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Are You Up for a Fixer-Upper?

Published
by
Gina Pogol
on October 15, 2008
in New Home Loan
. 5 Comments

One result of the increase in foreclosure sales is a surge in “distressed” properties on the market. So maybe this creates an opportunity for those shut out of the market before. There are discounts out there, but what’s involved with getting a fixer-upper? You’re willing to do some work–is anyone willing to lend you the money? 

The FHA Streamline K program may be just the ticket. You get a single loan to purchase and rehabilitate your property. Here’s what you need to do:

* Find a property. Your purchase offer must state that you will need a 203(k) loan to complete the purchase.

* Find a contractor to write an estimate of work needed and materials required. You aren’t allowed to do the work yourself unless that’s your line of work. Even then, you won’t be allowed to pay yourself. But you may be allowed to save money by doing cleanup and hauling.

* Find a lender approved to do 203(k) loans. Get your mortgage application approved. Get your project appraised (there will be two–before and after–and your loan will be based on the cost of buying and fixing, not the home’s eventual value.

* Complete repairs. When the loan closes, the seller will be paid and the remaining funds will be held in escrow for the contractor.

* Move in! Once the repairs are complete and approved, the builder receives final payment. You owned a “fixed up” house that may already be worth more than you paid. Those willing to make a little extra effort can benefit. It’s true that hard circumstances can create opportunities for those willing to look.

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Help for NINJAs: No Income, No Job, or Assets

Published
by
Gina Pogol
on October 13, 2008
in Uncategorized
. 3 Comments

It’s about to hit the fan, your job is history, and you know it. And your “emergency fund” just funded an emergency jaunt to Vegas. This is exactly the point at which some sort of financial suicide instinct kicks in. For many people, anxiety about money creates a compulsion to spend whatever’s left. Wrong! Even if bankruptcy is in your immediate future, eleventh hour stupidity can get your filing kicked right out on its impulse-buying little butt.

So get serious and into survival mode (yes, there is Ramen in your future–deal with it).

* First, anything not related DIRECTLY to survival goes. That means you can have food (in its cheapest guise–your local organo-heaven offers classes for turning $1.09 worth of dried beans into um, fuel).

* Reevaluate your shelter–if you own your home, well, you’ve probably heard about the hoops you need to jump through to get a short sale approved. If you have a line of credit, max it out while you can, then ration it out as needed for survival. If you can’t borrow against your house or sell it quickly, consider renting out your place and finding a cheaper lease. Or get a roomate or three to help with expenses. The cable bill? Not even gonna ask that one–turn it off voluntarily and avoid the extra meanie charges.

* If you manage to score a new job fairly quickly, talk to your mortgage lender about bringing your account current, adding the arrearages to your balance and going on as before (except this time you’re not going to get silly with the emergency fund, are you!). Do your best to keep up health insurance, but sell your car if you need to. The last thing you need are insurance and car payments when you have no job. And public transportation builds character…

* Ebay, Craigslist, whatever….Sell it. Be ruthless. Simplify your life and concentrate on rebuilding.

* Divest All non-retirement investments. Borrow against or sell life insurance policies. But….

* Leave retirement accounts alone. If you end up in bankruptcy they’re untouchable. Unless you make the mistake of giving them away before you get there…

* Take care of business. Yes, get down to the unemployment office and file for your benefits–but don’t stop there. Chances are you acquired some marketable skills at your previous job, and if your current industry is going through a slump you can sidestep into another. Many employment divisions offer career counseling. Or try the counseling at your local community college–you may find a new career altogether. And financial aid for training isn’t out of the question either. Maybe check out entrepreneurship. Are you good with recalcitrant laptops? Tap your network and get the word out. Detail cars, babysit pets? Run errands? Yes, there are people with more money than time –find them!

Don’t worry about taking stopgap measures–none of them have to become permanent careers, unless you end up liking them. Who knows? You may be the future ultra-famous author of “100 Things You Can Make with Ramen that Don’t Suck.”

