The Debt Disease…Dollar Buy Dollar

May 5, 2007 by 1 Comment

ShredderThe other morning, I had CNN on as I was getting ready for work when a story about a local blog caught my attention.   Dollar Buy Dollar is authored from a Washington State resident who has found himself in quite the pinch by jacking up his credit card bills and student loans to a total that tipped over $70,000.   The blog is an honest (sometimes painfully honest) account on what he’s doing to try to get out of that mess.   This should be a must read for every senior in high school and anyone with more credit debt than savings.    Debt happens far too easily and, like packing on a few pounds, it’s much easier to gain it than to whittle it away.

The author of the blog is remaining anonymous and calls himself "Fellowes" (like his shredder).    Here is an excerpt from Fellowes most recent post:

  • Taking on debt has become a lifestyle for many people, something that seems to be actively encouraged by our consumerist society
  • Couples hiding/lying to one another about debt IS a huge problem
  • Debt and the seeming inability to pay it down, discuss it openly with your spouse or other members of your family has a HUGE impact on mental health, physical health and family stability
  • There is a tremendous amount of confusion about the “best” way to pay off debt while still maintaining one’s dignity and self-respect.

As a Mortgage Planner, I see consumer’s debts all day long when I’m completing a loan application or reviewing a credit report.   It can be a tremendous slippery slope for a family when your debts exceed your savings.   And with the national savings rate at below 0%, we are in more danger of a credit bubble ready to burst than a real estate bubble (at least in the Seattle area).

This is such an important topic and I personally believe that this issue is more wide spread and impacts more consumers than we know since it is often kept secret, as Fellowes mentions above.   Fellowes is receiving quite a bit of attention from his bit on CNN, many others are confessing their tough situations via comments to his posts.   Fellowes offers this heartfelt advise:

For those of you in the same situation. DONT WANT ANOTHER MINUTE. Overspending, lying and hiding from this can lead to other VERY destructive behaviors that can not only put your marriage at risk, but your life at risk. Go seek professional help if you can’t have the conversation with your spouse, but my all means HAVE the conversation. The hardest part of this whole ordeal was admitting how bad the problem was and that I my behavior was out of control. Paying in down and finding ways to negotiate and save and nickel and dime here and there is becoming a game for me, albeit a fun one. Thanks everyone for your support, suggestions and feedback. I will do my best to chronicle my journey and share other financial musings to keep you all coming back.

I will be following up with a series of posts on this topic.   You can consider this "Part One".

Filed Under: Debt Restructuring, Financial Planning, Weblogs

Is it better to buy or rent?

April 12, 2007 by 3 Comments

An article in the New York Times was brought to my attention from Tim at Seattle Bubble on whether or not you should buy or rent.    The article is very slanted towards renting and considering the part of the country it’s originating from, they are right.   Our local economy and housing market remains strong and is not experiencing any sort of a slump.   

What I really liked about the article is the on-line calculator to help you determine if you should rent or buy.  The calculator is flexible and friendly with adjusting appreciation, down payment, rent increases and the costs associated with owning a home (funny how many potential home buyers forget about that).   If you’re considering buying a home, I encourage you to check it out.

Tim, where was this calculator when I did my post at Rain City Guide and Seattle Bubble Blog countered it? 

Filed Under: Financial Planning, First Time Home Buyer, Residential Purchase, Seattle, Weblogs

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

How Do You Find an Ethical Lender?

April 4, 2007 by 4 Comments

On Rain City Guide, there are often debates that will arise about measuring one’s ethics (usually referring to real estate agents or loan originators).   So how do you determine whether or not someone is indeed ethical?    You can have a Code of Ethics plastered all over your web site and at your office…but it really doesn’t mean squat unless you do what you say.   

Cmpssmall As a Certified Mortgage Planning Specialist, I am to adhere to their Code of Ethics or I will lose my CMPS designation.  This includes 11 Statements of Commitment and 8 Duties to the Client Codes of Conduct.  There are 10 other Codes of Conduct that apply toward fellow CMPS members and the CMPS Institute.   It’s pretty elaborate.

The Washington Association of Mortgage Brokers (WAMB), which I am a member of, also has a Code of Ethics.   WAMBs Code of Ethics are more "short and sweet" than those of CMPS.Campfire

The company I am employed by, Mortgage Master Service Corporation, has their philosophy and goals on our website.    And I was a Campfire Girl while in elementary school.  (Our troop was the Blue Bird Blue Stars).

