Now coming full circle, I am seeing many of these people come back and ask about getting a home loan and buying a home after foreclosure. When they ask “Can I buy a home again?” I have great news for them. The answer is!!!

Maybe.

I know. That was kind of messed up. Get your hopes up like that and then jump right into reality. But thats what people want; They want answers that are real not fluff.

So today I am going to spell out what your options are so that whether you are now several years past your “troubles” or are just about to enter them, you will fully understand what your options are.

Understand what it takes to get a loan today

Loan guidelines can change. Sometimes daily; So its important that you stay up to date on them. My suggestion would be to form a relationship with a lender that is an expert on credit. This way you can periodically communicate with them about whats going on in lending and make sure that you are doing what you can to stay qualified.

When we meet with a prospect the first thing we do is lay out a detailed “Map to success”. We look at what their credit score is now and review all the factors that contribute to it. We discuss what needs to be done with each item and discuss a time-frame for accomplishing these things.

A typical client may need anywhere from 30 days to 12 months to fix any credit related issues.

The most common issues you may deal with if you have had a foreclosure or bankruptcy are:

1. FHA requires a minimum of 3 years since a Foreclosure, Bankruptcy or the last 120 day late (considered the same as a foreclosure to underwriters)
2. You cannot have any derogatory credit in the last 12 months. (No late pays etc.)
3. Credit score must be a minimum of 620. (there is a “hit” or penalty to the rate below 660…this is a Lender thing, not FHA)
4. Make sure all of the debts included in a Bankruptcy are being reported to the credit bureaus as “Included in Bankruptcy”. Items often report inaccurately and can impact your scores or an underwriting decision as it could cause it too look like you were late or had a derogatory report (see #2)
5. FHA allows you to have up to $4,000 in Medical Collections however all other Collections and Judgments must be satisfied.
6. To have a good credit score after Bankruptcy or Foreclosure the most important thing you can do after you have “stopped the bleeding” is establish 3 revolving lines of credit (read: Credit Cards) and keep the balances below 30% of the available credit limit (10% is optimal). DO NOT use Store credit for this strategy. One of the best methods is to obtain an overdraft protection line of credit on a checking account. They report just as if they were a credit card and help re-establish credit scores.

Look for opportunities to own now

We have a lot of clients who own their home now and do not qualify for a loan.

This is possible by finding a home where the seller is willing to finance the property for them. Often called Seller Financing or a Contract for Deed, this method can allow you all the same rights and benefits of buying a home with a traditional mortgage without having to be fully qualified at the time of purchase.

This is sometimes confusing, so often what I do is have people imagine something smaller than a home. Think of a car. Lets say I have a car that I want to sell and someone comes along and says they want my car but they cannot get a loan right now.

Lets also assume I own the car outright, so there is no loan still owed against it.

I have the option to sell it to them and they would make payments to me rather than a bank or credit union. The terms of the agreement are completely negotiable between me and my buyer.

This gives you some big benefits:

1. You own it legally. This means any interest paid is likely tax deductible (I am not a CPA, please consult one before signing any agreements)
2. When the time comes to get a Mortgage you can now refinance rather than get a loan for a purchase. Refinances typically have less closing costs so you save money!
3. Money spent on the property benefits you not a landlord.

This might seem a little backwards, but owning a house first and then working on your credit as you work towards refinancing can be a great way to go. This is a great strategy that is a legitimate way to have your cake and eat it too.

Summary

If you know ahead of time what you are aiming for you can make sure you hit your target. Get with a lender that is an expert with Credit, its worth knowing ahead of time what you need to do to be ready for the day when your credit is back on track.

If you would like to own a home but have had some credit issues we are a local Mortgage Bank located in Utah. We have branches from Salt Lake City,  Layton, and Riverdale Utah. We specialize in working with people that have had credit problems but want to get back on track. Whether you are just about to file Bankruptcy or think it might be time to buy again, call us and we will discuss all your questions and show you all the options available. We are Utah Mortgage Team and our address is 101 N Fort Lane #104 Layton, UT 84041.

“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!

Well, you’re right, short sales aren’t exactly rocket science, but if you are unaware or unprepared, there are several big pitfalls that could bite you and your client for some real money.

Here are some short sale pitfalls to look out for:

Pitfall 1 – Money in the bank is not safe

One of the first things you may want to recommend to your client is that they immediately close out any accounts they may have at any bank that services or holds their mortgage and second mortgage. The reason is that many banks have a clause in their bank account agreement documents that allows them to take funds from one account to pay for another account. This clause is in the fine print of most bank’s account agreements that hardly anybody ever reads.

So if your client has a checking account and their mortgage with Bank X and they are late on their mortgage payment with Bank X, then Bank X may sweep their checking account to get money for the mortgage payment. Banks have even gone so far as to extend overdraft protection on a checking account to cover the mortgage payment. And depending on the bank documents this all may be done without notification. Huh, not the kind of situation I want my money in.

Pitfall 2 – Don’t forget about the cash contribution

This little pitfall can come in several places and cost you any further referrals from your client. If you don’t pay attention cash contributions could bite you and your client hard when it comes time for settlement.

