“Are they safe?”

Of course this question is rooted in the housing slump and all the news reports about Option ARM’s.

If you look a bit closer you will see that the difference between the ARM’s at the heart of the housing mess and an FHA 5/1 ARM are substantial.

Convention and Interest Only ARM’s

My first encounter with conventional and Interest Only ARM’s was when I was building my first home back in 2004. A friend of mine was building homes and he offered to help me, and a friend build our homes. He said that he had some great contacts for getting mortgages done fast, and since I can’t do my own loan I of course said I would be open to meeting his contact. It was also a nice surprise that they also did Home Loans in Layton where our office is.

I remember having a discussion with my wife’s Uncle whom I hold in high regard with respect to life in general, but especially with financial matters. I told him that I was being offered a loan that started out at 1%!

I had never heard of such a thing, and frankly I had to really think for a while before I felt like I could really get my head around why ANYONE would ever offer such a loan.

The overall theme of the discussion could probably be summarized as “I just don’t get it”.

Musing about Wall Street, where he worked for a good 15-20 years of his Career and about all the different ways that housing was really picking up steam, I still recall at one time one or both of us asking rhetorically “it can’t go on forever like this…can it?”

Two years later, I was still asking the same question and wondering if my understanding of sound fundamental economics might need to be adjusted in the face of some new development. Perhaps housing really could defy economic history and just go up.

Of course we all know what happened within just one more year. Looking back, I made a sound decision in not accepting that ARM, and of all the reasons that it didn’t make sense to me there were a couple that stood out from the crowd.

Here are the factors that separate FHA 5/1 ARM’s from those that caused so much trouble for the housing market.

Prepayment Penalties

Penalties that cost thousands of dollars would cause borrowers to wait until their loan had already become an adjustable rate before they could refinance. New, higher payments often shocked borrowers and led to problems paying either their house or their other bills on time. Late payments made refinancing difficult or impossible. FHA 5/1 ARM’s never have any pre-payment penalties.

Volatile Index

Most ARM’s were based on the LIBOR. I won’t bore you with the details, so I will just say that FHA 5/1 ARM’s are based on the US 1 Year Treasury Bill and not the LIBOR which gives the FHA ARM less volatility.

Caps

With the I/O (interest only) ARM’s of the housing boom rates could often jump up very quickly. Increasing as much as 2 and 3 percent right from the beginning. Alternatively FHA 5/1 ARM’s are capped at 1 percent increase per year based upon the start rate for that year. So if you are starting at say 3.75% on an FHA ARM, after the 5th year passes your rate could not be more than 4.75%. This of course goes on with each successive year after that.

It’s worth noting that the bad ARM’s also had what I call a Parachute. Meaning they rose fast but if rates dropped these loans dropped down slower than they went up. FHA 5/1 ARM’s follow the rates and hold to the 1% cap, meaning they cannot go up or down more than 1% per year. However that also means that if it started at 4.75% and went up to 5.75% in year 7 but then rates went down to 3.75% you could drop down below the 4.75% start rate for the year. Nice!

Streamline option

This in my opinion is one of the strongest benefits of the FHA loan. Put simply, an FHA streamline refinance is like a regular refinance except the lender does not really verify income. They will verify value, employment and credit. The reason it stands out as a benefit is if for some reason you needed to refinance rather than sell, you can do so with less difficulty than a traditional refinance. You can move from an ARM to a Fixed rate loan and vice versa with an FHA loan, even before the 5 year fixed period ended if you wished.

Over all, my general advice to people goes like this. Will you be in the home longer than 7 years? If so, its not likely that an FHA 5/1 ARM makes a lot of sense.

On the other hand, if you will likely be selling within 5-7 years then it might make a lot of sense financially. One client recently dropped from 6.25% all the way down to 4%. Considering thats over a $2,000 per year difference you can see that the savings add up, and if you know what your plans are within that 5-7 year time frame, its worth running the numbers to see if an FHA 5/1 ARM can save you money.

We are local Mortgage Bankers located in Layton Utah, and we like helping people understand their home loans. We write this blog and other articles to share information and answer questions. If you want to get a home loan and live in Northern Utah, give us a call, shoot an email or drop by!

Many married couples or life partners apply for credit cards, auto loans, and mortgages jointly. One aspect of understanding how to build credit, means knowing how divorce can complicate your credit situation.

