Archive for Credit Bites
October 24, 2007 at 4:44 pm · Filed under Bites of Buckwheat, Bites of Washington, Credit Bites, Mortgage Bites
Life can be overwhelming at times. It happens to us all. There’s information overload, the mounting costs of everything from gasoline to college educations, the internet explosion, health care cost increases, international strife, the whole political tennis match, FHA reform, rising foreclosure estimates in America and the day-to-day business of living while raising families. Have you tried to help your children with their homework lately? It’s no wonder many Americans consider “letting the house go back to the bank” as a viable solution to the ever-present stress of living life.
As a solution to debt problems, Foreclosure may not provide the financial relief some homeowners are seeking. Rather than ending up with a more managable budget after foreclosure, many consumers are horrified to find they must still make payments to a lender on a home they no longer own. The problem didn’t get better, it got worse.
Homeowners with significant equity in their homes tend to fight vigorously to save them. Homeowners who believe they have little to lose in equity, are more apt to “throw in the towel” when financial times get tough. These homeowners often get hurt the worst. And its not uncommon.
A deficiency balance occurs when the proceeds of the sale are insufficient to cover all the costs associated with the property being sold. First, there is the mortgage (sometimes there are more than one). Then there are late fees, attorney fees, court cost and any penalties that were assessed during the Foreclosure process. Sometimes there are back taxes that must be paid and unpaid utility bills. Once all these amounts are added up, they often exceed the amount of money generated by the sale of the property by tens of thousands of dollars. Now the homeowner is a renter with a huge liability owed on a home they no longer own as well as the cost of rental housing.
One of the hardest things for any of us to do is to keep a clear head while under financial pressure. It is the one time we can ill afford to make a poor decision. A decision to allow a home to be foreclosed that results in this scenario, does nothing to alleviate the stress a homeowner with financial trouble is under. It just prolongs the misery. Think twice before “throwing in the towel”. Is there ANY other way to work your way out of this tight spot?
To make matters even worse, if the Lender decides to “Forgive” the deficiency balance, don’t be surprised if the IRS labels this as Income and demands taxes on the money. They have done it many times in the past.
September 6, 2007 at 12:23 pm · Filed under Bites of Buckwheat, Credit Bites, Mortgage Bites
In March of this year SoundBiteBlog.com published an article titled There Is Hope After Foreclosure. On September 4th we received an email that reminded us once again just how small and personal the planet is when you maintain a blog.
DM from California sent an email asking that I expand on the original article. Her view is that now, more than ever, consumers will be searching for information concerning what to do after a foreclosure. Her comments got me thinking and I tend to agree with her.
“Dear Mr. Flanders,
…I came across your article regarding life after foreclosure while doing a search of the same title…
…I am a mortgage consultant in California and have been for almost 16 years…
…I am so concerned about the state of and future of our industry. What’s to happen not only to us, but also our clients?…
…I have spent much time reading and researching about the current foreclosure activity nationwide…
…Yours was the first article I was able to find about life after foreslosure. I was wondering if you would have any ammendments or thoughts to add to the article given the date you originally wrote the article and the present state of the industry?…”
First - Let’s Face The Facts
Some facts of life are unpleasant to face, but they must be faced nonetheless. The facts about recovering from a foreclosure fall into the unpleasant category. But this is no time to delude yourself with thoughts like “everything will work itself out”. After a foreclosure you need to “work things out”. You must be proactive; you must be consistent and determined. Your efforts will pay off in short order.
You will need a down payment if you want to purchase a home within 24 months of the foreclosure.
If you want to purchase another home in less than 24 months, expect to bring cash to the transaction. That’s the bad news. The good news is, if you are determined to purchase as quickly as possible and you have saved up a down payment, you can buy a home in as short a time as 12 months plus 1 day. These mortgage loan programs will require between 10% and 25% down payment. The terms of these loans (interest rates, pre-payment penalties, etc) will not be attractive. But, these programs will allow you to get back into a home quickly. This new loan will show up on your credit report as a mortgage and it will help improve your overall credit picture. But it will do so at a cost.
You will need to have a ‘clean’ credit history after the foreclosure.
