This Way To Debt

Mortgage Financing Made Easy

I.  Lending Guidelines

Understanding Credit

There are three C’s of lending: credit, capacity and collateral.  This section will focus on credit.  You must understand what lenders are looking for in order to qualify you for a loan.  How you pay your bills makes a big difference in the programs you qualify for.  More importantly, it affects the interest rate you are charged.  It is called risk based pricing.  Banks and other lending institutions charge higher interest rates for customers with “spotty” credit.  For example, a person who always makes their payments on time and has a reasonable amount of credit available will get a lower rate than someone who pays their bills late and has too much revolving debt.  Most important is your payment history on mortgage loans and other installment loans.  Read on to learn more.

Installment loans differ from revolving accounts in how the contract is written.  A car loan is an installment loan.  It has a fixed repayment period with a consistent monthly payment.  Credit cards are considered revolving loans.  They do not have a set payment amount.  It varies to the amount of your charged balance.  It has a maximum allowed, or credit limit.  The payment is calculated based on the interest rate and current balance in any 30 day cycle.  Understanding the difference will be important in helping you assess your credit profile.  A mortgage loan in most cases is an installment loan.  We will discuss revolving mortgage accounts or lines of credit later in the book.

It is easier to obtain a copy of your credit report today more so than ever before.  I recommend that everyone take advantage of the free options available.   Periodically checking on your credit file helps to ensure no one is fraudulently using your credit information.  You will be able to see what trade lines (companies) are reporting to your credit file.  Any liens or judgments that may have been filed against you will report.  If you have ever filed a bankruptcy, that information is public record and reports to all three of the major credit reporting agencies in the country.  Medical collections can also be seen.  It is important for you to know what information lenders are reviewing in order to make a lending decision based on your loan request.

Most companies report their loan records to credit reporting agencies.  Utility companies and some smaller institutions such as credit unions, may not report.  Lenders typically review the last twelve months of your payment activity.  They will look to see how many late payments you have had during that time.  What a lender considers late, and that which is reported, is greater than 30 days past due.  For example, if your mortgage payment is due on June 1^st, it would report as 30 days delinquent as of July 2^nd.   Many people juggle which payments to make within their monthly budget.  I strongly recommend that you pay your bills in this order:  mortgage, other installments (car), revolving, medical, and collections last.  Let me explain why.

A collection account is one that reached a point of default where the lending institution writes it off as a loss.  Other collection agencies by the “paper” or loan and begin to make collection efforts to make their money.  Most collection agencies will settle for a lesser amount if negotiated properly.  Because the debt has already reported to the credit bureaus as a charge off or loss, the damage is done.  The collection agencies may report the debt again on your credit report.  Paying that last makes sense.  Focus on maintaining what is most important, shelter and transportation.  Your consistent payments efforts are what lenders call, a history.  Having a history of late payments tells a lender that you will probably pay late in the future.  Therefore, they price your loan higher for that risk.  A proven payment record gives the lender confidence you will pay your loan back on time.  You have a proven history of payments.

Consider how many trade-lines you have reporting and what the high credit limits are.  If you have open revolving accounts and you are not using them, close them.  This is important because from a lenders perspective, that is less available credit.  A lender considers what your capacity for additional debt could be.  If utilized, it could affect your current ability to pay.  We will discuss your ability to pay in the debt to income section.  Having revolving credit cards with high credit amounts tells a lender you could choose to charge that much.  If the account is closed, the trade-line will only report the history of your payments, but show you no longer have access to additional debt.  You can’t charge any more.

If you decide to co-sign for someone, recognize that the loan will affect your personal credit.  It will report on your credit file just as your own debt would.  If the person you co-signed for doesn’t make the payments on time, it will report as delinquent debt and can damage your credit.  I am sure you have all heard about your credit score.  It is a scoring model to help lenders assess credit and the risks involved with each consumer.  Most models consider the higher your credit score, the better your credit worthiness.  There are several different models, the most common is FICO.  There are thousands of factors that affect your FICO score.  A credit inquiry is one of them.