If all of your personal credit was kept separate during your marriage, then you will not be impacted by your former spouse’s credit behavior at any time before, during, and after your marriage. However, if your spouse was added to your accounts as an authorized user or joint holder of a credit card, this can spell trouble with respect to divorce and credit.

When opening joint accounts, both you and your former spouse are jointly responsible for the repayment of the debt. A relevant term here is ‘Jointly and Severally Liable”. In plain english this means the creditor does not care if you and your partner agreed to pay 50/50, or if you had an agreement for some other shared liability. They can collect 100% of it from either of you, and then its your problem to work out who owes each other what. To illustrate, lets say a Husband and Wife divorce leaving a $10,000 debt on a credit card. The card holder decides to sue and obtain a Judgment for the debt. This Judgment eventually gets attached to the title of the Husbands house. He goes to sell his home and a Title Search reveals the Judgments existence. The husband would not have the option to pay 50% of the balance owed, and then ask them to go after his ex wife for the difference. They were Jointly and Severally Liable. Both were responsible for 100% of the debt individually.

This also means your ex-spouse’s late payments and collection notices could potentially show up on your credit report after the divorce if you have not split the accounts. The same would hold true for medical debts incurred by the former spouse for services administered to children you had together. There are many areas that can come back to bite you in the keester.

Removing a co-borrower is not as simple as removing an authorized user. Because of this, often the best decision is to cancel the cards rather than risk the possibility of their poor choices coming back to haunt you.

Certain credit card companies may require a written notice to cancel an account. With respect to divorce and credit it is in your best interests to do this as soon as possible. Your ex-spouse may have a difficult time adjusting to reduced income, and in a pinch decide to utilize available credit. Even if your ex is not being malicious, and fully intends to pay back the debt, this could harm your credit score by causing your credit to debt ratio (the balance divided by the credit card limit) on jointly held credit cards to increase. The amount of your available credit that you use, should never exceed 30% to maintain optimal credit scores.

Dealing with a house in a divorce also presents its own range of issues. Often I hear from one spouse that the other “wants their name off title”. This is a commonly misunderstood concept. Title is ONLY an indicator of ownership. Removing someone from Title, does not remove their legal responsibility to pay a debt that they agreed to pay. Often couples mistakenly record a Quit Claim Deed, erroneously thinking it will remove ones name from the loan. This is not the case. Only refinancing can accomplish this.

Having said that, removing them from title is ALSO a good idea. Nothing would be more frustrating than having a lawsuit aimed at them take the house to satisfy their debt.

If you are separated, it would be wise to prepare yourself by taking a few precautionary steps, especially if you think you are heading toward divorce. Obtain your credit report and assess your financial situation, take note of all existing credit accounts. Maintain copies of them in a safe place. If you have some joint accounts, discuss with your spouse who will assume payments for which credit accounts. If you are still on peaceful terms with your spouse, have a frank discussion about divorce and credit, and how you can both protect yourselves. Speak with an attorney, and create a plan to keep your credit protected and your payments on time.

Additionally, to avoid further disaster when dealing with divorce and credit, contact all credit bureaus to ensure that your address information is updated.

Buying a home with bad credit is more common than you might think, EVEN if you filed Bankruptcy, or had a Foreclosure YESTERDAY.

This technique is OLD, but so few people know how to do it. Many Realtors don’t even know how to make this happen. The ones who do guard this information because its so valuable to anyone looking to get into a home that may have had credit issues in the past.

What if I told you, that RIGHT now in this market you could get a great interest rate while having bad credit? One couple in Ogden just bought a house and their rate is 6.75% and their scores are Below 600.

So if its so common, and so easy why DON’T the “experts” know about it?

I could talk for hours about the why, but whats important for you to know is that YOU CAN, and it doesn’t require a huge 10 or 20% down payment.

So what is this strategy called? It has lots of names, and variations. It is often called Owner Financing – Seller Financing – Lease Option – Contract for Deed. All have subtle differences, advantages and disadvantages and details that you will want to understand BUT the bottom line is you CAN get into a house TODAY.

There are tons of opportunities out there created by this current housing market and We can help you find a property and work through each and every step of the process.