I had an underwriter make the following comments while reviewing a file: “Mark, your clients missed four house payments before they were removed from the property. Yet they were also late on their car payments, credit cards and they have a collection from the power company. What did they do with the $7000? They certainly didn’t use it to pay bills”.
This client had missed four $1800 payments. The underwriter was willing to consider the file but could not get past the fact that the money for housing costs had disappeared with no apparent attempt on the borrowers part to use it for other bills. Do everything you can to keep current on your other liabilities.
You will need to show job stability.
Bouncing around between different jobs gives the appearance of instability. Longevity on a job shows discipline. Your new lender will be looking for signs of discipline.
You will need “Reserves”
Reserves in underwriter-speak, refer to cash or other liquid assets (like retirement accounts, IRAs, mutual funds). In most cases, you will need a minimum of 2 months of reserves. (You will need to prove that you can pay your bills even if you have no job income). This creates a safety net for you and indicates to the new lender that you can weather a financial crisis if you need to. Some loan programs require up to 6 months of reserves.
If you plan to use retirement accounts as reserves, be aware that you may only be able to count 75% of the account’s face value. This is because penalties often apply to the early withdrawal of funds from retirement accounts. Have your loan officer check these guidelines carefully.
What You Can Do Right Now
If you are one of the many American homeowners in this position, there are things you can do right now to set the wheels in motion for the future purchase of a home. A foreclosure is not the end of your dreams of owning a piece of real estate. A foreclosure is a stumbling block. It is a very large stumbling block, but it can be overcome with some consistent effort and a willingness to re-prove yourself to potential lenders.
Yesterday while preparing to write this article, I searched for lenders in the US who have loan programs for borrowers with a foreclosure in their recent past. I found 72 such loan programs in about half an hour! A foreclosure will not stop you if you are determined to own a home again. It will slow you down.
The good news is obvious. It appears that many lenders are already prepared to make new mortgage loans to people who have had a foreclosure in the recent past. My guess is that within the next 2 years we will see more and more mortgage lenders create programs for this group of borrowers. The loan parameters will be strict but for homebuyers determined to reestablish themselves as homeowners, lenders will be waiting to fill the breach with a new mortgage.
Pay your rent on time, all the time
Your rental payment history will be critical when you apply for the next mortgage. It will be looked at carefully as an indicator of how you pay for your housing needs. Keep in mind some landlords keep very good records and some do not. You will need a complete history of your payment pattern so make sure your landlord will be able to provide it when you need it.
Pay off any collections that may have accumulated
A foreclosure is not usually the only item of derogatory credit that shows up on a credit report. More often there will be other accounts that suffered late payments, bills that went to a collection company and accounts that were closed for non-payment.
Get aggressive about tracking down any creditor who has reported a collection on your credit report and get them paid. Expect to be treated poorly at first. Remember that the majority of the people a collection agency talks to are trying to avoid paying for their collections. The collection agent will probably assume you are the same. Once the collection company sees you are trying to resolve your debt with them, you should find them more helpful and polite. Just don’t expect it at first.
Try not to take ill treatment personally. Remember what you are trying to accomplish. Take pride in the fact that you are attempting what many people wont. You are reestablishing good credit.
Pay any judgments you have acquired
Treat any judgments as you would collections. Contact the creditor and see if you can work out some way to “satisfy” the judgment. Negotiation of the balance is sometimes possible. Payment arrangements are also possible.
You want a letter stating that your judgment has been satisfied. Even if this document in not recorded at the courthouse, it will serve as proof that you paid the debt. The underwriter will want a copy of this proof. If you can get your credit report altered to show your judgment has been satisfied, you will be once step closer to your goal of homeownership.
Start a savings plan
At a minimum, you will want to have all the funds necessary to pay for your closing costs and pre-paid items (property taxes, homeowners insurance etc). If you can save money for down payment, all the better.
You should set a minimum target of closing costs + required reserves (see above). This is one of the reason’s it’s prudent to establish a relationship with a loan officer early in the process. The loan officer will be able to tell you what amounts to expect for both of these items.
Contribute to your retirement accounts
Regular deposits to a retirement account indicate someone is planning for their future. Deposits over time indicate self-discipline. The ability to make regular deposits indicates someone who is earning more money than what they require for basic living expenses. All of these indicators help strengthen your financial picture as someone who is a good credit risk borrower.