When you fill out an application for a loan, it reports as an inquiry.  An application is almost automatically followed by the lender “pulling” your credit report.  That means they must assess your credit history and allow the lender to make a lending decision.  The inquiry will report whether or not you are approved for the loan you were applying.  A lender considers credit inquiries with an implied risk.  The more you are “shopping” the more credit exposure you could take on.  If you have multiple inquiries, but no resulting trade lines, that is another inherent risk associated with your credit profile.

A thin credit file is not always good because it doesn’t establish an ability to pay.  If nothing reports to your credit file the lender has no way to know how you will pay in the future.  It is important to establish credit trade-lines even if you don’t need to.  For example, if you have an option to purchase a large appliance on a same as cash option, take it.  It will report as a trade-line and allow you to make monthly payments.  You may be able to afford to pay cash, but if you need to build a credit file, this is a great way to start.  As well, applying for credit cards is not a bad thing.  Having one or two cards that you can use, but can afford to pay off monthly, will help you to establish a history of credit and payment activities.

In summary, a lender will review your entire credit profile when making a lending decision.  You represent low risk when you have made all your payments on time and don’t have too much debt available to you.  On the other hand, you are a risk if you have shown an inability to make consistent monthly payments or have allowed a debt to be written off as a loss.  Bankruptcies are a whole story in themselves that will not be addressed in this publication.  Finding a way to handle debt and pay it off in half the time is what United First Financial can do.  Be mindful of the damage a late payment can have on your ability to qualify for a loan or get the best rate available.  Your history will determine your future.

© Submit to Any - jjtcomputing.co.uk

Tags: banks, credit, credit reporting agencies, Debt, fico score, loan, mortgage

Loan Modification Strategies To Help You With Debt

Current Economic Times

Due to years of aggressive lending in the prime and sub-prime markets, the mortgage industry and banks have suffered serious losses.  Although many people believe banks want to take your home that could not be farther from the truth.  Banks take huge losses when they foreclose on properties.  With the suffering economy, many banks are going to drastic measures to keep customers paying and in their homes.

As little as two years ago, banks would not even talk to you unless you were three payments behind on your mortgage.  That is not the case now.  Many lending institutions and banks will even solicit you when you are current, in an attempt to curb losses.  Take advantage of the tough economic times and try to get lower mortgage payment now.

One of the most commonly used tools used by banks to prevent foreclosure is a loan modification.  In essence, a loan modification is like a refinance but with no closing costs and much less hassle.  Banks are doing hundreds and thousands of loan modifications every month.  You should be one of the lucky customers that receive a lower interest rate and payment.  But you must know how to negotiate and what to ask for.

This guide is an easy overview that can help assist and guide individuals in the process of a loan modification.  This guide is written by individuals who have worked in the banking and mortgage industry for many years.  This guide will give you an “insider’s” view on the easiest way to get approved for a loan modification.  By investing a small amount of time in reading the material enclosed and following the simple steps, it will lead to better negotiations and a lower mortgage payment.  If you want to keep your home but cannot pay your current high payment, this is the guide for you.  Also, if you are in a variable rate mortgage and are worrying about when your next rate increase will happen, we can help.  Negotiating with banks can be tough, but once you know what they are looking for, you can become a professional at getting the lowest mortgage payment possible, with little to no cost. Even if you can afford your current payment, it never hurts to keep more money in your pocket, try for a lower payment, in many cases your may get approved.

What is a loan modification?

A modification allows for a restructuring of your loan.  It can include past due payments, principal, interest, costs and fees to be waived or added into your principle balance for a fresh start.  Capitalization means anything outstanding such as interest, fees or late charges can be added to your principle balance.  You will hear this term often during the loan modification process.  Also be aware that your principle balance may increase after the loan modification process.  However, now banks are waiving a lot of the interest and fees.  An important tip is to refer to the lack of equity in your home, ask if they will waive the fees and costs versus capitalizing.  Banks often do not want to add these to the principle balance because they will be in worse equity position if you stop paying.  It never hurts to ask, but make sure to stress the current value of your home, if you make it appear that there is no equity in the home, there is a better chance you can get some or all of the interest and fees waived.

A loan modification also allows for the original payment, term, balance and/or interest rate to be changed if needed.   The interest rate is usually lowered to allow for a lower monthly payment.  At the same time many banks are drastically extending your loan term with a rate reduction to allow for an even lower payment.  Some banks are extending terms to 40 years, just to keep the payment affordable for customers.