Call and talk with one of the Utah Mortgage Team today about getting into a home regardless of your credit

AND

With Utah Mortgage Team, your credit problems can be a thing of the past. Ask us about our cost free path to great credit scores.

]]> http://utahmortgageteam.com/2010/05/lending-strategy-lets-you-get-a-mortgage-with-bad-credit/feed/ 0 http://utahmortgageteam.com/2010/03/how-to-get-a-good-credit-score/ http://utahmortgageteam.com/2010/03/how-to-get-a-good-credit-score/#comments Tue, 30 Mar 2010 21:16:52 +0000 Corey http://utahmortgageteam.com/?p=175 How to get a good credit score is a question that is both easy and difficult to answer. Meaning some aspects of it are constant and straightforward, and others can vary depending upon circumstance. First, lets talk a little about the principles that remain constant. Some are obvious, but its always good to review.

• Paying your bills on time (Late payments are HUGE credit killers)

• Don’t get in over your head (A good rule of thumb is never use more than 45% of your income on Housing and Transportation expenses combined) This actually has little bearing on your actual credit score, but the implications are obvious, people in over their head tend to get in trouble, have late payments etc.

• Get on a Budget (Like the old saying goes, those that fail to plan, plan to fail) Its hard…I KNOW it is, but this is one of the single greatest indicators of financial success. Those that dont have discipline in their spending rarely have a good credit score for long.

• Use credit as a tool. (It is a means to an end. ALWAYS have your outcome in mind when you use credit. Using it without a purpose is a recipe for disaster) Building a credit score by charging items that you HAVE the cash to pay for, or supplementing cash flow for a business are valid reasons to use a credit card. Christmas spending that you didn’t save up for…is NOT.

Dave Ramsey often refers to credit scores as “I Love Debt Scores” and he is right. He is the prototypical “millionaire next door” meaning despite him having an above average income, he lives below his means, saves money, invests it well, follows a budget and DOES NOT USE CREDIT AT ALL. For this reason, he does not have a credit score.

Credit Cards: Your Best Friend…Your Worst Enemy

This scenario plays out at least 3-4 times a week when I meet with people about getting a home loan.

I ask the borrowers if they know anything about their credit. If it is good they tell me how they ALWAYS pay everything on time and always have since 1982 and they have cut up all their credit cards because they don’t believe in them.

I then pull their credit and they are dismayed to find that they do not have amazing credit scores. They might be average, or low, or non existent.

“WHY!?” they ask.

And I tell them; You don’t believe in Credit cards.

There are essentially two factors that come in to obtaining and maintaining good credit. Depth, and Credit usage. These are my own terminology, and are not actual words used by the credit bureaus or the industry at large per se. I simply use them to illustrate ‘how it works in the real world’.

You see paying your house or car on time every month is OUTSTANDING…when a human looks at your credit. It says you are responsible, it says you care about paying your debts.

On the other hand the mathematical equation used to determine your credit score (called an Algorithm, and typically provided by FICO or Fair Issacs Corporation) looks at this factor with little weight in the over all big picture.

On the other hand, a person with the very same credit profile who also has 3 revolving (read credit cards) lines of credit that had perfect payment histories over a 5 year period, who never carried more than a 30% balance (this number is somewhat debated amongst credit experts and varies from 10-45%) would likely have a much higher credit score.

So in laymans terms…a Credit score is an indicator of who borrows money and pays it back the most often. Or who makes the banks a lot of interest. THEY will have high credit scores.

Why? Because Credit Bureaus are in the business of selling information.

They sell YOUR information to lenders.

Lenders want to know who will make them money.

Credit scores indicate who will make them money.

Thus, having and using credit cards will get you a high credit score.

Lesser Known Facts

Here are some pointers that are not quite so commonly known about obtaining and maintaining a great credit score

• Never use more than 30% of your available credit (It’s a good rule of thumb for your spending, but its crucial for your credit score) There are times when you actually need to “go into debt to go into debt” meaning if you know you are coming up on a large purchase such as a house, refinancing or a car it might be worthwhile to put a balance on your credit card(s). This needs to be done well in advance of applying for the new credit because creditors typically only update once a month. So if you charge your groceries on the 20th, and go apply for credit the next day, it won’t show up and your credit score won’t be affected.

