Debt and Your Mortgage

May 9, 2007 by Leave a Comment

Istock_000002310753medium_3This is the second part of my series on debt inspired by the blog Dollar Buy Dollar.  Before I get too deep into my posts, I want to stress that if you have a mortgage and you are sliding further into debt, please contact your Mortgage Professional as soon as possible.   Don’t wait.  It may feel better to dig your way out without help, however, credit card lates and even worse, mortgage lates, will ding your credit score down to where either:

  1. Your rate for a possible refinance or equity loan is much higher as rates are credit score based.
  2. You no longer qualify for a mortgage at the loan to value you need for debt relief.   (The amount of equity-loan to value-that is allowed to borrower is also credit score based).

I’m not a huge fan for using one’s equity as a cash card.   However if your equity can bail you out of a desperate debt situation and if you are capable of changing your spending and savings habits so you don’t wind up having to tap your equity again, then it makes sense.   

I cannot emphasize enough how important it is to take action right away.  Especially in our current mortgage "subprime" climate where it is tougher to qualify for loans with lower credit scores.  If your scores plumet too low and if you are not able to access  your equity, you may be forced to sell your home.   A mortgage late is more devistating to your scores than a credit card late and any recent lates will zap your score (mortgage lates carry more weight than a credit card late).    Credit is reflective, so the more time since a late payment, the more your score will rebound.

Recently I helped a couple where the homeowner, who was self employed successfuly for over 20 years ran into hardships with his business.   He wound up relying on credit cards to try to "bridge" his lack of income.   In a short period of time, he was not able to pay his credit cards or keep up with his mortgage.   He has a beautiful home valued around $700,000 and a mortgage balance of $250,000.   He wound up with a 120 day late (3 months of not paying a mortgage–preforeclosure).   His then Fiance helped to get him current on his mortgage, he was lucky!   However the mortgage he had was ugly.   The Fiance contacted me about refinancing their high rate subprime loan he was currently in.  She had credit scores over 700 and his were around 400.   In addition to the "preforeclosure" on his mortgage, his credit report was full of collections and late payments.  Here’s what we had to do in order to help this couple in order for them to receive the best rate and program available:

  1. Wait until the 120 day late was 1 year old.  (We were six months away and were waiting for the underlying mortgage’s prepayment penalty to expire).
  2. They married and she was added to the title.   The lender wanted to wait until she was on the title for 6 months before they would close.
  3. He remained on the title (is still a vested homeowner) and is not on the new mortgage.
  4. His judgments had to be paid at closing.  (This was a cash out refinance to pay off all remaining derogotory debts).

We did a no income verifed loan with just her on the mortgage.   The new rate was just 0.25% over the available conforming rates with no prepay penalties.   Bottom line, he was fortunate that when he disclosed his situation to his partner, she was willing to stick around and help bail him out.   He’s also lucky that he owned a home and had enough equity that he could do the cash refinance or, if he had to, sell the home and have enough proceeds to pay off debt and have a savings left over.

If he didn’t have the mortgage lates, we could have refinanced his loan much sooner.     It all worked out for the couple…now newlyweds!   Restructuring the mortgage to eliminate the debts has made a dramatic difference in their lives.   Your Mortgage Professional may or may not be able to help "bail you out".   At the very least, a qualified Mortgage Professional can help you decide which debts to pay first.   I’ll address that issue in my next post for this series.

Watch CNN’s video on Dollar Buy Dollar and couples who hide debt from each other.

Related Post: The Debt Disease…Dollar Buy Dollar; Borrower Beware

Filed Under: Credit Scores and Reporting, Debt Restructuring, Financial Planning, Mortgage, Refinance, Subprime Lending

Subprime LTVs and Credit Scores

April 11, 2007 by 4 Comments

Yesterday I received an email a subprime lender promoting their new loan to value (LTV) limits based on credit scores.    I thought it was a good reflection of the current LTV/credit score guidelines for this current market.

100% LTV @ 660 Credit Score

95% LTV @ 580 Credit Score

90% LTV @ 560 Credit Score

85% LTV @ 540 Credit Score

80% LTV @ 520 Credit Score

Interest rates were not provided with the email that I received, however, I would be they’re undesirable.   

Someone with a 660 credit score, depending on what their actual credit history and financial portfolio looks likes, should actually be able to obtain other financing besides subprime, such as FHA or a Flex type program. 

This is a sharp contrast to what was available a few months ago for subprime borrowers.   And I’m amazed at how many phone calls I’m still receiving from people who know they have a credit score in the 500 range wanting zero down who are living paycheck to paycheck.   I don’t blame anyone for wanting to own a home, it is touted as the "American Dream".  But a 2-3 year prepayment penalty with a double-digit mortgage interest rate, is not. 

Filed Under: Credit Scores and Reporting, Predatory Lending, Subprime Lending

Are You Getting An Income Tax Refund?

April 9, 2007 by Leave a Comment

Lucky you!  If you are, may I offer you a few suggestions?