Pitfall 2a – Second mortgage holders are tending to want to be paid something now when there is a short sale involved. Your home seller’s goal when they sell their house should always be to have nothing to worry about after the short sale is final. For second mortgage holders – in many cases – they want to be paid some percentage of their balance say: 5-10% to have them satisfy their lien position. Make sure you prep your home seller for this increasing possibility.

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/2010/05/real-property-attorneys-in-utah/ http://utahmortgageteam.com/2010/05/real-property-attorneys-in-utah/#comments Mon, 03 May 2010 16:44:19 +0000 Utah Mortgage Expert http://utahmortgageteam.com/?p=185 Transactions in real estate can be very complicated. When a buyer and seller sit down at the closing table, essentially all of the heavy lifting has already been done by the realtor, financing parties, and the real estate lawyers who prepared all the documents the buyer is about to sign. Before closing day, a Utah real estate attorney has performed research on the title, ensured that all necessary documents are in place and ready to be executed, and ensured that all inspections were performed properly.

Most people buying a standard residential property may never meet face to face with a real estate attorney, but they most definitely benefit from their work. When a potential buyer selects a real estate agent, that agent forms a fiduciary relationship with that buyer. The real estate agent must look out for the best interests of the buyer from that moment forward. Part of the real estate agent’s responsibilities are to ensure that the buyer gets as good a deal as possible and that the buyer’s objectives are vigorously pursued. In performing this duty to their buyer, many realtors have sought out the assistance of one of Utah’s qualified real property attorneys.

Most typical residential real estate transactions don’t require a lot of novel or complicated legal work. However, one thing that every real property transaction requires is a title search. The title search will reveal whether the seller has a salable interest in the property (i.e. whether the seller actually owns the property), whether there are any restrictions or allowances regarding the use of the real property such as easements or covenants, and whether there are any liens on the property such as mortgages or taxes owed on the real property. While there are other options for obtaining a title search, an experienced real estate attorney is generally the safest option.

Real property attorneys also remain up to date on changes to Utah law affecting restrictions such as easements and covenants that may curtail the use of the land and may therefore affect the value of Utah real estate. During the 2010 legislative session, the Utah legislature passed legislation that restricts the use of transfer fee covenants on Utah real estate. This new Utah real estate law does not allow individual sellers to place a transfer fee covenant on their property. Such covenants are only allowed when used by Homeowners Associations and when the revenue is used to enhance the value of the burdened real property. Many Utah realtors benefit from the help of a real property attorney while navigating issues relating to new regulations and changes in Utah real estate law, such as the new transfer fee law.

Naturally, the more complex the real estate transaction becomes, the more likely a real estate attorney will be directly involved with the buyer and the seller. Regardless of the complexity, a good real estate attorney who understands Utah real property law can make the help parties buying, selling, leasing, or otherwise using real property avoid legal pitfalls. This is why so many Utah realtors and real estate agencies have formed lasting relationships with Utah law firms specializing in real estate law.

• 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.

So, you decide to go ahead and purchase that home…or maybe move into a larger home if you already have one. You call your loan officer in order to get prequalified for a loan. You know about how much you want to spend and how much you want to put down on that home. You’ve given all your numbers (income, expenses, etc.) to your loan officer and you’re feeling pretty good about the impending purchase. The numbers are crunched and then your loan officer says the sentence you may not have been expecting…

“If only you didn’t have to worry about this car payment…”

This would come up because of your debt to income ratio. This means the percentage of your income before taxes that is already taken to pay debts – car payments, existing loans, etc. This is one of the things that every lender looks at when they’re determining whether or not to give you the loan you desire. A new car payment on your record will reduce the amount of money you have to purchase a house with.

While it may not seem like a lot (let’s assume your car payment is about $400 a month and you earn $5,000 a month), at an interest rate of 8.0% you would qualify for more than $50,000 less than you would if that car payment didn’t exist. Sure, you might tell your lender that you can handle the mortgage note and the car at the same time – but it doesn’t matter what you think – it’s what they think that determines the amount you’re prequalified for.

Now, this doesn’t mean that you shouldn’t get prequalified. You should. However, before you purchase that car you should think about that home. A home is more important when you’re considering your future, and especially if you’ve already got a car that’s nothing to sneeze at. You can always go for a new automobile purchase later after you’ve already purchased the home of your dreams.

In summary, while a new car purchase might be nice, the more important purchase (the house) will happen much more easily if you haven’t got the extra weight of a new car payment. Consider that and then make the wise choice on what to invest your money in.

About the Author:
I was born and raised in Central Toronto, spending my whole life in the neighborhoods that I now work, and in the Toronto Real Estate industry. I understand all the nuances of Toronto’s various communities & what Toronto real estate agents have to deal with.

I have dedicated my education to negotiating, marketing, business development and staying ahead of the curve with technology. I have attended international conferences, understand major agencies like Johnston and Daniel, all of which has helped me learn how I can provide more efficient, effective and thorough service.