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Cash Out Refi with No Equity? Yup

Published
by
Gina Pogol
on October 7, 2008
in Mortgage Refinance
. 8 Comments

The Wall Street Journal recently featured a new mortgage product that allows borrowers to pledge their future equity in exchange for a loan today. It works like this: The finance company advances you money–usually 10 to 15% of the current value of your home, and when you sell it, the investor gets half of the property’s appreciation.

Some require that you pay back the initial advancement while others do not. All investors require that you keep the property maintained and pay your taxes, and you can’t sell it for a minimum number of years (usually 5) without paying a hefty penalty. Additionally, you cannot take on more home equity debt or refinance without approval. The good thing is that if your home doesn’t increase in value you are not penalized and in some cases won’t even have to pay the loan back!

So, if you need money desperately and have no equity, this loan could save your life. Otherwise, it might be a really, really expensive way to borrow. Consider the following “what-if:”

A borrower with a $500,000 home and no equity could borrow $50,000 with this product, called a shared appreciation loan. In ten years, the home could be worth $750,000 (at less than 5% appreciation this is not an unrealistic scenario). Well, the owner sells the home and has to repay the $50,000–and an additional $125,000, for a total of $175,000 to borrow $50,000 for ten years. If one invested that $50,000, it would have to earn a return of nearly 13% to break even! Most would find 13% pretty spendy for a mortgage loan. But it’s still cheaper than most credit card loans, many small business loans, or private student loans.

And it could make home value depreciation almost a good thing….

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Living in the Boonies? 100% Home Loans Still Available Through USDA

Published
by
Gina Pogol
on October 3, 2008
in New Home Loan
. 3 Comments

100% mortgages have not gone completely by the wayside. While layering risk by lending to borrowers with low credit scores + no down payment + no income documentation will no longer fly (good!), there are programs out there for those who don’t face all of those challenges. The USDA Rural Development home loan is one such option. What is rural? The USDA has defined rural as anything not ”places of 50,000 or more people and their adjacent and contiguous urbanized areas.”

USDA Rural Development administers a couple of  programs: Guarantee and Direct. Their Direct program is funded directly (hence the name “direct,” duh) through the rural development office. To be eligible, your income can be only 80% of the median income for the area.

The Guarantee program is funded thorugh USDA-approved lenders and brokers. It is a guarantee program (duh, again!)with no subsidies, and the income guidelines allow up to 115% of the median income after certain adjustments. A good loan officer who specializes in these products should be able to help you determine how your income would be considered.

The 100% LTV mortgage amount is determined by the appraised value instead of the purchase price. Credit underwriting is flexible and the guidelines have no minimum buyer out-of-pocket expense and no maximum for seller concessions. Note: some lender policies may be more restrictive, so if it’s the lender guidelines shooting down your application and not the USDA’s,  another lender may be able to approve you.

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Rate Shopping: Bait and Switch?

Published
by
Gina Pogol
on October 1, 2008
in New Home Loan
. 3 Comments

Increasingly common scenario: you call a couple of mortgage lenders, tell them what you need, and get two interest rate quotes. The next day you might contact another one, and the guys you emailed for quotes on day three get back to you later that day or the next morning. On day four, you consider the terms of all the loans, just like you’re supposed to. You look at APRs, rates, and fees. You comb through the Good Faith Estimate (GFE) and your Truth-in-Lending (TIL) disclosures like the smart shopper you are. Then you call the lender with the best deal.

Except that deal went away three days ago. The new quote is half a point more! Is your agent a scum-sucking scammer? Maybe….but probably not. See, rate quotes are based on pricing in bond markets, which are driven by the same things that cause changes in the stock markets. And you know how quickly prices change there. While lenders used to be able to offer the same rates for several days, increasingly they rarely go a full day without having to reprice to accommodate market movements. Today’s lenders also operate on slimmer profit margins and a market-based price increase can’t be absorbed as easily. The upside is that pricing improvements are also quickly passed on in the interest of remaining competitive. But a quote obtained one day probably can’t be compared realistically to one picked up a couple of days later. And until you actually lock in your loan you still can’t be guaranteed a rate.

