others who went into trial mortgage modifications had mixed results. If they were current on their loans at the start of the trial period, the lenders did not report them as late. And if a permanent mortgage modification (which caused the score to initially drop 100+ points to about 600) made it possible for them to begin paying all of their obligations on time, their scores often rebounded to 700 in nine months.

Borrowers who were offered principal reductions in their mortgage modifications also got mixed results, depending on how the loan was reported. If it was left alone, with the same start date and initial balance but the current balance reduced, the credit score tended to increase, because the homeowner still had an aged account with a lower balance. However, if the account was treated like a mortgage refinance with a new start date and balance, the score went down. This effect was even more pronounced if the mortgage was reported as settled for less than the amount due.

Those who let their homes go into foreclosure, negotiated a short sale, or returned the property with a deed-in-lieu of foreclosure all suffered the same amount of credit score damage. And finally, those who filed bankruptcy took the biggest hit of all. However, borrowers with perfect credit saw their scores drop as much as 365 points, while borrowers with credit problems already (score 625) only took a hit of 110 points. The moral of the study? Address your credit problems early, then do what you can to recover. It needn't take that long.

If your credit is, well, iffy, you'll want to take note of this. FHA is taking a hard look at lenders with higher default rates, and taking away their approval to underwrite FHA mortgages. Even if every loan they approve and fund conforms 100% to FHA's underwriting guidelines. Why should you care? A couple of ...

If you have a bad credit mortgage, chances are you have a high interest rate. Your housing expense may very well exceed 31% of your gross monthly income. And if you live in a neighborhood dominated by bad credit mortgage financing, chances are there are lots of foreclosures and your property may very well be ...