Archive for the 'Home Equity Loan' Category

If you have bad credit, home equity loans for improvements, debt consolidation and other financial needs have been pretty much off the table in recent years. The bailout of the U.S. banking industry didn't extend to struggling small business owners.

However, there are financing opportunities for those self-employed business owners who take credit card payments from their customers. In recent months, unsecured business lending sources have brought forth new products and are approving unsecured business loans at a 12 percent interest rate without credit approval. If your home is no longer available as a source of cash, you might try working through your business.

Cash advance requires no credit check

A merchant cash advance is is an unsecured form of financing (meaning no collateral involved, unlike with a home mortgage) in which a business owner sells his or her future credit card receivables at a discounted rate. In return, the merchant receives a lump sum of cash.

This unsecured business loan financing comes from a variety of sources and isn't determined by credit scores or assets. If the business you own accepts credit card transactions, you should qualify for a loan. Your repayment is tied to the revenue of your business.

The unsecured cash advance program makes borrowing a lot easier for business owners, and it cuts out the strict application requirements normally associated with both business loans and home mortgages like home equity loans or lines of credit. The unsecured cash advance works for business owners who might not be able to avail themselves of cheaper home equity financing.

Repayment of merchant cash advances

This product is geared toward short-term money needs and is typically repaid in six to 12 months.

Unlike with a mortgage, your payment on a merchant cash advance can be determined by your income. "Split funding" is the preferred method of most lenders to collect payment on the loan. The merchant (you) processes credit cards in batches as usual. Once you've "batched out," the credit card processing company simply splits the funding per your agreement with the lender. The funds are divided into agreed-on percentages before they post to your bank account.

For example, if you process $1,000 each day and have a 20 percent hold-back percentage set up with your lender, then $200 of the $1,000 goes toward paying off the advance, and $800 is posted to your account.

Yes, mortgages for people with bad credit have lower interest rates and longer repayment terms. However, if you need money badly, using your business to get it might be your best hope.

I was reading a blog post today in which the merit of requiring real estate agents to have college degrees was hotly debated. It got me thinking about the value of a similar requirement in the mortgage lending industry. When you analyze the sub-prime lending crisis and the bad credit mortgages that were provided to people who probably should not have become homeowners, it's clear that the source of the problem was not (just) an insufficiency of ethics but often of training. That's the problem with fields being too easy to enter when business is good -- everyone stampedes in and the rotten eggs give the whole profession a stinky reputation.

Portrait of a housing boom loan officer

You probably saw him at the neighborhood sports bar, projecting his self-important voice through his cell phone and drilling it into the irritated skulls of everyone in the room. He still had on the same tie (30% silk!) that he wore at Boris O'Malley's Pre-owned Cars, which is where he worked until deciding to become a lender two weeks before. He was typical of hyped-up go-getters chasing the big easy money they were sure would be theirs if they got into mortgage lending. The pros who had been in the business for a decade or so groaned and wished for the hundredth time that mortgage lending was harder to get into.

Fog a mirror!

In many states those who wanted to become mortgage lenders faced no requirements at all. There was no coursework, no continuing education, no test to pass, no code to adhere to. Just start cold-calling or canvassing neighborhoods occupied by people with bad credit and sell them poor credit home loans that you don't understand yourself. So you earn a few commissions, mess up a few families' lives, and then your lack of knowledge, your poor service, and your bad reputation catches up with you and you go find another way of making a buck. Because while it's been too easy to enter mortgage lending, it's very, very difficult to stay with it unless you are very, very good.

I helped cause the financial crisis, and I'm sorry.

One loan agent who worked for a subprime mortgage broker wrote about his experience and said, "All you needed to do was learn the script. Everything else was unimportant. JUST LEARN THE SCRIPT." No classes on what the Truth in Lending Act was about. No training in the disclosures customers were supposed to receive, or in the laws that prevent racial discrimination. Just the script, and pushing people to "lower their monthly payments," or "consolidate their high-interest credit cards into a low monthly payment," mostly through sub-prime refinancing.