In addition, as I mentioned above, retirement account balances can be used to prove you have sufficient reserves to handle potential financial problems while continuing to make a new house payment.
Contribute as much as you can to your retirement accounts during the time you are rebuilding after a foreclosure. Don’t forget you can reduce your retirement contribution later if you need to.
Establish new credit
There is a fine line to tread with regard to new credit. On the one hand, you need to show you have established (and paid for) new credit, on the other hand, you don’t want to give the impression you are working your way right back into a debt problem.
Here is one idea of many for establishing new credit. This technique costs very little, does not require a credit review (in most cases) and can be paid in full whenever you decide the time is right.
It is a very good idea to gain some new creditors as soon as you can after a foreclosure. But you must be ruthless about getting this new credit paid on time or you will create a new problem. If you can manage your new debt well, it will improve the overall picture of your creditworthiness when the time comes to apply for your next home loan. One well-know guideline to follow is the 29% guideline. Don’t let any credit card balance exceed 29% of the available credit line. If you exceed the guideline, your credit score will drop.
Monitor your credit report
It can be emotionally difficult to look at your credit report after a foreclosure. If you only remember one thing from this article, remember this. Your credit report after a foreclosure is not a reflection of your character. This credit report is simply your starting point for the future. Try to view it like a roadmap. You cannot get from Seattle to Boston without a map that shows both places. You begin in one town, you follow the map and you will end up in the other town. But you must look at both places to get where you want to go.
As you work your way towards buying your next home, make sure you get updated copies of your credit report. It is very satisfying to see the improvements to your credit that will occur. This will also give you early warning if something pops up on your credit report as time passes. An early warning will allow you to correct discrepancies before you apply for your next home loan.
Find a loan officer with whom you feel comfortable as early as possible
Although it can be hard to share your credit difficuties with a loan officer, it will help you tremendously to have access to a loan officer while you are rebuilding. Take some time to interview a few likely prospects before you actually need a loan. Look for someone with experience handling credit challenged files. Many loan officers specialize in this area. Ask if they are familiar with the government loan programs like FHA. Watch for someone with empathy and a non-judgmental approach. It is not necessary to discuss the details of your situation with a loan officer on the first visit. Simply explain that you are currently working at correcting past credit problems and explain that you know it will take some time. Remember that you are interviewing the loan officer, not the other way around.
March 20, 2007 at 3:00 am · Filed under Bites of Buckwheat, Buyers, Credit Bites, Mortgage Bites
Applying for a mortgage is stressfull under the best of circumstances. Even experienced borrowers feel a little twinge of anxiety at the thought of taking on hundreds of thousands of dollars worth of debt. There are things you can do to reduce the stress. Lists such as this one can be found on all mortgage websites, yet no real estate related site is complete without one. So here’s SoundBiteBlog’s list of Do’s and Don’ts.
The mortgage approval process is forgiving of many things, but these items will throw a serious wrench in the works. The following is a list of things that I see most often as a Loan Officer, that derail the process of getting approved for a mortgage loan.
- Don’t quit your job.
- Don’t pay your bills late.
- Don’t procrastinate getting stuff to the loan officer.
- Don’t lie to your loan officer.
- Don’t withhold information from the Loan Officer.
- Tell your loan officer in advance if you plan on making a large purchase.
- Don’t open any new credit card accounts.
- Do take your time. Make sure you understand everything that is happening.
- Do overestimate expenses and underestimate income. Be conservative.
- Do have fun!
On occasion, you might have to break one of the rules in this list. Life happens and there is just no way to make it a perfect one. When you simply must break one of the rules (with the exceptions of #4 and #5!), let your Loan Officer know about it right away. Let him or her know in advance it at all possible. There are ways to compensate for almost any sitution that can arise during the mortgage loan approval process. But it is much easier to anticipate a problem, than it is to pick up pieces after the fact.
March 18, 2007 at 3:00 am · Filed under Bites of Buckwheat, Credit Bites
We all have different strengths. Some people are creative geniuses yet housekeeping disasters. Some people paint. Others can do complex mathematical equations in their heads. We all have things we do well. We also have things we don’t do well at all.
