Financial adversity happens, everyday people lose
jobs, have unforeseen bills or lose money in investments. Whatever the
reason your not alone, thousands of consumers are facing the that fact
that they may default on their mortgage. To avoid foreclosure there are
certain steps you can take.
The key is to have open communication with your
loan provider. Once an issue with making payments is identified you
should be in contact with them. The earlier in the process that you
communicate that there is possible problem, the more options are
available to create a non-foreclosure solution. This also builds good
faith with the lender assuring them that you're committed to being
honest and honoring your mortgage obligation.
The first step before talking to your lender is
accessing your short term and long-term financial situation. What can
you afford to pay on your mortgage now and moving forward, are you able
to consolidate debt to improve your current situation. Is your
financial situation temporary or is it something that could have a long
lasting impact. When you speak to your lender it's important to
communicate your finances and to show that you've made a good faith
effort to meet your current mortgage payments.
The second step is to speak with your lender to
find a solution. After speaking with them they can possibly put in
place prevention options for your mortgage that will alleviate the
burden of your current payments.
Some option to consider and discuss:
Reinstatement - An agreement
with your loan provider to pay back past-due amounts, late fees and
penalties by a certain date.
Repayment - Lender allows you
to repay money your are behind on by adding a portion of the amount to
your monthly payments.
Forebearance - When your
lender suspends or reduces payments for a set period of time, followed
by resuming regular payments and paying of any missed payment through
either a lump sum or adding to monthly payments.
Loan Modification - Your
lender agrees to modify your loan to make monthly payments more
reasonable, an example of this would be extending the loan length or
lowering interest rates.
At this point the hope is that you will be able
to come to an equitable solution for both you and your lending
provider. Reality is that if you are not able to reach a solution you
may need to take more drastic measures. If your not able to resolve the
issue and your finances are limited to the point that you are not able
to meet your mortgage payments then it might be time to consider
selling your home or filing bankruptcy. By selling your home you may be
able to create the funds to pay off your mortgage, which will stabilize
your finances and allow you time to re-group and qualify for a home
loan later. Filing bankruptcy is considered a last resort, the
implications on your long-term credit is drastic. For ten years it will
be on your record and can limit your ability to get future loans.
From
2003-2007 popularity of ARM loans was at an all time high, the loans
usually started at a fixed interest rate below the rate of a fixed
interest loan. After the specified time the rate would have an
adjustable or variable rate in accordance to the market index.
And why
would consumers not find this appealing, from 2003-2006 the housing
boom had reached its peak and interest rates and the economy where all
showing positive signs. But now with a possible recession looming along
with billion dollar losses being reported by major financial lenders
the appeal has lost its luster and consumers want security.
If you're
currently in an ARM loan and you're considering changing to a fixed
interest rate start by researching the loan
terms carefully. ARM loans
often have conditions for how much an interest rate can change for
specific periods of a loan. You can then compare the max ARM interest
rates through the duration of your loan and compare it to a fixed rate
loans cost. It's a simple risk management assessment that can help
clear up what is the best course of action.
Another
key indicator is the margin of your loan, this directly ties into
increases in your ARM interest rates. Track the margin over time and
although slight increases may seem minuscule, an increase of 1% over a
20 year loan can lead to increased costs of $20,000-$22,000. So be
aware of trending, if the margin continually increases this may
indicate that it's time look into a fixed interest loan.
Making
the decision whether a fixed rate or ARM is right for you can be
challenging. Remember to research all your option thoroughly. Your
money, future and house are online use caution, consult with
professionals and only move forward when you have a solid plan.
Here are
the definitions of the loans and financial terms we have described:
Adjustable
Rate Mortgage: A home loan that permits the lender to adjust its
interest rate periodically during the life of the loan on the basis of
changes in a specified financial index
Fixed
Interest Rate Loan: A mortgage in which the interest rate does not
change during the entire term of the loan
Interest
Rate: The fee charged for borrowing money.
Margin of
Loan: For an adjustable-rate mortgage or a home equity line of credit,
the amount that is added to the index to establish the interest rate on
each adjustment date, subject to any limitations on the interest rate
change.
Subprime Lending - An Unsound Home Loan
Lending Practice
We've all
seen the advertisements "bad credit mortgages" or "no credit bad credit
home loans" while enticing and admirable in allowing people to realize
the American Dream and own their own home it's not the most financially
sound practice. Recently we've all seen the impact on our largest home
loan-lending corporations such as Countrywide Financial and Citigroup,
giants of the industry once reporting record profits are now struggling
to stay afloat and others are on the verge of filing bankruptcy. So why
the sudden fallout? How can a catalyst in our economy now cause such an
economic downturn?
The
answer is subprime (less then ideal) home loans, when home loan lenders
offer loans to consumers who do no qualify for the best market interest
rates. This is often done due to poor credit history or financial
adversity. Subprime lending also means that the lendee will pay a
higher interest rate then a prime candidate who qualifies for an A
paper loan. This is a very risky situation, you are asking someone to
pay more for a loan that they may not even be able to financially
handle. So why would a lender take this risk? The reason is that 25% of
consumers fall into the subprime category, which is defined by having a
credit rating less then 620. And while the risk is greater the reward
is also greater. Lenders can charge higher interest rates and add fees
associated to lending to a subprime candidate.
The
result of these practices has lead to record foreclosures and with
questions on how this could happen and who is responsible. Some are
blaming the government for lack of oversight. Others are accusing
subprime lenders of predatory lending practices by offering loans that
they knew customers could not meet their financial obligations for.
Issues have also been brought up with investors investing in subprime
lending corporations without due diligence in terms of verifying their
portfolios. And these are just a few examples of the finger pointing
now being caused by this crisis.
So to
stay alive now subprime lenders are borrowing from the Federal Reserve,
Citigroup borrowed $500,000,000 according the Financial Times from the
Federal Reserve on behalf of clients. It's concerning that corporations
can borrow money to offset losses directly associated to risky loan
practices. With the financial impact tied to the economy it would be
better to first see a clear plan in terms of changing those practices.
If you or I made an investment into a risky stock option we would be
responsible for the losses associated with that risk.
With that
said as consumers it's important to understand how we can protect
ourselves. First don't commit to a home loan that you are not
financially able to fulfill. Second before acquiring a home loan
improve your credit, use a credit agency/advisor if needed but try to
get your credit rating above 680 to qualify for the best market
interest rates. Third work on lowering your debt to credit ratio get it
below 35%, this is ideal to qualify for a good loan. Below are the
criteria for qualifying for an A Paper loan, meaning you will be a
prime candidate for the best market interest rates for your home loan.
- In the
United States, the borrower has a credit score of 680 or higher
- The
borrower fully documents their income and assets
- The
borrower's debt to income ratio does not exceed 35%
- The
borrower retains 2 months of mortgage payments in reserves after
closing
- The
borrower injects at least 20% equity