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.

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

Why does it take So Long for Me to Pay off My Debt?

Debt is a part of our everyday lives. Are world goes on because of debt. Since the beginning of time, we have made a system, to have things that we couldn’t afford, and set up a debt payment to pay it back. Weather is was a horse or a house, we find a way to get it and pay for it on time.

If I were to buy a home, the bank would give me a loan to purchase that property, and issue me a mortgage. This word mortgage comes from two root words, “mort”, comes from the Latin word meaning dead or death, and “gage”, means a pledge to forfeit something of value if the debt is not paid. So this mortgage is literally a death pledge. If I don’t pay my mortgage, they will take my home, or something of value. If I pay my mortgage the pledge is dead also. Either way, through the payment or nonpayment of the mortgage, the pledge is a dead pledge.

Now homes are not as valuable as they once were. Back in times past you might be able to barter something else of value, like one of your children, or an animal, but today we are much more sophisticated.

The beginnings of a mortgage system have been found, as early as 1190. English common law included a law that would protect a creditor by giving him an interest in his debtor’s property. According to this law, the mortgage was a conditional sale. Although the creditor held title to the property, the debtor could, in the event the debt wasn’t paid, sell the property to recover his money.

Doesn’t sound like things have changed too much today!

We live under a free enterprise system called capitalism.  Capitalism is an economic system in which wealth and the means of producing wealth are privately owned and controlled, rather than state owned and controlled. The one downfall of capitalism that can bring the whole structure down is greed. We are seeing plenty of that right now in our economy, and many think that we are heading to a socialistic society, where the government controls and runs everything.

If I have a 30 year mortgage, for 200,000 dollars, at a 6% interest rate, your payments will be 1199.10 a month. Now, let’s examine how this exactly works.

Mortgages today are designed specifically to benefit the bank. They are set up so that all the interest that you pay the bank will be made in the front end of the loan. The loan is top heavy with interest, and that interest belongs to the bank, not you. This is no accident. The bank makes sure that they will make their interest off the loan, before you make any payments to the principle. And there is a lot of interest for the bank to take. There is a name for this interest. It’s called compound interest.

Your mortgage is a closed end loan. It is interest which is working for the bank and not you. When you closed on your home, you were given an amortization schedule. This schedule is a schedule of every one of your payments to the bank, from your first one to the last one. If it is a 30 year mortgage, it will be for 360 months, a fifteen year mortgage will be 180 months. It will show you the amount of your payment that goes to interest, and the amount that goes to principle for every month that you have this mortgage. This schedule cannot be altered or deviated from. You must make every payment, as scheduled, on the date it is scheduled for. Usually there will be a late charge added to those payments that are late.

But what if I came up short one month and could not pay the full payment. Could I ask the bank to let me pay just 1100 dollars this month? Well, I could ask them that, but they would say no. The full amount is due every month and they will take nothing less.

Just as your mortgage is an example of a closed end loan, your credit card is an example of an open end loan. If you were to go out and charge up 500.00 dollars on your credit card, but when that credit card bill was due, you paid the full 500 dollars, how much interest would you pay on that credit card? If you said, none, you are absolutely right. You would pay zero, because the interest that you pay on a credit card is simple interest. It is figured on the average daily balance that you carry on that card. No balance, no interest. You can make as many payments that you want on your card. You can move money in and out of the balance; there usually are no limits as to how many times you can do this.

Interest is a part of our everyday lives. It’s everywhere, and it is what makes our economic system move. Interest can work for you or it can work against you. Albert Einstein said, “Compound interest is the eighth wonder of the world. Those that understand it, earn it, and those that don’t, pay it.” The banks certainly understand it and have been using it since they first existed. They get you and me into a death pledge, (mortgage),  that many of us are unable to get out from under. Today, one in every ten homes is vacant because someone was unable to fulfill their pledge to the bank and lost their home.

Compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. The act of declaring interest to be principal is called compounding (i.e., interest is compounded). A loan, for example, may have its interest compounded every month: in this case, a loan with $100 principal and 1% interest per month would have a balance of $101 at the end of the first month.