Loan modification terms can be permanent or temporary.  It is always better to try to negotiate for a permanent modification so you are locked into your new lower payment for the entire loan.  Many banks do not like to give lower rates for the entire loan, but it never hurts to ask.

Getting started in the loan modification process

To get started and on your way to a lower payment you must first determine which department handles the loan modifications.  Usually it is the Loss Mitigation, Loan Workout or Homeowner’s Assistance Department that handles the loan modifications.  Banks call these departments’ different names; however the typical name is Loss Mitigation.  If you contact any bank or lending institution and ask for the Loss Mitigation Department they will know what you are asking for.

To get started you will need to contact the Loss Mitigation department and advise them that you cannot afford your current payment and need assistance.  You can also ask them if there is any way that you qualify for a lower payment.

Most lenders will ask you to complete a financial packet, which includes a detailed list of all of your monthly expenses and net income. This may sound difficult; however it is simple and takes only 30 minutes to fill out.  It is important to show enough extra money left over each month to pay reduced payment but make sure you show you cannot pay the current payment.  Many banks use a formula to determine what you can afford, which varies from bank to bank.

Example:

If your net or “bring home” income is $2,300 and you’re your current mortgage payment is $700 a good financial application will look like this:

Car payment                        $250

Food                                    $300

Gas/Electric                 $250

Car insurance/Gasoline        $300

Telephone/Cell                    $50

Trash                                   $25

Water/Sewage                      $25

Credit Cards                        $100

Student Loans                      $100

Child Care                           $350

Prescription Medicine $50

Total Expense                     $1,800

Net Income                                 $2,300

Subtract Expenses                      -$1,800

Surplus                                        $500

Factor for Misc. Expense           -$50 *

Affordable payment                   $450

*Banks use 10-20% calculations as an allowable surplus for unexpected expenses

The example above shows that you can only afford a monthly payment of $450 versus the current $700 payment.  Therefore, to put you into a payment you can afford the bank would need to lower the rate and extend the term enough to lower your payment to $450.  This is a general example, but allows you to see how it works.  The bank often keeps their current payment out of the equation and backs into the payment amount that you can afford.

It is important to remember and list all expenses paid out each month.  Many banks will make you provide a bank statement to prove your expenses and a pay stub to show proof of income.  So be careful not to list items too high as that will bring questions and may cause you to show additional proof.

Beware, that most lenders also pull a credit report to validate the information that you provide.  Please be as thorough as possible.  The other living expenses such as food, utilities, insurance, prescription medicine cannot technically be proven, so this is the area where you can be a little creative.  All of your expense contribute to your full financial picture and show your ability to pay.

Loss Mitigation Departments can send you the Financial packet and list of required documents (pay stubs, bank statements etc).  However, many banks now have the version online, so ask, it can really speed up the approval process.

Modification basics

It is important with a loan modification that you show some ability to make a payment.  Many people want to exaggerate their expenses in order to show no excess income.  However, if that is the case the bank many times will not approve a loan modification because your financial picture shows you cannot afford a realistic payment.  If you show no ability to pay, then the bank will often times suggest that you sell the property.  Therefore, it is important to show the ability to pay, but only the ability to pay a lower payment than you currently have.

Loan Modification types

There are several different types of loan modifications.

• Permanent Loan Modification- this reduces the rate for the remaining life of the loan.   This is the best type of modification because you will get to reap the rewards of a lower payment throughout your loan even if your financial situation improves.

• Step Loan Modification- this type of loan modification temporarily reduces the rate for a specified period.  Then “steps” back up to your normal rate.  There are several types of Step modifications.  There are one step modifications where the payment goes for a set period then goes back up to the current rate in one transaction, when the step period expires.  There are also multiple step adjustments on some step modifications.  For example the rate will be lowered for a specified period then gradually return to the current interest rate over a period of a few years.