• Open and Maintain 3 revolving lines of credit for 5 years (Often opening a new revolving line of credit for a borrower with zero credit cards will provide an immediate boost to their scores) Having said that, over time they will need two more to establish good credit depth in the eyes of the credit bureaus. The longer this history is reported the better credit scores tend to be.

• Become an Authorized User (This was supposedly done away with, but we have proven it still works with certain companies) The idea comes from a law that was passed in the 1970’s to allow parents to help their kids build up a credit history. Essentially you can take and add your child or spouse (or relative, or…well anyone) and add them as an authorized user to an existing credit card account. Once this information reports to the credit bureau they “piggy back” on your account and your good credit history would report on your report AND theirs. In theory this could allow whoever was added to the account to make charges. However if the card holder provides their own address for the new authorized users card to be delivered to, they can destroy the card and make it impossible for the authorized user to make any charges to the account. For those looking to build a credit history this can be a valuable tool.

• Open an Overdraft Protection Line of Credit Often people who “dont believe in credit cards” will simply refuse to give in, even for the sake of getting better credit scores. If you fall into this category, one option is to apply for an overdraft protection line of credit. Yes it is still technically a credit card. However its purpose is very different. It merely protects you in the event that you ever go beyond your checking account balance. However the bureaus see it as a credit card. This is a great strategy for building a credit score without having to give in to the evil forces of capital one.

• Stay Away From Store Credit Whether its a Jewelery store, Home Depot, Best Buy or Sears…just pass. Not only are the rates and fee’s often exorbitant, even in comparison to some major credit cards, but they are not “created equal” in the eyes of the credit bureaus. For the purposes of building credit stick to good old fashioned credit cards.

• DON’T dispute every single thing on your credit report Often so called credit repair companies will dispute everything on a persons credit that isn’t a perfect account. This can do more harm than good at times. The math behind your credit score is complex to say the least. It is heavily weighted towards the newest items, and as things age they become less important to how your score is calculated. One curiosity is that sometimes removing a negative item from your credit can LOWER your score. One example is a satisfied collection account that was revolving. Odd as it may sound, sometimes these get reported as open and revolving accounts. Losing that history will lower your score.

Following these tips will help anyone get the best rates on any type of loan be it a Mortgage or a Car Loan. Credit is increasingly used in Insurance as well to help determine risk. Not to mention by prospective employers for Job candidates.

We Finance Anyone

But I digress. In recent years since the sub prime melt down, this has started to change. Initially FHA began requiring a minimum 580 FICO score. Many lenders moved their own guidelines to 620, in spite of FHA’s lower mandate. Now, we are seeing many lenders inching towards the 640 mark as a minimum credit score requirement to get a loan.

So what does this mean for anyone looking to buy a home or refinance in Utah?

Well, first you need to know that not ALL lenders are requiring a 640…YET.

We can still help even if you have NO credit score, below a 600 Credit score, and of course if you have great credit we can help you.

What you need to remember is that it is crucial that you are very diligent about protecting your credit rating. If it is good now, make sure it stays that way by following our tips on how to get and keep a great credit score. If you have poor credit but want to buy a home, we are just the guys you want to talk to. We have over 8 years of experience helping people improve their credit so they can buy a home.

Call or Email us today and we will show you how we can over come credit issues and help anyone own a home.

My Friend Justin McHood over at Mortgages Unzipped humorously explained how most people end up choosing a title company when they purchase a home or refinance. In the end the answer is, they rarely do…choose that is.

This is something that has bothered me for a long time, so I wanted to take a moment and clarify REALLY who “GETS” to choose the title company.

YOU DO. The guy paying the charge for the services performed.

Not your Agent

Not your Agent’s Broker

Not your Mortgage Broker/Loan Officer

YOU.

Now having said that, how would you know which one to choose? Lets talk about that for a moment. This is where our discussion becomes about roles. See, sometimes how things ought to be, are often close to how they are…but like my 5th grade teacher used to always say (and I mean always) Close only counts in Horseshoes and Hand Grenades.

He also would say “You want me to turn you into a water buffalo?” Why a Water Buffalo you ask?, “Because a Water Buffalo’s hind quarters are up higher than its ears…after I kick your @** yours will be too”

Yeah, those were the days. When teachers could say that kind of stuff and not have the ACLU and the evening news there an hour later.