Another example of compounding interest is this; what would you rather have, one million dollars or a penny doubled every day for the next thirty one days? Take your time…. Grab your calculators…. Give up?

After thirty one days you would have, ten million, seven hundred thirty seven thousand, and four hundred eighteen dollars, and twenty four cents.

Now back to our 200,000 dollar mortgage. It will take you twenty one years before you make it to the half way point of your mortgage. Twenty one years of your hard earned money going to the bank. After twenty one years of payments, you will still owe the bank 100,000 dollars. Do you think the bank understands how compound interest works? They do and you pay them interest, lots of it. As a matter of fact, after thirty years of monthly payments to the bank of 1199.10, your death pledge, oh, I mean your mortgage; will have cost you 231,677 dollars. That’s why it will take you thirty years to pay that mortgage off. Your 200,000 dollar mortgage will have cost you 431,677 dollars by the time it is all over. You will have bought one home, but you paid the bank for two. That just doesn’t sound right to me.

Our economy is changing. The more we understand how debt and interest work, the better we will be able to secure our financial situation, and learn to live debt free. Yes this is a fact that thousands of Americans are learning and living debt free, through United First Financial.  How about you? Continue to follow this blog and we will discuss ways to achieve this goal. The good debt that you should have, and getting rid of the bad debt and the interest that goes along with it. Instead of paying interest, let’s start using interest to our advantage and our benefit.

Financial institutions want to keep you and me in debt. They don’t want us to learn how money really works. They don’t want you to know how compound interest works, because the longer they can keep all of us in the dark about money, the more of yours they get to keep.

As you can see, interest is a very much needed element in our economy today. We pay it, and we earn it but it is what keeps our economy working. As consumers, or entrepreneurs, we all need to learn every aspect of what interest is, and how it works. It can be the defining line on whether we succeed or fail.

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Tags: bank, Capitalism, Debt, economy, home, interest rate, mortgage