• Balloon Loan Modification- this is the most dangerous type of loan modification.  It allows for temporary payment relief, then similar to a balloon loan, after a set period of time the entire loan balance balloons and becomes due and payable.  This should only be used in extreme cases and when you are confident you will be able to refinance the balloon amount when it comes due.  If you are not careful, if you cannot pay or refinance the balloon amount, foreclosure can begin and you can lose your home.  Beware of this type of loan modification and try to avoid it.

How to speed up the approval process

Many banks and mortgage companies have the financial assistance applications online.  Some banks have the full application online such as National City Mortgage.  Their application process is so advanced that you can even look at the status of your application online.  Other banks such as Washington Mutual have the full financial application online, where you can print it and fax it.  Other mortgage companies have more limited forms to fill out online.  If the form is simple and requires very little financial information, they are simply preliminary forms that are forwarded to the Loss Mitigation department, who will contact you later to obtain more detailed information.

The online forms are the quickest way to get your application reviewed.  If you run into technical difficulty many online application websites for major banks have ways to request technical assistance. CitiFinancial Mortgage has a website where you can fill out a form requesting technical assistance if you are having difficulty with their online form.

The paper intensive process

Many of these financial applications are accompanied with a checklist of the additional information needed with your financial application.  Many banks require one or two pay stubs from each borrower, accompanied by W2 forms and bank statements.  The trend in the industry is now geared to requiring less paper documentation.  However, if the documents are listed on the form as required it is important to send them.  In many cases your file will be denied and closed simply because you do not have all of the required supporting documents.  To ensure your files is reviewed in a timely manner make sure it is accurate and complete.  Also include alternate numbers to reach you.  In many cases they may not have valid phone numbers for your account.  Also, if you prefer to correspond via email only, include your email address.  Many banks prefer to send documents and correspondence via email.

Lender Guidelines

The guidelines to qualify for a loan modification vary across the industry.  Some banks even charge a modification fee of $500-$750.  However, with the economy in shambles, many banks now waive the modification fee.  Most banks will require the first lower “modified” payment to be made at the time of the modification.  This first payment shows that you have the ability to make the new payment amount.  Some banks require a total of three new modified payments be made before they will modify the loan.  These banks want you to show a renewed “willingness and ability” to make the payment. In other words, they want you to prove you can make the payment. They assume that three months of making the new lower payment amount shows you can stay on track.  Whichever down payment or fee is required, it is necessary.  It is still much cheaper than a refinance and will pay for itself in only a few months.

Some banks require subordination’s or approvals from second mortgages, which can delay or even derail the process.  Mortgages companies are now skipping the subordination process and modifying the loan without re-recording the new modification agreement.  If a bank is going to record the new modification agreement on your property you may also be required to pay a recording fee, which can be a few hundred dollars.

Helpful hints and tips

When you contact the Loss Mitigation department get a full name and number of the representative you are talking to.  Also get a direct email address to this person.  This person will be your main contact during the process.  You do not want to always be routed through the frustrating maze of toll free numbers and departments every time you call in.  Taking the time to get a direct contact is essential to keep in close contact on the status of your loan modification.

Meet the deadlines set forth in your agreement.  Often banks will offer a modification to your loan with a deadline attached.  If the deadline is missed, there may not be a second chance.  So hit your deadlines and dates.  Also include any down payment required by the deadline.  You do not want to give them any reason to revoke their offer. Make sure you are prompt in responding and sending in all required documents.

Bank employees often have “quotas” to hit at month end. Some are even paid bonuses based on how many customers they help.  So your deadline will most likely be prior to the end of the current calendar month.

Closing

A modification can be a great tool to lower your payments and keep your house.  However, the federal government regulates banks and sets guidelines and parameters for workouts.  Currently most banks cannot complete more than two modifications within a five year period.  Also, there are limits on how old the loan must be. Some lenders require 9 to 12 months from the original loan date before they will consider a loan modification.

Government loans such as FHA, Freddie Mac or Fannie Mae loans have special guidelines and requirements for their loan modifications.  They currently will lower the interest rate very little if any and require that the loan be three payments delinquent.  They are behind on the times and their guidelines are sure to loosen up as well.

Please refer to our other guides and books for helpful hints on other workout option or specifics on government loans.

© Submit to Any - jjtcomputing.co.uk

Tags: banks, financial, foreclosure, homes, Loan Modification, loans, mortgage