So back to how it ought to be. Professionals in the Real Estate industry are trusted advisers. We should know who you would want to use, not because we were “Bamboozled”, but because you will get the very best service you could get, for a reasonable price.

I will add as a disclaimer, that where you obtain title is a negotiable item in a contract. A seller can specify that if you wish to purchase their property you must use the specific title agency that they require. This is perfectly legal, and common when purchasing bank owned properties. However, in any other circumstance it is your right to choose as the buyer or seller. You might even ask your agent, or loan officer why they chose the agency they are recommending. A good loan officer or Agent will have done their homework and will be recommending someone based on Competency, Service, Communication, Efficiency and Speed, and of course price, but not at the expense of the other necessities…the last thing you want when dealing with the most expensive purchase you will ever make is the guy that is the cheapest just because they are the cheapest.

Someone other than my 5th Grade teacher said “The bitterness of poor quality remains long after the sweetness of a low price is forgotten” -Benjamin Franklin

When it comes to a good Title and Escrow officer, I couldn’t agree more with good old Ben.

Now, I’m off to Walmart…I need milk.

This is due to the Fair Credit Reporting Act which was enacted to help protect consumers credit scores from erroneous facts being reported against peoples credit.

One can shop for a mortgage worry free as long as the inquiries happen within a 30 day period. This means you can visit multiple lenders and brokers to make sure you are getting the best rate possible and not have to worry that your credit will be going up and down as a result.

If you are looking for a Mortgage in Utah and are told by a mortgage lender not to have others pull your credit because it will lower your score, run. This is an old trick that some people use to discourage shopping and competitive rates and fee’s. You want the best deal possible and the credit laws enable you to find it!

Some important things to remember when you know you will be applying for a mortgage:

• Put off applying for any new credit until after the loan is closed not merely approved.
  • Credit Cards, Auto Loans, Signature Loans, Satellite TV/Cable, Cell Phone Service
• Make sure all of your credit card balances are below 30% of the available credit limit.
  • Maxed out cards are a score killer, pay all balances down to below 30% (10% is optimal). Carrying a small balance, no more than 10% of the available balance can actually help improve scores more than carrying a zero balance.
• Credit reporting can take 30-60 days on recently changed status’s. If you intend to pay down balances to help improve scores make sure to do it well ahead of time as it wont help at all if you do it a week before your credit is pulled for the application.
• If there are some credit issues that need to be resolved, have all of the documentation available that shows if debts were paid or reported in error ect.
• Gather up all the basic required documentation for a loan ahead of time to help speed up underwriting. You will need the following to begin the process (but you may need more once Underwriting starts looking at the file):
  • 2 years tax returns
  • 2 months pay stubs or profit and loss statements for self employed
  • 2 months bank statements (personal and business for self employed)
  • Most recent statement from Retirement accounts such as IRA, RothIRA, 401K
  • Paper trail documenting the source of your down payment (Bank Statements, Letter of Explanation etc.)
  • Personal Identification (Valid Drivers License, Social Security Card, Passport, W-2)
• If you are not 100% sure that you are a ‘perfect borrower’, look into what you qualify before you go house hunting. Nothing is more disappointing than finding out you don’t qualify for that beautiful home or ‘killer deal’ that you just found.

Remember that to get the lowest rate possible you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including a loan origination/discount/broker fee which can be negotiated with your lender representative.  You may elect to pay less in fees but you will have to accept a higher interest rate.  This is a good strategy for consumers not planning on keeping their home for more than 3 years. Discuss all available scenarios with your loan advisor

Foreclosures are everywhere, people are defaulting, loan modification companies have commercials during prime time because the demand is so high. The news of mortgages being more difficult to get is covered regularly, yet many people are surprised to find that they do not qualify for the lowest rates available due to increasingly strict credit requirements from lenders.

During the heyday of easy mortgages someone with a below average credit score could obtain a loan, including borrowers who’s scores were as low as 500 using the standard FICO model of 350-850 for determining people’s credit worthiness. Now however, Lenders are increasing the credit score requirements. In 2009 Lenders changed the requirements twice from 620 to 640, and within months of the initial change from 640 to 660.