Dealing With Emotional Factors Leading To Debt

Why Does It Take So Long For Me To Pay Off My Debt…And
How Can I Speed It Up?
There are many reasons why your debt seems to be ongoing for a lifetime. Many of the
following reasons may be familiar to you, things you have said to yourself, your
spouse or others. Perhaps you will see something here that will trigger a new thought
pattern in the approach to becoming debt free.
What’s Your Plan?
Most people, although well intentioned, have absolutely no plan for becoming debt free. They
may occasionally pay an extra $10, $20 or more on a particular debt thinking what a large
difference that will make. That is a good move but it’s the perfect example of the
proverbial drop in the bucket.
A good plan includes many components. Some, and I repeat myself, some of the components
are:
· Determine the amount of discretionary income you have to work with each month.
· Know every detail about each debt you have. Some of these details are the rate you
are paying on each debt, whether the debt is revolving or installment in type, balance
on each debt, length of time or payments remaining on each debt and whether the debt
has a fixed rate or is an adjustable rate. This will be discussed in later chapters.
· Determine a strategy. Which debt is first, 2nd and so on until you are debt free. This is
computed using Factorial Math. This requires a computer program or a plan that
includes Factorial Math within that program. This will be discussed in later chapters.
· Get educated on strategy. Debt payoff strategies are not “one size fits all.”
· Find out where your mortgage fits into your plan since interest is calculated in a
different manner than your other debt.
· Think “long term.” You didn’t get into debt over night and you certainly won’t be able
to get out overnight.
· Increasing income and reducing outgoing fits will help you but certainly is not
enough to bring the results you are searching for. It is a component of a good plan,
not the total answer.
It’s enough to make you want to drop your pencil, put away your calculator and go
outside in the sunshine and feel the fresh cool breeze on your face isn’t it.
Unfortunately, that’s what most people do. They give up before they ever get started. Therein
lies the problem with why most people don’t have a plan today.
It’s just the way it’s supposed to be.
Our first experience with debt comes to most of us between the ages of 16 and 18 years of
age. It’s called “our first car.” Although we may have a job after school and during the summer
there just isn’t enough income to pay cash for the car and insurance coverage. After all, if I
were to pay cash I might have to save for a year or more to get enough money to pay for both
the car plus a year’s insurance. After all, there are clothes to be bought. There’s money
needed for fun and trips and all around good times to maintain ones social status. What if the
car breaks down? I’ll need money for repairs.
Enter Mom and Dad or the Grandparents who either co-sign or front the money for the
car. Often times, Mom or Day will take on the loan assuming that we will honor our word and
make regular payments each month. What quite often happens next is a scenario many of
you may already have experienced so I won’t go into that here. Even if you haven’t
experienced it yet you still know what comes next.
So here we are age 16 to 18 with our first debt. We make the first 3 payments on time then
something comes up and we need the money and skip the 4th payment. Our payments start
getting sporadic and so it goes until we either get the car paid off or Mom and Dad just
give up and pay it off.
Now we’re 21 or older and we have our first credit card. We manage to maintain that card
somehow and we get a 2nd card. As we get older we acquire more cards. We marry, increase
the joint incomes and get more cards and more cars and more stuff for the happy
home (plus babies) and one by one the debt mounts.
Years pass – we decide “Hey, we don’t need all these payments, all this debt” but we
rationalize that we are, after all, doing what everyone else is doing so that’s just the way it has
to be. “We’ll pay everything off when we get the raise or the better job.”
When 5 to 10 more years have passed we then resign ourselves to the fact that being is debt
is simply the way everyone lives their lives and we will be in debt forever after all, how could
we possible get all this debt paid off. It’s just the way it’s supposed to be.
Let me say that there are ways to accomplish complete debt freedom without sacrificing your
lifestyle.
Availability of Credit
Until recently, the availability of credit was a contributing factor to why we rack up so much
debt. For most of our lives we’ve come to expect one or more envelopes in the daily mail
offering us additional credit cards or some type of additional credit. You passed on some and
accepted others. Over the months and years the credit cards in your wallet or purse grew to a
surprisingly high amount along with your available credit.
Some obtained new credit to help manage and pay for existing credit going down a road with
the brick wall at the end. At this writing, credit is difficult to obtain. We are forced to utilize and
live on the credit we have. Some people with equity lines have had their lines frozen. We now
need to manage more payments with the same or less amount of income, not a pretty
sight.
The thought of becoming debt free sometimes becomes hard to imagine when one is juggling
so many payments. I would like to tell you that you should remain hopeful, do your
research, and watch for more information from us regarding the methods and
possibilities for becoming debt free. If you are motivated and persistent you can live a
debt free lifestyle.
Should you be offered new credit, do not accept it. The thought of new credit may seem to be
helpful at first but just remember; new credit was a contributing factor in bringing you to where
you are today.
I trust my bank.
Oops! “When we really needed that new car our bank or credit union gave us our very own
great low interest loan. They really did us a favor!” If that’s not what you said, I would guess
that it is what you thought at one time or another. You may or may not have actually needed
that new car. I say that simply for your consideration. You may have needed it; then again,
you may have simply wanted it.
In any case, the bank or credit union thought it was a good idea so let’s do it, right. I’ve been
there. Perhaps we all have. Its so easy. Lending institutions have slowly convinced us
that debt is normal and just a part of being a good American.
We are bombarded with ads for more debt through TV, newspapers, the Internet and by mail.
There’s so much media coming at us constantly we begin to believe that it’s “normal” to be in
debt for most, if not all our lives.
It’s our responsibility to look beyond the advertising at the big debt picture and begin
perhaps even with baby steps to filter this out. This is one of the first steps to acquiring a
mindset that it really is possible to be debt free.
Principal and Interest
Compound Interest, simple interest, amortization, fully amortized, and many other financial
terms will not be discussed in detail here. There will be some discussion of these in other
chapters but just a reminder, our purpose is to leave you with the hope and the
knowledge that it is possible to live debt free.
In a perfect world, what if you could cancel all the interest off of all your debts? Every
dollar you paid would reduce principal. How long would it then take you to pay everyone off?
It sounds great doesn’t it? We all know that it isn’t a perfect world but, what if you could
cancel forever a large portion of your interest charges on your debt. How great would that be?
Hold that thought as you read the rest of this book.
We Need Help!
Think back from your elementary school days through college. How many of the students
were really good at math in any given math class. Not many right. Formulating a plan for
becoming debt free is a struggle for the best of us, even those who have always
thought they had the gift of mathematics.
Without a computer and the proper software it is impossible or nearly impossible for the
average person to devise a plan, work that plan on a monthly basis is such a way as to stay
on target for becoming debt free. Going back to school won’t get it done. Buying a book won’t
get it done. Neither will listening to the financial media gurus. While all this good information,
very little of it ties together for you, so you remain stuck, head in hands with a figurative
question mark above your head.
Do we have the answer? Well, yes we do. In fact, there are several ways which we will
share with you. We will also share the ultimate strategy that we have found to work in the
fastest way possible. First, we will break down debt and all that it entails. Then, we will give
you a better understanding of debt, what it is, how we arrive at a life of servitude because of
debt, but most of all, we wish to give you hope and instill the knowledge that you don’t need to
spend the rest of your life suffering under that debt servitude. Don’t worry. We will offer you
the solution. We wouldn’t want you to be left in the dark. Just hang in there and keep
reading. You’re already making progress by thinking about your problem in a new light.
OK, I got all that. So what do I do next?
At this point we want you to simply understand that you don’t have to remain in debt for
the rest of your life. There are ways to become debt free with grace and ease without
disturbing your lifestyle to any great extent.
In order to adopt this way of thinking you will need to accept what I like to call a Paradigm
Shift. Think about it. We are asking you to go from thinking, “debt to the grave is normal,” to “I
can live most of the rest of my life debt free.” Wouldn’t you call that a Paradigm Shift?
So, start imagining your life debt free. What would you be able to do with the income you
are receiving right now if it wasn’t all going out the door to pay off your debts? How
would it feel to have the peace of mind that comes from owning your own home free and
clear? It’s OK to start thinking this way because we are going to show you how to realize
those dreams in less time than you probably think.