  1. Look at adjusting how much income you are withholding from your pay.  A refund always feels like a bonus, but in reality, you’ve given the government an interest free loan.   Why not adjust how much is withheld from your paycheck each month by increasing your exemptions?   Give yourself a monthly spiff instead.
  2. Do you have credit cards with a balance over 50% or 30% of your credit limit?  Pay them down to below 50 or below 30% and give your credit score a boost.   
  3. Imagine how satisfied you would feel paying off a credit card with a high interest rate and cutting up the card? 
  4. Invest your refund into a traditional or Roth IRA or other retirement plan.
  5. Start a 529 account for your child.  It’s never too early to start saving for college.
  6. Save your refund towards a down payment or closing costs on your next home.  "Zero and low down" loans are much tougher to qualify for.   Especially if you have credit issues (which in that case, you should probably refer back to items 2 and 3).

Please do not get a income tax refund loan.   These loans are loaded with high interest with all intentions of you not paying them back once your refund shows up.  E-file and try to be patient.

As always, consult with your professional Mortgage Planner, CPA and/or CFP.  Everyone’s personal situation is unique and may call for a specific strategy and complete review of your financial information.

Filed Under: Credit Scores and Reporting, Debt Restructuring, Financial Planning, Residential Purchase

That New Car Will Cost You

March 15, 2007 by 3 Comments

Mpj043319200001If you’re considering buying a home anytime in the near future, please think twice before purchasing your next car. I’ve had a couple different scenarios lately where the car payment has really impacted the home buyers.  Don’t get me wrong, I love cars.  Old and new alike.   Here’s how it impacts your home purchasing power (based on a 6% mortgage interest rate amortized for 30 years):

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Filed Under: Credit Scores and Reporting, Debt Restructuring, Financial Planning, Mortgage, Residential Purchase Tagged With: ,

Part 2: Know Your Credit Score

March 14, 2007 by 4 Comments

EDITORS NOTE: What is considered a “good score” has changed quite a bit since the subprime era.

Mpj040244300001

In Part 1 of the Subprime Series, you should have found your Note and contacted your Mortgage Planner.  The next step is to review your credit report.   I suggest having your Mortgage Planner pull a tri-merge report.  They may or may not charge a fee for the cost of the report (around $20).

Whats your mid-score?  Just last year, a score of 600 was an easy mortgage transaction (for subprime)…now the bar is raising due to all of the foreclosures.  Typically, your “mid score” is going to be how you’re judged by the mortgage companies.  With a tri-merge report, you should have 3 scores ranging from 350 – 850.   Your mid score is literally the number between the highest and lowest score.   680 and above is considered to be a good credit score.   720 and higher is excellent.

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Filed Under: Credit Scores and Reporting, Financial Planning, Subprime Lending

My First Subprime Client

March 7, 2007 by 2 Comments

Mpj042856200001_2It happened quite on accident back in 2002.  When I began my mortgage practice seven years ago, I was pretty much an "A Paper" lender.  Conventional, FHA and VA loans were my bread and butter.  The thought of doing a subprime loan made me shudder.  I knew they were out there, but I was perfectly happy sticking to my 680 and higher credit score clientele and not diving into the subprime pool.

Then one day, a Realtor, Ima Agent, asked me if I would review her brother and sister-in-law’s good faith estimate since she felt the rate and fees were a bit high.  Ima Agent told me that they had challenging credit in the past and were looking to buy "zero down".   What could I say?  I would at the very least talk with them to see if I could help.   I reviewed their good faith estimate and was surprised at the cost of doing the mortgage.   Most of our loans (to this day) are Correspondent and the closing costs are fairly low.   Brokering to a subprime lender often has Broker Fees around $795 in addition to the regular closing costs.  Of course the rates are higher too since the risk to the lender is greater.

Mr. and Mrs. Buyer are a very nice couple who were recently married and wanted to stop paying rent.   She admitted that he had a troubled past with his credit and that they had been working on improving his (and their) finances.   Their mid credit scores at the time were around 610.   Back then, I would not have known where to go for an 80/20  with a credit score below 700…except the other loan originator they had met with previously had the name of the mortgage lender he was brokering to…BINGO!    I called the lender and priced out their loan.   I was able to provide my clients a much better rate so they elected to leave the other loan originator. 

Here is what the basic guidelines were back in 2002:

  • 600 minimum mid-credit score
  • 100% total loan to value using an 80/20
  • 50% Total Debt to Income Ratio
  • First mortgage is a fixed for 2 years and amortized for 30. 
  • First mortgage has a 2 year prepayment penalty of 6 months interest.
  • Second Mortgage is amortized for 30 years and due in 15.
  • Reserves (taxes and insurance) were OPTIONAL.
  • Funds for closing were not seasoned (no bank statements provided) or sourced.
  • Seller can pay up to 6% of closing costs and prepaids (taxes and escrow).   