Is this the sort of person we want helping us with huge financial decisions?

Of course not. And requiring a degree, whether it's in pre-law, management, marketing, or finance, would make sure that the person setting himself or herself up as your mortgage adviser has the education to sort out home loan products, present your case to an underwriter, and know when a mortgage is NOT in your best interest. Even more important, degree requirements would mean disenchanted and unsuccessful sorts can't just become mortgage lenders on a whim; you wouldn't be able to pick up a new career like a middle-aged dentist picks up a new 'Vette. There would have to be a level of commitment strong enough to inspire the candidate to get through school, pass exams, and respect a code of ethics.

So, we want our loan officers to be smarter and more ethical and professional.

That doesn't necessarily mean a college degree is required but it should mean a level of training considerably higher than mastering a script and memorizing a product line. Licensing requirements are being beefed up and standardized, thanks to the Dodd-Frank Wall Street Reform and Consumer Protection Act and other regulations. Today, all over America, new licensing and education requirements are driving dubious loan agents from the industry. That's a good thing, and the professionals who remain are happy to see the shakeout and the upgrading of the mortgage credit profession, especially bad credit mortgage lending.

So, ask your mortgage consultant a few questions.

Ask any of the candidates you consider doing business with how long they have been mortgage lenders, what kind of license they have (get the license numbers too), and what sort of lending they specialize in (if you have bad credit and want an FHA loan, you'd better get someone who knows government lending inside and out). When they recommend a mortgage product, ask them why they have selected it for you. When they give you a mortgage quote, ask what goes into the rate you were quoted. In short, ask them things they probably won't have been taught in silly-script-school and you'll see who has bothered to get an appropriate education.

According to a survey by CESI Debt Solutions in Raleigh, N.C., nearly 40 percent of all seniors say they have accumulated debt in their retirement years that they won't be able to pay off during their lifetimes. The heirs will have to deal with it, and depending on the state you live in, that can be unpleasant. In addition, seniors have a higher likelihood of ending up with large medical bills and other encumbrances that can make their golden years more like lead years. The choice between dodging creditors' phone calls or tapping your retirement accounts to unload unmanageable debt is not attractive.

Bankruptcy versus a reverse mortgage

Bankruptcy and reverse mortgages are two very different ways of dealing with the same problem. Chapter 7 bankruptcy involves liquidating non-exempt assets (like cash in the bank, a boat, and a third car), paying your unsecured creditors with the proceeds (VISA, for example, or your medical bills), and leaving you with a fresh start. This is the most popular bankruptcy plan and works best for those with limited assets. In most cases, your home equity is exempt and so is your retirement account. Chapter 13 bankruptcy allows you to repay your creditors using your income. It's a better plan for folks with assets they don't want liquidated and sufficient income to pay some portion of their debts over time.

Whichever plan you choose, you will probably be able to protect your home equity and retirement accounts from creditors and distribute them to your heirs when you die. Both bankruptcy options result in some damage to your credit score and will subject anyone who has co-signed on loans with you to collection efforts and credit damage.

Reverse mortgage

Reverse mortgages allow you to exchange some home equity for a lump sum with which to pay off your debts. No repayment is required as long as you remain in your home. You may also be able to add a line of credit or receive monthly cash payments in addition to retiring your debts.

A reverse mortgage does come with fees and its balance does grow over time. Your heirs may inherit less (depending on your state's probate laws) than they would if the debts were simply charged to your estate. If anyone has co-signed for your debts, their obligation disappears when you pay off the loans through a reverse mortgage.

It's not necessarily an either - or proposition

If you are in very poor financial straits, talk to an attorney. Your best bet may be to file for bankruptcy protection first to discharge overwhelming debts and save your home and your retirement savings, then take out a reverse mortgage. Your bankruptcy filing won't disqualify you from reverse mortgage eligibility (credit rating is not a factor), you'll be able to supplement a low income with monthly checks, and any remaining home equity or retirement savings will eventually revert to your estate.