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Tags: car, credit, credit cards, Debt, job, mortgage, school

Short Sale Strategies and Overview

Tips on selling your home short of foreclosure

This information is a general overview and guideline and is not necessarily state specific.

This information is distributed with the understanding that the writer is not rendering any legal or professional services.  Mortgage professionals developed this manual, however it should not be used as a substitute for legal advice.  If legal or other professional advice is required, these services should be retained.

Any federal tax discussion contained in this written communication is not intended to be used and cannot be used for the purpose of avoiding federal tax penalties imposed by the federal government or promoting, marketing or recommending to another party any tax related matters.

Table of Contents

1. Current Economic Times

1. What is a short sale?

1. Parties involved in the short sale process

1. Short sale basics

1. Getting Started

1. Manage expectations and timelines

1. The paper intensive process

1. Lender Guidelines

1. Prepare HUD-1/Settlement sheet and send to lender

1. What is a BPO?

1. Patience and follow up

1. Approval letters and parameters

1. Short sale deficiency balances

1. Professionalism and ethics

1.  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.   Americans generally spend aggressively; it has become the American way.  This aggressive borrowing mentality combined with aggressive lending and a decline in the housing market has led to the “perfect storm”.  Many financial institutions are faced with hundreds of thousands of over-valued homes and millions of loans facing foreclosure and serious credit losses.

Many borrowers made decisions to continue to refinance their homes in order to finance their current lifestyles.  Now borrowers must face the fact that if they are experiencing financial hardship, they must work to rid themselves of their over-mortgaged property.  That is where a short sale comes into play.  Selling a home through a short sale is not an easy or quick venture.  It can be frustrating and overwhelming for all parties involved.

This guide is an easy overview that can help assist and guide individuals in the process of a short sale.  By investing a small amount of time in reading the material enclosed, it will lead to better negotiations and a more easy path towards completing a successful short sale.  Ridding oneself of over-mortgaged property can be a relief and can help turn the page on a new tomorrow.

Lenders open their eyes to the current crisis

• Home values are on the decline
• Adjustable rate mortgages reset causing increased delinquency
• Real Estate inventory increases across the country
• Home values are decreasing at alarming rates
• Homeowners are stuck

Banks are willing to negotiate.  Contrary to popular belief banks are not in the market of owning homes.  In reality when banks take properties through foreclosure and into inventory they lose up to 60% of their loan balance.  This amounts to large losses and is incentive for banks to entertain short sales.