So how do you become a savvy shopper? 

First, get your information quickly. Try to get all your quotes within a short time period so that comparing them has some relevence. 

Then don’t let the pricing be your only guide. Interview lenders until you find one you are comfortable discussing your finances with, asking questions of, and (yes) negotiating interest rates with. A trustworthy and reputable loan officer will want your business again and again and will be less likely to jerk you around. When you work with someone you trust, you can stop frantically checking bond market movements sixteen times a day and relax, knowing that you will be treated fairly regardless of where rates have moved when you are ready to lock your loan.

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CNN Survey: Compulsive Buying Ruining Marriages and Lives

Published
by
Gina Pogol
on September 30, 2008
in Uncategorized
. 2 Comments

A recent survey of 1,000 American households found that splurging is alive and well in the US despite uncertain economic times. According to CNN.com, Americans continue to splurge because it just feels good and they have been conditioned to go out and get that new Coach bag or iPhone even if they can’t afford it. This habit can cause more than just the destruction of credit ratings and the increase in mortgage foreclosures–it takes down marriages too.

Couples talked about spending nightmares in which significant others ran through their partner’s savings and blew the mortgage money on compulsive purchases. For example, in 2001, Joe Peacock had a $160,000 a year job in software design, and he was not in the habit of denying himself anything he wanted. Then, he lost his job–but not his spending habit. Until he realized that he had racked up $70,000 in credit card debt and was in serious trouble.

 Joe gave up his addiction–and like all addictions it took real willpower. He learned to avoid spending by keeping himself very busy. ”I learned how to entertain myself with everyday pursuits, like running, riding a bike, hiking, and drawing in my sketchbook,” he says. “These things cost nothing.” Happily, he and his wife paid off their creditors and stayed together.

Others were not so lucky. Marisa Vallbona’s shopaholic husband was unable to stop, even for his family’s sake. “I loved him dearly, but in the end, I realized that if I didn’t divorce him, my kids and I would end up on the street.” Kit Yarrow, a consumer psychologist at Golden Gate University in San Francisco has some tips for salvaging credit ratings, bank accounts, and relationships:

* Face it together and commit to overcoming the problem as a couple.

* Determine what psychological issues are triggering the spending problem. Counseling can help with this.

* Create a spending plan in writing and have everyone involved sign it.

* Stick reminders everywhere. She recommends something like a love note: ‘With a love like ours, who needs new shoes?’ rather than an admonishment: ‘No shoes!’

For most families, relationships and the home are top priorities. Don’t lose both by overspending in today’s economy.

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Ready, Willing, Able? Can You Qualify for a Mortgage?

Published
by
Gina Pogol
on September 26, 2008
in New Home Loan
. 2 Comments

You were turned down for a home loan. Or haven’t applied because you don’t think you’d be approved. Well, no need to go into a bank’s office, fill out a hundred forms, and get embarrassed when the dude in the blue suit says “No.” You can see where you stand by doing a little investigative work online.

Beginning at the top, know that even A-grade credit is no longer enough to get you a mortgage. You need sufficient, stable income, and you need to document how much it is and how often you get it.

Step 1: Prequalify Your Income Before even looking at your credit, try checking out a mortgage prequalification calculator to see if you can afford the payments on a home in your neighborhood. If your income is sufficient, go to step 2. If it isn’t, improve your debt to income ratio by putting a plan in place to pay off debt and get where you need to be income-wise. Other solutions people have tried include buying a home with someone else–the two incomes make home ownership possible.