The Federal Open market Committee, which famously meets periodically to talk about the economy and interest rates, is having a meeting today and tomorrow. And it may decide to "raise" interest rates. But does that mean mortgage rates will go up as a result? Nope.

In fact, you could argue that the fed affects long-term mortgage rates about as much as it affects the outcome of the Super Bowl. What the fed can influence is the Federal Funds Rate.

So, what's the Federal Funds Rate?

Banks and other depository institutions by law have to maintain a certain level of deposits, called reserves, with the Federal Reserve Bank. That's to make sure there is cash to pay depositors when they want it. The Fed doesn't just leave the reserves in a vault, however. The money is lent to banks overnight to cover varying needs for cash. The Federal Funds Rate is what is charged for these funds. So when the Federal Reserve "changes" the Federal Funds Rate, all it's really doing is choosing a different rate to target and using its power in money markets to move the rate toward its target.

So, how does the Fed Funds Rate affect mortgage rates?

An increase in the Fed's overnight rate does not cause an increase in long-term mortgage interest rates. In fact, Fed rate cuts can actually trigger slight increases in 30-year mortgage rates! This is because mortgage rates are driven by bond markets and the price of mortgage-backed securities (MBS), which reflect investors' expectation of future inflation. When the Fed cuts rates, more money is dumped into the system, but the resources it can be spent on are limited, so prices increase. Today, the most influential resource is oil. When oil prices rise, investors get nervous and exit the bond and MBS markets, which causes MBS prices to fall and interest rates to rise.Conversely, an increase in the Fed Funds Rate could result in rates dropping a little.

But home equity rates could increase.

Home equity loans often carry interest rates based on the prime rate (which is the rate that banks charge their largest and most credit-worthy customers) shows these two rates parallel each other almost perfectly). And which mortgage product pricing is based on the prime rate? Second mortgages like home equity loans (HELOANs) and home equity lines of credit (HELOCs). So, home equity customers may be the losers in the Federal Reserve rate game.

Bank of America announced that it signed an agreement to commit to the pending second-lien plan of the federal government's Home Affordable Modification Program (HAMP). The mortgage lending giant says its the first lender to do so. Bank of America has put systems in place to start implementing the Second Lien Modification Program (2MP) as soon as final program policies and guidelines by federal regulatory agencies are released. 2MP will require mortgage modifications that reduce the monthly payments on qualifying home lines of credit and fixed loans under certain conditions, such as the completion of HAMP modifications on the borrowers' first mortgages.

Worthless Second Mortgages

This is a big step; in the past, the sticky wicket in the modification process or the short sale of property was often the holder of a junior lien against property. Because they are subordinate to or positioned behind the first mortgage holder, second mortgage lenders have little expectation of getting paid once the balance on the mortgages exceeds the value of the home and foreclosure becomes imminent.

What a Nuisance

Holders of home equity loans often deliberately hold up loan workouts to extract money from deals when their junior liens are technically worthless, claimed Dave Walker, chief credit officer of PennyMac Mortgage Investment Trust in a Business Week article. So their strategy is to exploit the loan's nuisance value and gum up the works until someone pays them to release the lien and go away. First mortgage holders are reluctant to reduce the principal balance on their first mortgage when the holders of second mortgages refuse to take any hit to the value of their own loans. Getting second lien-holders to the table may break the deadlock.

The rules change when the economy goes south. Whatever you heard from NPR or Grandma, like always pay more than the minimum on your credit cards, retire your mortgage as soon as possible, and a home equity line of credit (HELOC) is the best second mortgage because of its flexibility, isn't necessarily true when times ...

In tough economic times, the rules go out the window. Rules like, always pay more than the minimum on your credit cards, it's smart to pay your mortgage off as early as possible, and a home equity line of credit (HELOC) is the best second mortgage because you only pay interest on the money you ...