2.  What is a Short Sale?

A short sale is an approved sale of a property for less than the full payoff on the loan.  Generally, a short sale is used when a borrower cannot afford to maintain payments on the property due to financial hardship.  The funds accepted by the lender are “short” of what is owed.

Many borrowers make the mistake in not realizing that there are numerous arrangements or verbiage placed in acceptance letters regarding the deficiency amount.  The deficiency is the amount that is left over after the short sale is accepted.  This booklet will give you valuable information to negotiate properly during the short sale process.

Most lenders have departments that handle their short sale negotiations.  These departments go by a variety of different names depending on the institution.  The most common names are Loss Mitigation, Workout Team or Homeowner Assistance Group.

It was customary within the last few years that many Loss Mitigation or Workout Teams would not entertain a short sale if the loan were current.  Often times it was a pre-requisite for the loan to be 90 days delinquent.  However, tough economic times have forced many lenders to become much more pro-active in mitigating potential losses.  Most lenders will review short sales even when the customer is not delinquent.  Some lenders still resign to the fact that the customer must be delinquent in order to sell their home to a short sale, “borrowers beware” of these lenders.  A short sale can be a tough road and may even require the loan to fall delinquent prior to moving into short sale negotiations.

3.  Parties involved in the short sale process

• Lenders accepting a short sale- this includes any lender which holds interest in the property
• Third Parties- includes Homeowners Associates, judgment lien holders and the local property tax office.  All of these entities must be involved in the short sale process in order to “clear title” and negotiate properly
• Seller/Borrower
• Purchaser
• Funding Lender – this includes a loan officer or broker
• Loss Mitigators – the representative at the lending institution that will negotiating the deal and providing approval and acceptance letters
• Real Estate Agent – this is two part, due to the fact that most real estate sales have both a buyer and seller agent
• Closing Attorney/ Title or Settlement Agent- the closing agent will be facilitating the short sale transaction until funding

For the coordination of a successful and timely short sale transaction, it is important to remember the entire cast of characters involved.  Communication is essential in the proper coordination of a short sale.

There are even some companies or third party negotiators that take on the task of coordination of a short sale.  However, these companies complete the job at a cost to the consumer.  By following this easy guide, borrowers can negotiate their own successful short sale, potentially saving thousands in costs paid to third party companies.

1. 4. Short Sale Basics

There are several key factors that are important to remember when working on a Short Sale.

-The lender does not have to agree to a short sale, it is a voluntary agreement.

-The borrower has no rights to a Short Sale.

-A Short Sale is an optimal alternative to foreclosure action

-A Short Sale presumes an arm length’s purchase transaction of the property by a third party purchaser

-Seller/borrower will not receive cash at closing

-Realtor commission or any fees involved will be negotiated or reduced

-Sellers will not be retaining the property

Banks accept Short Sales for a variety of reasons.  Banks generally get more money from a short sale that by completing foreclosure and selling the property through the lender’s REO (Real Estate Owned) Department.

Foreclosure actions can be costly averaging $3,000+ to complete.  Not to mention the cost in property preservation and resale expense of marketing the home as a “bank owned property”.  Banks generally market their homes in “as is” condition with no representations or warranties, which drastically affects the overall sale price of the home.

All parties included below complete work during the short sale process:

• The Seller or Borrower
• The Real Estate Agents
• The new home buyer
• The Lender
• The Closing Attorney/Settlement Agent

Short sale negotiations requires a variety of skills including title clearance, brokerage, technical, paralegal and legal work.  However, the lender and closing title agent will facilitate most of the work for you, with no out of pocket to you.  Do not pay attorneys or short sale companies thousands of dollars; with a little knowledge consumers can maneuver through the process free of charge.

1. 5. Getting Started

It is important to know the value of your home prior to listing it with a realtor.  Obtaining a market analysis is a good way to start and is generally done for free by a realtor.  This will provide a good starting point in determining what the property is worth.