Many men are taught from childhood that being completley self-sufficient is a sign of manliness. Women seem to ask for help more easily and naturally. It seems they automatically know that ,as individuals, we can’t be great at everything and it only makes sense to collaborate. When it comes to building and maintaining really good credit, the “I don’t need anyone’s help” mentality can be a serious roadblock.
Play to your strengths and delegate the rest.
If one of your non-strengths (notice I didn’t call it a weakness) is in the area of consistency when it comes to bill paying, consider asking for help. With couples, one of partners will generally be good at this while the other partner is not. That’s great if you are in a commited relationship, but if you aren’t? It doesn’t mean you can’t use the same technique to advantage. Do you know someone you trust who is really good at budgeting and has the credit to prove it? This could be a brother or sister, it could be a close friend, it could even be an uncle or a grandparent. Be open minded about who you can approach to get help. I have several clients each year who are fisherman in Alaska but reside in Washington State. They all have someone in WA handling the chore of getting the bills paid while they are fishing for months at a time. It seems to work very well for all of them. Why can’t the same thing work for a non-fisherman?
How do you pay them back?
How do you even up the scorecard if someone agrees to take on the task of managing your bills? Be creative and think about the old-fashioned idea of barter. When America was young, settlers had very little cash. They traded skills back and forth. The farmer traded grain for livestock. The blacksmith traded horseshoes for clothing. The same system can work vey well today. You probably have a skill that you are good at. Are you a roofer, or a handyman? Believe me, there are many folks who wouldn’t know where to begin tackling jobs like those. Trade what you are good at for the help of someone who is good at maintaining great credit. Do you have more money than time? Cash is always in demand.
Don’t let your ego trip you up.
If you have ever been in a management position you know that one of the most powerful tools a manager has is delegation. Important tasks are assigned to the employee who is best able to handle the task well. Approach your credit report as a manager, not as an employee. If someone else is better suited to handle that job, delegate it. When managers do this they are viewed as efficient, they are not viewed as lacking skill. You do not need to be great at everything to reap the benefits of a great credit report. That is your ego talking.
Don’t let your ego get in the way of a great credit score, or your credit score will end up hurting your ego.
March 16, 2007 at 3:00 am · Filed under Bites of Buckwheat, Credit Bites
Did you know that many mortgage lenders view Consumer Credit Counseling as worse than bankruptcy? It’s true. Getting a mortgage loan approval for a client who has a bankruptcy is easier than getting an approval for a client who has been in a Consumer Credit Counseling program.
The revolving debt nightmare is faced by many Americans everyday. An entire industry has developed because of it. As with any industry, there are some good companies, many mediocre companies and too many very poor companies. In this industry, the mediocre and poor companies can make a bad situation significantly worse. The impact of this mediocrity shows up on your credit report. While you believe all your credit problems are under control, the reality is often quite different.
THE PITCH – When you see commercials for consumer credit counseling, the sales pitch is amazing. “Consolidate your bills into one low monthly payment!” “Never worry that this credit card bill can’t be paid or that other payment will be late.” They promise that you will make one affordable payment to the credit counseling service, and they will divert the funds to all of your creditors as necessary to keep everyone satisfied. You will have no more bill collectors calling you daily, hounding you for payment. Is it to good to be true? Should you consider other alternatives? What are the alternatives?
WHAT HAPPENS – The way a credit counseling service consolidates your bills can actually be more damaging than helpful. Initially, the service will have you collect information on all of the bills you wish to consolidate. You turn this information over to them. They will request information on your income and help come up with a monthly payment that you can afford. They will then contact your creditors, inform them of the consolidation, and set up slow payments. This will get the bill collectors off your back and usually stop compounding of interest on accounts, but it can also affect your credit. Also, rolled into this payment is a fee for the service that the consumer credit counseling service keeps for itself.
REALITY CHECK ON YOUR CREDIT – Understand that, if you allow the counseling service to “slow pay” your creditors, your credit score will be reduced, and your credit report will be severely tarnished. While you will live more comfortably, knowing that all creditors are receiving payments, no one is hounding you for money, and you can afford your monthly payment, your creditors are reporting you as either a “charge off” or a “slow pay” to the credit bureaus. A charge off is the worst rating you can have on a credit line. Slow pays show up as current activity while you are in credit counseling. This information is rarely disclosed by Consumer Credit Counselors.