FHA itself has increased its requirements for several popular loan programs such as the FHA Streamline Refinance, which at one time did not require a credit score. Although FHA still will accept borrowers on a purchase as low as a 580, the vast majority of lenders have increased their own requirements to 620 in spite of FHA’s allowance.

While a 620 FICO will allow you to get FHA financing through most lenders, you will not get the best rates available. Lenders have criteria that they consider to be risky, such as lower credit scores or gaps in employment history that will increase the rate you are able to obtain. These are called ‘hits’ to the rate. In order to avoid the rate hit on an FHA mortgage a borrower needs to have a minimum 660 FICO score.

Many people assume that credit help is something that you only need if you have been through Bankruptcy or were irresponsible with your credit in the past, however, it is becoming increasingly common for people who thought they had no credit issues whatsoever to have need of someone who can help them understand the in’s and out’s of the credit laws.

If you are looking to refinance or purchase a home in the near future, obtain a free copy of your credit report and make sure there isn’t anything lurking there that could prevent you from getting a great rate.

One thing that sets Utah Mortgage Team apart is that we will help you get the best rate rather than simply telling you what you qualify for at the time that you talk with us. We don’t care how long it takes…there isn’t any pressure to do a loan or make a decision. We love to see people save money and have better credit in the process. So whether its a quick fix or several months in the making, we can lower your mortgage payment with our credit expertise.

Here are some tips to help you understand what the bank is looking for, and how you can present them with the right information that will give you the greatest chance to get the kind of modification you are looking for.

Make sure its actually the house or mortgage that’s the problem

Recently a client called telling us how they had tried and tried to get a loan modification but the bank just wouldn’t work with them. After speaking for a bit and asking questions about their finances, it was discovered that their mortgage payment was rather modest, but they had nearly $2,000 dollars a month going out in credit card payments and other debts. The house wasn’t the problem, but its often something people rationalize. They figure its easier to change the mortgage than it is to get rid of their credit card debt. On a fixed income, their best solution was to do something about the debt and leave the house alone.

Understand what qualifies as a hardship and what does not

This point is best made by telling a story of a client I was working with years ago. It was this client that caused me to revise my list of necessary documentation that I give out. One item that is required is a hardship explanation. She was very thorough in explaining what happened. 4 Pages worth of explanation…front and back…in Spanish.

The next day I got a call from the negotiator assigned to the file. I’m paraphrasing but his response went something like this “I just opened your clients file, and noticed that her explanation is 4 pages, front and back and in Spanish”. I replied, “yes it is” with a little laugh. He then asked why she didn’t make her payment and I told him it was because her husband had lost his job. He said “OK thanks, that’s all I needed” and our call ended. The lesson? They don’t care what the reason is. They are simply going by the book. If it fits whats considered a hardship in their eyes, they don’t care about all the details.

Here is a list of what banks will consider a hardship for consideration of a loan modification:

• Divorce
• Death, loss of a spouse or child (due to the expenses)
• Major Medical expense
• Loss of employment or Loss of Income

These are broad parameters are what a bank will consider, so you will need to figure out how to get your situation to fit within one of them. Now, having said that I’m sure someone will make a comment about how they had some situation that didn’t fall under any of these guidelines and got approved…my answer is GREAT, that’s awesome, but I am trying to make this apply to the broadest amount of people and this is what banks look for.

Here are some others that probably fall under one of these different categories that can also be considered a hardship

• Too much debt
• Mortgage payment increases
• Business failure
• Job relocation
• Damage to property
• Military service
• Incarceration
• Tax or insurance increase

Make sure you are doing all you can to help solve YOUR problem

I love what I do, its fun and very rewarding to see someone have the weight of facing foreclosure come off their shoulders. But I have little patience for someone who is just looking to game the system.

When you do an analysis of your budget, make sure you have eliminated all the non essential expenses that you reasonably can. Look for ways that you can make it work before you go asking the bank to make concessions for you.

Talk to a HUD approved counselor

I’m going to say this with a lot of hesitancy. But you should go see one. Why? Because sometimes it actually helps (terrible I know) but its true, they are horribly understaffed and in many cases under qualified to help. But the government in its wisdom (sarcasm) has decided that it will create a plan to help and then under fund it and under staff it so that its demise is inevitable.