Secondly, order payoff quotes from your first and second mortgages.  At this point you will have an estimate of how much the property will sell for versus how much is owed on the property.  If your information indicates you will not have enough to pay off the property immediately call your lenders.

Most lending institutions have departments that specifically handle short sales and they can guide you through the process free of charge.  These department names vary depending on the lending institution.  However, many are referred to as Loss Mitigation, Homeowner’s Assistance Department or Workout Group, these groups can help you.

When making contact with the lender advise them that you need to open a file for a possible short sale and request a list of information required.

Most lenders require that you complete a financial hardship application.  This may sound difficult, however it is simply a list of your monthly expenses versus your monthly income.  It is important to show little to no means to pay in order to complete a successful short sale.  Beware, that most lenders pull a credit report to validate the information.  Please be as thorough as possible.  In most financial applications you must also include monthly expenses such as groceries, utilities, insurance, childcare and medical expenses.  This contributes to your full financial picture.  Please make sure you provide a thorough picture of your financial situation.

6.  Manage Expectations and Guidelines

Short sales may take a long time, often times you do not know how long it will take.  Depending on the lender it can take 1-2 weeks, which would be quick turnaround time.  Some lenders are so overwhelmed with the current economy that it can take 8-12 weeks for someone to review your file or your current offer.

There are no guarantees that a short sale offer will work out.  The house may still go into foreclosure.  It really depends on how willing the lender is to work out an agreement.

Also, it is important to work with your listing realtor.  Any offers from potential buyers, should be advised of the time constraints in receiving acceptance.  It is IMPORTANT to make sure when all offers are received it is clearly stated that they are “subject to bank approval”.  Any offers requiring 24-48 hour response need to be advised that the response time is dependent on the bank.  Generally formal short sale offers need to leave open time limits for acceptances and counter offers.  Buyers need to be aware of this guideline to avoid disappointment and in order not to anger potential buyers.

7.  The paper intensive process

After the offer on the property is received now the work begins in getting the paperwork together.  Attached is a list of items that may be required- all lenders have slightly different requirements, so check with your lender first.  This list will provide a good overview.

Paperwork Needed

• Authorization to release information – this is required so the lender can work directly with the realtor and title company.  This will help in keeping you out of the day to day and allowing these individuals to do the work for you.
• Listing Agreement- initial property listing agreement
• Purchase and Sale Agreement
• Hardship Letter- letter explaining her financial situation, which led to making the short sale necessary.  Usually describes things that are beyond the customer’s control, including illness, death in the family, adjustable rate loan or job loss.  This letter can be handwritten and is no more than one page in length and should be a polite request for assistance.  The most important message should be conveyed that the customer does not have the ability to maintain payments going forward.  A well-written hardship letter can help alleviate many unrealistic requests later in the process.
• Financial Statement or Packet – A form generally supplied by the lender which details your income and expenses
• Recent 401K, Investment or IRA Statements – required for all borrowers on the loan
• Copies of the last one or two pay stubs – required for all borrowers on the loan
• Last two years of tax returns – this requirement may only be required for customers who are self employed and unable to provide pay stubs
• Copies of the last one or two bank statements
• Any special forms required by the lender

8.  Lender Guidelines

Once you get the requirements on what is needed from the lender it is easier to proceed with the short sale.   Make sure that all of the required documents are sent, incomplete or missing information can further delay the approval process.  Many times buyers will walk away if the short sale takes too long.  Therefore, it is important be timely in supplying these items that are within your control.

Many banks require that all realtors reduce their commission to 5%.  This is often not negotiable.  Realtors are familiar with this, but should be reminded.  You do not want a stubborn realtor to prevent your short sale from taking place.

9.  Prepare HUD-1/Settlement sheet and send to lender

Many times the realtor or title agencies can prepare this for you.  It must include the purchase price, estimate closing costs, delinquent taxes.  All proceeds go to the lender.  You as the seller in all short sales must receive $0.00 from the sale of the home.  In some HUD workout programs seller cooperation is rewarded by allowing the seller $1,000 at closing.  But generally this is not the case, go into the short sale expecting zero and focus on the relief when you can rid yourself of the over-mortgaged property.