I reviewed their credit history with them and we developed a plan on which debts they should focus on eliminating.   They had all ready established a budget since they were working on reducing their credit card debt.  I began to feel more comfortable with helping Mr. and Mrs. Buyer with their subprime financing since I could tell they understood the responsibility of having a mortgage and being a home owner.   Ima Agent found Mr. and Mrs. Buyer their next home and we financed it with the subprime lender.    They were extremely happy in their new home they purchased in March of 2002 in Seattle for $239,500.

Shortly before their prepayment penalty was over, Mr. and Mrs. Buyer contacted me to restructure their mortgage.   They were excellent borrowers; they paid their mortgages on time as well as their other obligations and did not over extend themselves with credit.    Mr. and Mrs. Buyer with having a mortgage (which helps improve credit score) their credit scores were now in the low 700s.   I was able to provide them a long term mortgage (30 year fixed) for 5.75% and their home had appreciated to $310,000.   

I’m thankful that I took the subprime plunge.   I’ve since been able to help many home buyers who would not have qualified for an FHA or VA mortgage.   Many first time home buyers lack the 3% down or are better off leaving the 3% down in their savings account as a cushion.   

Since my first subprime loan 5 years ago, the guidelines have gone through dramatic changes.   Soon Subprime lenders were promoting 80/20 programs with interest only payments, stated income and credit scores down to 580…yikes!  With these loose guidelines, lenders are now facing record foreclosures and are now tightening their requirements for a subprime loan.    Every day I’m receiving updates from various stating that the minimum credit score for 80/20 financing is now 620 and stated income is disappearing.

I have just added a new category to Mortgage Porter:  the market toughening up, these home owners really need to minding their credit and budget so they don’t wind up in the deep end with no way out of their subprime mortgage after the rate adjust.

Filed Under: Credit Scores and Reporting, Financial Planning, Mortgage, Refinance, Residential Purchase, Subprime Lending

Will someone please change the channel?

February 28, 2007 by 1 Comment

Mpj031638400001I’m watching CNN this morning while I’m getting ready to head into the office (it snowed a few flakes this morning, so being the chicken I am, I’m taking my time before I venture onto the roads)…when I see three commercials within 10 minutes that I found somewhat disturbing.

First commercial:  Ditech…cash out refinance your home with a fixed rate up to 125% of the value!  Well, thank God it’s not an interest only negative amortized ARM!   In light of the increased foreclosures and troubles with subprime lending, I cannot believe I just saw this commercial.   What happens to the borrower who has overextended their home equity and then they lose their job or they need to sale?  Guess what, they can’t.   There’s not ANY equity to pay for closing costs.   Welcome to Foreclosure City.

Next:  Countrywide…offering a no cost loan.  No origination fee, no credit or appraisal fee and no third party (title, escrow, etc.) fees.   This isn’t so upsetting to me (especially after following the Ditech ad).  Anyone can provide a no-cost mortgage.    What the commercial does not tell you is that no cost mortgages do cost a borrower in the monthly mortgage payment by a higher interest rate.  Nothing is free.  Typically, 1% of your loan amount equals 0.25% to interest rate.   If your closing costs amount to $2000 and your loan amount is $200,000, you can increase your rate by 0.25% and have "no closing costs" from any loan originator.  Please always compare good faith estimates by different lenders.   Their commercial was the least offensive–they just happened to be sandwiched between two commercials that got my goat! 

Last:  Freecreditreport.com.   You know the commercial…the friendly redhead young man challenges you to guess his credit score and encourages you to find yours.   This is great advice.   Where this one slips up for me is that it’s URL sounds just like www.annualcreditreport.com in fact, I think freecreditreport.com is a better marketing name than the one created by the big three credit bureaus by order of our government.    Should you not read the disclaimer on freecreditreport.com’s site, you might believe this is the web site the Fed had created for consumers.   However, this is Experian’s site and should you obtain your "free" report, you’ll be signing up for a credit watch service at $12.95 per month.    Not so free after all, is it? 

I just had to vent a bit.  It’s no wonder people get confused about their mortgages and finances with all of the misleading and deceptive advertisements on television, the internet, and coming to our mail boxes at home.   

Bottom line:  Do your research.   Ask questions.  Be responsible.

Filed Under: Credit Scores and Reporting, Mortgage, Predatory Lending, Refinance

Your ARM May Not Be Broken

February 26, 2007 by Leave a Comment

Mpj040739600001_1You may have noticed on the evening news and the local papers all the bad press about mortgages lately.   Specifically sub-prime, negative amortized ARMs a.k.a. payment option plans (which I am opposed to for 99% of the population), 100% financing and interest-only ARMs…to name a few.  Many sub prime lenders are restating their earnings and are suffering losses.  Some are closing their doors and the remaining are changing their underwriting guidelines.   It use to be very easy to obtain 100% financing with a credit score of 600…some lenders would even consider 580.   Now, the benchmark is 620.   Throughout history, lenders change underwriting guidelines based on market conditions.

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Filed Under: Adjustable Rate Mortgage (ARM), Credit Scores and Reporting, Financial Planning, Mortgage, Refinance, Residential Purchase, Subprime Lending Tagged With: ,
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