Step 2: Determine Your Credit Grade Your down payment requirement can range from almost nothing to 30% or more, depending on your credit rating. So your credit grade is crucial in determining what else you will need to buy your home. If you have Grade-A credit you probably know it. A score in the 700s, several longstanding accounts with no late payments, and relatively low balances on your accounts are signs of a high-grade borrower.

Once you get out of Grade-A range, your credit may be assigned a subprime grade of A- to D. Those with grades C or higher are most likely to be able to qualify for a mortgage within the next year, so let’s address these here.

A- starts at FICOs in the 660 range, a debt-to-income ratio of 38% max, no mortgage lates, and no more than 1 or 2 other slightly late payments. No recent bankruptcy. You can borrow up to 95% of the purchase price with A- credit. You may also be able to get an FHA loan with A- credit.

B to B- means a score of about 620, several late payments over the last 12 months, and maybe a couple of mortgage lates (but no 60 day late mortgage payments). You can have a debt-to-income ratio of up to 50% and finance 75-85% of the purchase price. You may be eligible for FHA financing if you have plausable reasons for the late payments and have done something about the situation that caused them. You may have had a bankruptcy within 24-48 months.

C+ to C- means a score of about 580, a debt ratio of 55%, and you may finance 75% of the value of the home. You become a grade C by being 30 days late on several bills and perhaps 60 days late on some payments. You may have had a bankruptcy within 12 months. You cannot qualify for FHA financing with C rated credit.

So, if you are an A-, B+, B, or B- borrower, your first stop should be FHA. See if you can avoid the bad credit mortgage market altogether with a government-backed mortgage.

If you can’t go FHA or your grade is lower than B-, and you don’t have a huge down payment (you probably don’t because if you had that kind of money you’d be paying your bills, right?!), you need a plan to pay your bills and pay them on time. Notice that these credit grades are drawn mostly from your most recent credit experience, the last 12 to 24 months. And on a $300,000 home, the difference in down payment requirement for a C- borrower and an A- borrower is about $60,000! Not to mention the difference in interest rate you will be charged as a C-grade borrower. The good news is that within a year you could be an A- borrower. So if you are serious about buying a home, get serious about paying your bills on time. Trashed credit today does not doom you for life–unless you let it.

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Renters Need Love Too…How to Get a Credit Score by Renting

Published
by
Gina Pogol
on September 18, 2008
in New Home Loan
. 2 Comments

Life is harder for those with no credit–and more expensive too. Talk about being kicked when you’re already down–you’re already young and broke–now you can’t buy a house, rent a car, or even reserve a hotel room. You’ve got to have credit to get credit, and it’s harder to earn a nice credit rating when you have less money but everything costs more.

Fair, Isaac, the company that compiles our FICO scores, has created an expansion score, which is derived from non-traditional credit, including utility payments, layaway charges, and bank deposit records. However, this doesn’t completely solve the problem because in many places it’s illegal to report utility records and it can be difficult getting nontraditional creditors to bother reporting credit data (there isn’t anything in it for them and it does entail an expense).

Today the system has been improved further, allowing you to get your rental history included in your credit rating. By paying a small fee and registering with Payment Reporting Builds Credit, you can get credit for your payment history including daycare, cell phone, rent, and insurance payments. Fair Isaac promised that it will include data from RentBureau and PBRC when compiling your score.

Registering with PBRC, opening a secured credit card, and piggybacking as an authorized user on a relative’s account are all strategies that can accelerate the acquisition of a usable credit history for a young borrower. Of course, all this reporting doesn’t do you any good if what’s being reported isn’t favorable. So if you go through the trouble of getting your payment history recorded for posterity, make sure it’s worth recording.

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A Rock and a Hard Place–When You Can’t Make All Your Payments

Published
by
Gina Pogol
on September 17, 2008
in Uncategorized
. 4 Comments

Which should you make and which should you miss? A couple of decades ago one creditor was known for being so sloppy with it’s records that no one took delinquencies from them seriously. “Oh, don’t worry about that one; it’s just Sears” was heard in many trade groups and credit bureaus before the retail giant got its act together. But are there accounts you can pay late these days? Yes, and no.