Once the lender guidelines are met and the proposed settlement sheet is completed, showing where the money is going.  Send the full package to the lender.  Make sure to include names and contact information in case additional information is needed.  Include any contract deadlines or foreclosure dates if applicable.  Also include a name and contact information for the BPO.

It is important to confirm that the lender received the packet.  Many times files can be lost in the chaos at the bank, especially in the current environment.  One follow up call to ensure the packet is received can relieve further delays.

10.  What is a BPO?

A BPO is a Broker Price Opinion.  Most lenders require an interior BPO on the property to ensure it is being sold at fair market value.  It is a real estate brokers opinion on what the property is currently worth.  It is important that your realtor be present during the interior inspection to answer any questions or point out factors in the house that contribute to the value such as roof repairs needed or any other negative factors.  The lower the BPO comes in, the better it is for you as a consumer.

11.  Patience and Follow Up

Now comes the hard part………………….the waiting game.

There are four essential keys:

• Wait- as previously discussed, this can take weeks or even months
• Have Patience- banks do not take huge losses lightly; it may require several levels of management to review the offer.
• Follow-Up- to ensure your information has been received and is being reviewed follow up regularly.
• Be Persistent- call your assigned representative and request answers and updates.  Remember the squeaky wheel gets oiled.  You want to be so persistent that they are anxious to get you an answer in order to prevent the excessive phone calls.  Your realtor can usually help you in making phone calls; it is basically their job to get the property sold.

12. Approval letters and parameters

Once the bank approvals the offer, you will usually get a phone call with a verbal acceptance.  However, a formal written Short Sale Approval Letter will follow.

This may be the most important part of the short sale.  Make sure to carefully read the wording regarding the deficiency, 1099 tax consequences and repayment terms.  These terms are essential and can be damaging if agreed upon hastily.  Terms after the acceptance letter may still be negotiable.

1. 13. Short Sale Deficiency Balances

Even though the short sale is negotiated, it is still important to review the terms of the deficiency balance.  The deficiency is the amount left unpaid after the sale of the property.  There are many ways to negotiate, including no repayment, some repayment or settlement in full.

1. 14. Professionalism and ethics

The closing title company and the realtor are professionals and should act accordingly.  Realtors are bound by ethics.  It is important to be able to trust your realtor, because they are on the front lines fighting and negotiating the best deal possible for you.

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Tags: federal government, foreclosure, HUD, legal, mortgage, real estate, short sale

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.

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

What You Should Know About Interest

What You Should Know About Interest

Interest is compensation to the lender for forgoing other useful investments that could have been made with the loaned asset. These forgone investments are known as the opportunity cost. Instead of the lender using the assets directly, they are advanced to the borrower. The borrower then enjoys the benefit of using the assets ahead of the effort required to obtain them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege. The amount lent, or the value of the assets lent, is called the principal. This principal value is held by the borrower on credit. Interest is therefore the price of credit, not the price of money as it is commonly believed to be. The percentage of the principal that is paid as a fee (the interest), over a certain period of time, is called the interest rate.

Interest is a part of our everyday lives. You can have it working for you or against you. Let me give you an example of what I am talking about.

Your mortgage is a closed end loan. It is interest which is working for the bank and not you. When you closed on your home, you were given an amortization schedule. This schedule is a schedule of every one of your payments to the bank, from your first one to the last one. If it is a 30 year mortgage, it will be for 360 months, a fifteen year mortgage will be 180 months. It will show you the amount of your payment that goes to interest, and the amount that goes to principle for every month that you have this mortgage. This schedule cannot be altered or deviated from. You must make every payment, as scheduled, on the date it is scheduled for. Usually there will be a late charge added to those payments that are late.

A mortgage for 200,000 dollars, at 6 % interest rate, for the next 360 months of our lives, requires a monthly payment of 1190.10 every month, but if I have some extra cash lying around, I could give that to the bank and ask them to put this extra money towards the principle balance of my mortgage. That would reduce my principle, thus adjusting the interest that I would have to pay. But what if I came up short one month and could not pay the full payment. Could I ask the bank to let me pay just 1100 dollars this month? Well, I could ask them that, but they would say no. The full amount is due every month and they will take nothing less.