This article may be disturbing if you have been considering Consumer Credit Counseling. The point of the article is not to cause you concern, it is simply to make sure you are informed. There are other solutions to the debt trap. Consumer Credit Counseling is just one of the possible solutions. It is by far, in my opinion, the most heavily adveritsed solution.
You can find alternative solutions on this site as the site develops. These alternatives will all be in the Credit category that you can jump to from the sidebar.
March 8, 2007 at 11:20 pm · Filed under Bites of Buckwheat, Buyers, Credit Bites, Mortgage Bites
A foreclosure is not proof of a character defect!
The process of having your home taken away from you is demoralizing and demeaning. Homeowners are treated like credit criminals. Employees working in foreclosure departments often treat the debtor with disrespect and disdain. Yet many foreclosures are the result of some catestrophic event in the home owner’s life. Serious medical problems, loss of income, death of a spouse and divorce in a tough real estate market are all common situations that can lead to the loss of a home.
Despite the fact traditional mortgage lenders may not have an interest in working with you in the time following foreclosure, rest assured that there is an active, professional goup of lenders looking for your future business.
While many lenders may refer to your situation as ‘credit-challenged’, other more creative lenders propose an entirely different and refreshing perspective. Countless lenders in the subprime mortgage industry agree that individuals who have endured financial mishaps, are among the most appreciative and loyal clients they have. The subprime mortgage lender will not have the ability to offer you the lowest rate available due to your credit history, however, if you take a sufficient amount of time investigating the numerous available loan programs, you may be surprised to find lower-than-expected and competitive rates. And no matter what type of financing is acquired, the significant tax benefits of home ownership remain the same for all borrowers.
Among the various and imperative things you will need to do post-foreclosure, is begin the credit rebuilding process right away. It is simply impossible to start this course of action too soon. Many mortgage lenders recommend that you take a two-year loan break and focus on credit concerns. Be certain that you make payments to any and all creditors on time; perhaps even early. Make every possible effort to avoid credit card balances; if you rely on your credit cards for monthly necessities, attempt to pay your balances in full at the end of each and every month. Often times consumers assume closing unused credit accounts will raise their credit score, on the contrary, it is better that you simply do not use these sources of credit, but maintain them in good faith. Closing accounts can, in many cases, lower your already fragile credit score. Your focus point should be maintaining adequate employment, a satisfactory rental payment pattern, and optimal credit responsibility. These few, but vital suggestions alone, will help you get back on the road to home ownership.
Here are the basic things to do to ensure the shortest amount of time between a foreclosure and the purchase of a new home.
- Credit cards — If you have one or more open accounts and can afford to keep them, pay promptly every month. In order to achieve the highest possible credit score, keep your balances at 30% of your available credit limit.
- Rent payments — Make sure this is the first thing you pay every month. Your rental payment history will be a big factor when you apply for your next mortgage.
- Other credit — Pay on time. If finances are very tight, make sure you pay each payment within 30 days of the due date. You may have to pay a late fee for late payments, but late payments are not reported to the credit bureaus unless the are 30 days or more late. Paying a bill 8 or 10 days late will not show up on a credit report.
- Savings — Begin a savings account immediately. Even a small amount of money deposited each month will add up in 24 months. These “assets” will be carefully reviewed when you apply for your next loan. Set a target of 2 full months of mortgage payments in the account. Once you have accumulated that amount, begin saving for closing costs.
- Payroll taxes — Review what is being withheld from your paycheck. If you are receiving a tax refund at the end of the year, you should consider changing your deductions. It makes no sense to offer Uncle Sam an interest-free loan while you struggle.
- Establish new credit judiciously — You will get credit offerings in the mail. Ask yourself first if you really need these credit sources. You really don’t need a bunch of credit cards to have a strong credit profile and there may be more efficient ways to build a good credit report quickly.
Foreclosure can be a emotionally crushing experience. But it is not the end of the world. A baby may take very small steps but, string enough of those steps together and you can cover quite a distance. The time after foreclosure is a time for baby steps. They will add up.