In my opinion, the greatest advantage to talking with a HUD approved Counselor is that you get someone to bounce your questions off of who does not have an agenda. They will give you strait answers based on the best information they have available and wont be trying to sell you on an expensive legal service that you probably don’t need.

Having said that, I do believe there is a place for paid loan modification services. What doesn’t exist yet is a way to know who to work with and who not to. So until something comes about to bring fee’s into reality and an ethical framework for what and how clients are given recommendations and what they are being told, I am approaching this field with a huge caveat. I am giving away all of my years of experience and knowledge for free, in hopes that I can help people avoid huge pitfalls and hopefully find a way to save their house in this uncertain time.

It seems reasonably logical that a bank would work with a homeowner facing foreclosure right? So why don’t more loan modifications get approved?

I regularly hear homeowners repeat this old adage “well the bank doesn’t want another house on their books so…”

But this is one of those maxims that’s both true and false at the same time.

How?

Well I’m really having to fight my urge to toss in a shameless Schrodinger’s Cat reference here, but only physics geeks like me would get it…so ill use a better known example to illustrate.

Its like how in Action movies the ‘good guys’ always say that they wont negotiate with Terrorists. In this example, a homeowner thinking this way is using the logic that they have the upper hand because the bank does not want to go through with a foreclosure since it results in a financial loss for them.

The reality is, yeah they don’t want to take your house but they will.

In this sense the bank is using Keanue Reeves logic from the movie Speed when he says to “Shoot the Hostage”. If you were to shoot a terrorists hostage, they lose their only source of leverage. Not that I necessarily agree with it, but from a logical stand point you could argue that it serves the greater good. Save many, lose one.

Now, you might think I’m getting off topic, but I’ve always wanted to be in a court room and say to the Judge “Just follow me on this one your honor, I promise I’m going somewhere with this” So, just indulge me here a second.

The reasoning behind why we don’t negotiate with terrorists, is so that we take away their leverage, or at least we hope to discourage them from trying to use it again in the future. In this way we are actually saying “while horrifying, we are willing to lose a few for the greater good of all”

Now, to come full circle with this example, Banks know that if they were to begin wholesale negotiating with the public the incentive to continue making your payments would disappear in many peoples eyes. I’ve seen it first hand… I had a guy call me asking about doing a loan modification. He had perfect credit, perfect payment history but was unhappy with his 5.75% rate (WHAT). So he was contemplating ceasing to make payments so that he could try and strong arm his lender into dropping his rate down to “something in the 3 or 4 percent range”.

Aside from the fact that this is a stupid plan, as the bank would look at your ability to pay and say no, leaving you with some missed payments to catch up on and damaged credit its also exactly why banks are so reluctant to work with people who are legitimately in trouble and need the help. They are worried that no one will want to make their payments and will use the pain involved in going through a foreclosure as leverage to try and negotiate with the bank. So the banks shoot the hostage. Thus very few modifications get approved.

More often than not, what you will get offered at the very beginning of any discussions with your lender is whats called either a repayment plan or a Special Forbearance. These can take many forms and the numbers can be set up any number of ways, but this is the most common boiler plate version:

1. 50% of the arrears (The money you are behind) as an upfront payment
2. 50% of the arrears paid back in equal installments over a period of time ranging from 6-24 months

Its no surprise that these plans fail more often than they work. It doesn’t take a rocket scientist to figure out that someone who couldn’t make their payment as is, won’t be able to make a higher payment let alone write a check for half of what they are behind.

It’s setting people up to fail, and the failure rates are staggering to say the least. Its closer to 100% than it is to 50%.

However, there is hope. A plan can be set up to not only help someone save their home from foreclosure, but actually come out of the experience better off financially than when they fell behind. This is something that everyone should know about whether they are already in foreclosure, or simply face the prospect of it sometime in the future. I’ve always said that I could do so much more if people contacted me before they actually fell behind.

Finally, its worth noting that it doesn’t hurt to have some leverage when you go in to negotiate. I work with a Law Firm that does a Forensic Audit on mortgages to look for violations that would cause the lender to have some liability. Its relatively inexpensive and can really tip the scales back in your favor, or at the very least even them out.

More on this at a later time though, as this is not the intent of the post.

If you are looking for more information on whether you should or can do a loan modification, feel free to email me or shoot me a call and I’d be happy to discuss your situation with you further and give you recommendations as to what your different options are.