Just as your mortgage is an example of a closed end loan, your credit card is an example of an open end loan. If you were to go out and charge up 500.00 dollars on your credit card, but when that credit card bill was due, you paid the full 500 dollars, how much interest would you pay on that credit card? If you said, none, you are absolutely right. You would pay zero, because the interest that you pay on a credit card is simple interest. It is figured on the average daily balance that you carry on that card. No balance, no interest. You can make as many payments that you want on your card. You can move money in and out of the balance; there usually are no limits as to how many times you can do this.

Ever hear of compounding interest? Compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. The act of declaring interest to be principal is called compounding (i.e., interest is compounded). A loan, for example, may have its interest compounded every month: in this case, a loan with $100 principal and 1% interest per month would have a balance of $101 at the end of the first month.

Another example of compounding interest is this; what would you rather have, one million dollars or a penny doubled every day for the next thirty one days? Take your time…. Grab your calculators…. Give up?

After thirty one days you would have, ten million, seven hundred thirty seven thousand, and four hundred eighteen dollars, and twenty four cents.

Compound Interest

As you can see, interest is a very much needed element in our economy today. We pay it, and we earn it but it is what keeps our economy working. As consumers, or entrepreneurs, we all need to learn every aspect of what interest is, and how it works. It can be the defining line on whether we succeed or fail.

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Tags: assets, compensation, credit, interest, loan, mortgage, principal

Debt! What About It?

DEBT! DEBT! DEBT! DEBT! DEBT! DEBT! DEBT! DEBT! DEBT! DEBT! DEBT!

Getting tired of that word yet? It’s just Debt! What about it?

That is a word that we are hearing a lot of today. The federal debt, state debt, bank debt, seems like everybody is in debt.

There are some people out there who aren’t in debt. They are out there, but they are far and few between. There are actually some people who don’t have a mortgage or a mortgage payment. They are probably your parents, grand parents, or aunt or uncle. Those are the people who learned, long ago, that they would bought a house, raise their kids, and live in it for the rest of their lives.

Not so today. The average person lives in their home for about five to seven years, and either moves to another home or refinances their current mortgage and gets locked into paying the bank a lot more interest  for another, long thirty years.

DEBT! Did you know the the last two years the national average of money that people are putting into their savings account is……ZERO! That’s right… I said zero. People are living paycheck to paycheck.  Nothing is going into our savings account. As a matter of fact, many people don’t even have a savings account.

But you know what is scary? People think this is OK. They think this is the norm. This is what we do. Buy things with money you don’t have so you can impress people that you don’t even like.

Do you know that there will be more people filing for bankruptcy this year then there will be people graduating from college? Now that is sad. That is real sad, but that is the state of our financial mode of thinking.

Everybody attaches emotion to their money. You want to get someones’ feathers ruffled, just start talking to them about money. Especially their money. The saying is, “don’t talk to people about politics and religion.” Well, you can toss money in there now also.

Now, I don’t mean to draw any barriers, but there is a definite line and perimeters to the way people think about money, and how they use it. Social class, religion, location, ethnicity, race, and gender. All these groups have a different emotional side to money and if we look at these emotions, I think that they will guide us to the answers of why and how we get into debt.

That is what this blog is about. I want to invite you on this journey with me to find the answers to the questions about our debt and how we can find the road to financial freedom… Can we?… Can we really learn to live debt free? Can we really get out of this mess and back on the road to prosperity? I want to find the answers to these questions and more, and I will need your help.

I too have struggled with debt most of my life. Living beyond my means. Wanting everything and wanting it now. Not worrying about the future or who would pay the price. Maybe, I am describing some of you.

Come with me on this journey. I need your input. I need your experiences and the way you coped with your debt. The ways that worked for you and the ones that didn’t.

I am co authoring a book, with six others, my business associates, and I would very much like to hear from you. Leave your comments, ask your questions, and give your advice.

I look forward to hearing from you all, and I can’t wait to travel this road with you.

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Tags: bank, bankruptcy, Debt, house, money, mortgage, prosperity