Jillayne Schlicke recently did a post on Vacation Mortgage about a local mortgage company who has "ethics in their name" and touts ethics on their web page.  However, if you contact them about their "vacation mortgage" which is heavily advertised on the radio, instead of providing information about the mortgage and answering general program questions (I emailed on several occasions inquiring about their vacation mortgage), they want to run your credit and obtain all of your information information to make sure you’re considering the proper mortgage.   Hmmm…dangling a vacation from your mortgage payment, then refusing to explain the program so they can offer you a different program…sounds like bait and switch to me.   Hardly ethical in spite of all their efforts to promote being an ethical company. 

This is why I will always return to relying on referrals from three different sources of individuals whom you respect to select your Mortgage Professional.   Such as a friend, co-worker, neighbor, Certified Financial Planner, CPA or Real Estate Agent.  Preferably, one who has recently gone through a purchase or refinance transaction themselves. Lego_gsr_2 Your referrals have all ready been tested by those you trust.

Unfortunately, you’re not able to submit a Loan Originator to a polygraph test to determine if they’re straight shooters with your best intentions at heart.  And, you cannot follow them around 24-7 (legally) to see what types of decisions they make throughout the course of a day.   And although the new legislation to have loan originators who work for mortgage brokers licensed (banks such as Washington Mutual, Countrywide and Wells Fargo; and credit unions are excluded from this law) is a start, it’s still no guarantee of the the person’s moral fortitude.   At least unsavory LOs who work for brokers will have a license to lose (or, at least they will not be originating loans at a mortgage brokerage). 

One of my favorite examples of a "Code of Ethics" is from Les Schwab Tire Company.   They promote that they treat clients just like they would their own mother.  I browsed through their web site and could not find a posted Code of Ethics…but I guess this is, perhaps my point.   They do what they say, it’s not all talk or print.   Simple.   Funny, I think some of the best things are!

Filed Under: Financial Planning, Legislation, Mortgage, Predatory Lending

Getting on Track to Buy Your First Home

April 2, 2007 by 2 Comments

Last fall, a Mom made an appointment with me to meet with her childreImg_3528n about buying a home.  It was so cool.   First off, she was very proud of her 18 and 20 year olds.   Both were hard working individuals…being responsible young adults.  Mom thought they should look at buying a house together instead of renting.   It was a very interesting consultatation.   I was happy to meet with this family to help make sure her young adults are on the right track of becoming home owners and mortgage payers.

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Filed Under: Financial Planning, First Time Home Buyer, Mortgage, Residential Purchase Tagged With: , ,

Why I Don’t Like Stated Income Loans

March 31, 2007 by 11 Comments

Let me start by saying, I prefer a “No Income” over a “Stated Income” loan.  If you Riskybusiness_2 have to “state” an income, you’re potentially setting yourself up for committing fraud.  A “no income” verified loan (where your income is blank on the loan application) does come with a slightly higher rate than a stated income loan, however, there are no questions about what is questionable…your income!

Recently, a home buyer contacted me for a second opinion on their good faith estimate.  They had just made an offer that was accepted on a home.  After reviewing his information, he revealed that the loan was stated income.   I did not have all of their documentation needed for self employed borrowers (2 years complete tax returns, for starters) since I was just looking at closing costs and the rate.   So I asked why they were going stated income.   Here is his actual response:

“Let’s just say it’s income we’re hoping to achieve, but higher than what is on our tax return.”

Does that sound a wee bit concerning to you?   For one, they are stating income they don’t make in order to qualify for a mortgage.  When  you’re self employed your income can vary quite easily.   What happens if they don’t make the income they “hope to achieve” and they cannot swing their new mortgage payment?   

I asked if his Loan Originator was going to have him sign a 4506 or 4506T.  These forms are sent to the IRS so the lender (and what ever company your loan is sold to) can verify the income you are stating on the loan application by accessing your tax transcripts directly from the IRS.

“I did ask [our LO] about that, and she said it’s basically a formality – that they don’t actually pull the tax return…it’s just put [the 4506 form] in the file.”

Often times, the 4506 may stay “in the file”.  However, if the borrower defaults on the loan, you can bet the first thing the lender will do is to grab the 4506 to compare what was stated on the loan application to the actual income reported to the IRS.   

 

“Since I certainly don’t plan on defaulting, I’m going trust [the LO] and the bank on this one. She’s got an interest in this as well!”

The LO certainly does have an interest in the loan.   She’s going to get paid and keep her real estate agent happy.   Stated income and no-income verifiers are very easy loans to do as compared to doing a full document loan for a self employed borrower where you have to review and average incomes for the past two years.   Yikes…the LO might actually have to pull out their calculator and do some hard math and go through someone’s tax returns.  Oh dear!