First, if you are going to be late on anything DON’T let it be your mortgage. Next on the list is your car payment. Then look at the rest of your accounts–it’s better to miss a payment on one big account and pay all the little ones on time–the number of delinquencies is more important than the size of the debt.

And finally, missing a utility payment will get you a late charge and maybe your service turned off (if you let it go too long) but it won’t show up on your credit rating. If you are trying to repair your credit it might be worth taking a hit with late fees and preserving your history. Other bills that probably won’t get reported are medical bills, insurance payments, daycare fees, newspaper subscriptions, and layaway payments. Make sure these get paid before they end up in collection (ugly) and you’ll be fine as far as your credit report goes.

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Can Debt Consolidation Hurt Your Credit Rating?

Published
by
Gina Pogol
on September 15, 2008
in Debt Consolidation
. 3 Comments

It comes in the mail. It has lots of exclamation points on it, so it must be GOOD!!!! It comes with a CHECK. Pay off all your bills! Consolidate your credit cards to one monthly payment!

Replacing all those credit cards and consumer loans with a single loan MUST be good for your credit, right? And a lower payment means you’ll be saving a bundle too! Right?

Maybe not. Remember, the big print giveth and the small print taketh away. Trading in several monthly payments for one isn’t a legitimate reason to replace those debts with a new one. Consider the following:

1. Paying off and closing out accounts may hurt the “utilization” part of your credit score. For example, if you have 5 accounts with a total limit of $5,000, and you owe $3,000, you are utilizing 60% of your available credit–not great, but not too bad either. By closing those accounts out and replacing them with a $3,000 consumer loan you now have 100% credit utilization. So, you say, maybe I’ll just leave the old accounts open? If you have the discipline to refrain from tapping them while that $3,000 account remains open, that’s an option….as long as the bureaus don’t then ding you for having too many open accounts.

2. Consolidation could cost more. A lower monthly payment isn’t really “savings” unless you are getting a lower interest rate too. And stretching out the debt over too much time can cost you more in the long run even if you get a lower rate. Suppose that you have a $10,000 car loan at 7%, and you have been paying on it for a three years and you now owe $4,000. Your payment is $198.01 and you will have it paid off in 2 more years. Now, some pretty, exclamation-point-loaded mailer shows up, you bite and call the 800 number, and the sales agent tells you (in a very sexy voice!) that you can use that check to pay off the car loan and your payment will only be ONE THIRD as much!!!!! Well, Slick, if you use that check your payment will drop to $57 all right, but only because your $4000 has been stretched out into a ten year loan! And your interest rate just went to 12%!

3. The consolidation loan may have “teaser” provisions. In other words, just because your balance transfers start with a low fixed rate doesn’t mean they will stay that way. Especially if the consolidation loan is another credit card or unsecured account, the terms can probably change whenever the lender chooses to change them. Read the entire agreement and make sure you aren’t jumping out of the frying pan and right into the fire.

Consolidation loans, carefully chosen, can be life-savers. There is a reason for their popularity–the right one can indeed lower your interest, give you a manageable payment, and help you get your financial house in order. The best consolidation loans are those secured by equity in your home. Unlike most other loans, mortgages are highly regulated. Rates can’t be changed arbitrarily, and if you get a fixed rate loan your rate and payment will not change. This makes budgeting easier. Mortgages may also confer some tax advantages–check with an advisor to be sure. And because they are secured by property, debt consolidation mortgages are considered less risky by lenders and rates should be considerably lower than for the unsecured debt you will be replacing. For best results (from a credit rating standpoint), keep a few old accounts (the ones with the best payment histories) open but destroy the cards and don’t use them. You want your credit report to show low credit utilization. Make that monthly payment on time and get used to budgeting. Eventually you’ll get the loan paid off and can divert that monthly amount into savings.

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