Let’s assume worse case scenario for this borrower who is all ready admittedly overstating income at what he hopes to achieve…what he suffers a loss with his business and and is not able to keep up with his mortgage?  As a self employed person,  your income and costs are not secure or stable.   This could quite easily happen to the best of people.  Now you’re in a mortgage that you could not afford to begin with because you had to over state lie about your income.   Should your mortgage go into default, will the LO who put you into this loan stand by you?  I doubt it.  Plus, she’ll probably state something like “I had no idea they didn’t make that income.”   She won’t go down holding the borrower’s hand in this case, far from it.

If you are considering a mortgage where you “state” your income on the loan application, you should know:

  • Stated income loans are not created to exaggerate your income so you can qualify for a mortgage.   
  • Your stated income should compare to what you have reported on your gross income tax returns.
  • Consider a “No Income Verified” loan vs. a “Stated Income”.  The difference to rate, with good credit, is often not that significant.   With no income stated, there are no figures to lie about.   You’re qualifying on credit and down payment alone.   
  • Don’t lose sight on whether or not you can actually afford the mortgage payment.    Qualifying for a mortgage does not mean that you should have the mortgage if you cannot make the payments.

Lying about your income, or anything on the loan application, is mortgage fraud.  There are many other types of documentation available so that borrowers do not need to go this route (unless it makes sense–ie they actually have the income).

Still thinking about stated income?  Watch this video from CBS.   

Filed Under: Financial Planning, Mortgage, Predatory Lending, Refinance, Residential Purchase, Subprime Lending Tagged With: ,

My Encounter with The Seattle Bubble Blog

March 24, 2007 by Leave a Comment

Mpj040113000001 My husband teases at me when I talk about the Bubble Bloggers…not because they’re funny (they can be), it’s simply the phonetics.   Our local bubble bloggers are a very serious and determined group of individuals.  In a nut shell, they believe that Seattle’s home values will plummet or burst like a popped bubble and when this happens, it will reek havoc for current home owners.   Many of them feel it is much better to rent than to own a home for financial purposes.     The Seattle Bubble is probably the most well known local blogs on this topic.   

Recently, an article I posted on Rain City Guide, The Great Rent vs. Own Debate, was featured (or should I say, "flogged") on the Seattle Bubble and Priced Out Forever (these blogs share writers).    Eleua, one of the "bubble bloggers" asked me if they could do this and I must tell you, I was a bit nervous about how this would all shake down.  For starters, where ever there are numbers and stats, there is opportunity for debate.  Numbers can be twisted and recalculated to prove anyone’s theory.   I must say they were very fair and kind in their "flogging" of my post.

Here are some points they make on why it’s better to rent than to own a home (I’m not going to debate these points in this post):

  • Renters are not responsible for repairing or maintenance of the building.   (I do spend many weekends at Home Depot with my husband to work on our house…and I love it).
  • Freedom to pick up and move when your lease is up without the cost of selling a home (approx. 8-10% of the sales price including commissions, 1.78% excise tax for King County and closing costs).
  • You can invest the funds you would use for down payment and earn interest on it (your home equity does not earn interest).
  • You may be able to rent a nicer home than what you can afford to buy for the same payment.
  • The standard tax deduction may be better than the deductions you’re allowed as a home owner itemizing your mortgage interest and taxes.  (As always, check with your CPA regarding any tax matters).
  • And of course, home values are going to tank once the Seattle bubble bursts.

I wrote The Great Rent vs. Own Debate over an exchange of comments on one of Rain City Guide’s post where I stated something along the lines of "owning a home is an automatic savings plan for some borrowers".    I still believe this to be true based on what I’ve seen in my past seven years as a Mortgage Consultant.   

Many people are not putting away money into savings accounts, retirement, planning for college…you name it.   When you make a mortgage payment (assuming it’s not interest only), you are applying a small portion of that mortgage payment towards reducing the principle balance.   For Americans who do not put 10% of their gross income (or anything) into an investment vehicle (no…not a new car!), this is their only source of savings.   They are at least putting some money away where they do not have immediate access to it (unless they treat their home equity like an ATM).   

I will be the first to admit that a big reason why I have bought homes is emotional.  I have "a need" to own a home.  I grew up renting and moving around quite a bit as a kid. I feel grounded and I have control over the home…it’s mine!   With that said, owning a home has proven to be the best investment for me.  I would not have realized the appreciation and profits from renting that I have as a home owner over the past 18 years.   

Home ownership is not for everyone.   Especially people who are careless with their credit and spending.   You need to be responsible, plan for repairs and improvements and make your mortgage payments on time.  Buy a home because you want to live in it and you want to be your own "home sweet home".

Filed Under: Financial Planning, Mortgage, Residential Purchase, Seattle, Weblogs

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: ,
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