Foreclosures and Loan Modifications

Saving your home mortgage from foreclosure is possible and obviously worthwhile. Now, more than ever, lenders are motivated to avoid having to foreclose on homes that they have financed. Why is this? Simply put, when a lender forecloses, they almost always end up losing money.
Very rarely is a lender able to recover the original mortgage balance that was owed at the time of foreclosure.

Why is this?

The lender incurs expenses during the foreclosure process. Foreclosing on a property is a legal process with stringent rules and almost all lenders will use a law firm to execute the foreclosure. This creates attorney's fees. Also, the lender will generally have to spend a certain amount of money to get the property back into shape to sell it. Then, the lender will have to pay a sales commission to the Realtor who sells the property. All these fees combined with the fact that foreclosed properties usually sell at a significant discount anyway, makes the foreclosure a losing proposition for the lender.

A significant portion of people facing foreclosure fall into a general group; People who have an adjustable rate mortgage and have experienced a significant increase in the monthly payment due to the interest rate adjusting upward. Many borrowers bought their homes with no down payment and were placed on a loan program with an adjustable interest rate. Most of these loan programs had an initial two or three year period during which the interest rate was fixed. Many borrowers went into these adjustable rate loans with the intention of refinancing to a lower fixed rate loan before their loans transitioned to adjustable. However, due to larger issues such as the meltdown of the mortgage market and the credit crisis, approval standards changed, and the majority of people with adjustable rate mortgages no longer qualified for a refinance. They ended up stuck with their original loan. Most borrowers experienced a 30% increase in their monthly payment when their loan made the first rate adjustment. For many, such a large increase in the monthly payment was simply unaffordable.

Knowing this back story is important to the large pool of borrowers out there attempting to cope with their rising monthly mortgage payments. Almost every major mortgage lender has created their own version of a note modification program to help borrowers who are stuck with an adjustable rate mortgage. Essentially, the lender modifies the interest rate back down to the original lower contract rate and keeps it there.

Remember, it is in the lender's best interests to work with the borrower to help them avoid the foreclosure.

Even though lenders are very motivated to work with a borrower to avoid having to foreclose, the borrower will still have to take initiative to avoid the foreclosure. Specifically, the borrower needs to communicate with the lender's loss mitigation department and clearly explain the situation, detailing what factors have made the monthly payment unaffordable.

With this knowledge, the loss mitigation department can go to work and attempt to work out a solution to avoid the foreclosure. Typically, the lender will want the borrower to provide the following in order to process a note modification request:

Hardship Letter: This is a simple written statement the borrow makes, detailing their financial situation and why the monthly mortgage payment is unaffordable and how a reduced monthly payment would allow them to keep the loan current.

Proof of Income: The lender will want to verify the precise amount of household income the borrowers currently receive. This usually involves faxing in pay stubs or tax returns.

A detailed list of all monthly obligations, including utilities, food, etc.

The lender usually takes close to 30 days to process note modification requests, so it is a good idea for the borrower plan for this delay and attempt to budget for it. Again, communication is key. The lender has to be able to talk openly and honestly with the borrower in order to assess the situation and come up with solutions to avoid foreclosure.

An important side note to the loan modification process can be found in this post about what to watch out for when dealing with a third party loan modification company.

By Personal Financial Guide

Loan Modification--Beware

The mortgage crisis has spawned a new niche industry--loan modification. Loan modification can be defined as a lender agreeing to "modify" the interest rate on an existing mortgage to help the borrower avoid foreclosure. It is in the Lender's best interests to help the borrower avoid foreclosure, because the Lender is never able to recapture the balance of the mortgage when they foreclose on a property.

There are a number of individuals and companies that advertise as loan modification specialists. For a fee, they will negotiate with your lender on your behalf to obtain a modification to your interest rate to help you avoid foreclosure. There are a number of very talented, honest and effective people working in this niche industry, but unfortunately, there is also a large group of unscrupulous, untrained and incompetent people and companies in the industry.

Here is what to watch out for if you are communicating with a loan modification rep:
If they tell you that you need to be behind in your mortgage payments for them to obtain your modification, terminate the conversation and do not use them. This is a dangerous misconception when it comes to loan modification. You do not have to be behind on your mortgage payment to get a modification from your lender. If your lender is convinced that your current mortgage payment is a financial hardship and that you will not be able to sustain it in the future, they will grant a modification in most cases and you will not have to ruin your credit by missing mortgage payments.

By Personal Financial Guide

Websites for Small Business

Small business online marketing has become an almost crucial factor in the success or failure of many small businesses. Today, a business without a website is regarded by many as behind the times or even with suspicion. A website should be regarded as a standard business tool. For some businesses, a static website that simply lists the location, contact information and a brief bit about what the business is and what it does is enough. However, for many businesses, remaining competitive depends on having a dynamic, optimized site that attracts and funnels targeted traffic into a marketing machine.

A good example of this is the real estate industry. Almost all Realtors have a web presence, and the effectiveness of their sites has a direct impact on their contacts, listings and ultimately sales. As with any business, the Realtor's website should be designed with two goals in mind: attracting the right sort of targeted traffic and then feeding that traffic into a marketing machine. The targeted traffic is primarily attracted through the correct use of keywords that are relevant to the housing market the Realtor is in. The marketing machine is the mechanism by which the Realtor gets that traffic to contact them or gets that traffic to register their information to be contacted.

For almost any small business starting up, a website that is properly optimized with relevant keywords and that contains the elements that filter traffic into the marketing machine should be regarded as a standard business tool.

By Personal Financial Guide

Credit Repair---Old Charge-Off Strategy

Credit repair is mostly about paying debts on time and about getting credit limits paid down. There are, however, a number of other factors to consider when you are trying to fix your credit. Charge offs can be defined as debts that were not paid, and were eventually written off by the original creditor and sold to a collection agency. Once a collection agency has bought a charge off account, they will aggressively attempt to collect the debt, using collection tactics including persistent phone calls, letters, and in many cases settlement offers.

Obviously, you should make every attempt to meet your obligations and pay your bills on time. Unfortunately, with the current state of the economy, paying bills has become a major challenge to many hard working people. Once a credit card has gone unpaid for a certain amount of time--usually around 5 to 6 months---the card company will charge off the debt. Once you have a debt that charges off, you have that blemish on your credit for the next seven years.

Should you attempt to make payment arrangements or accept a reduced settlement offer from the collection company that buys your bad debt from the original credit card company?

Maybe. Keep this in mind: Once your credit card company has reported you 30, 60, 90, 120 days late and then reported the account as charged off, that is the worst they can do to your credit. It will remain there for seven years, but if you do a settlement, enter into a payment agreement and in some cases dispute the account, you run the risk of re-setting that seven year clock. Simply put, if you have charge offs on your credit report, you might want to consider trying to hold out until they fall off at the 7 year mark.

We in no way advocate not paying debt that you legitimately owe, but if you have a choice between making payment arrangements on an old charge off account and having the account update and remain on your report for another 7 years, or just holding out a bit longer until the original collection account reaches the initial 7 year mark, you might want to seriously consider waiting.

On the other side of the coin, having charge off accounts on your credit report, regardless of how old they are can prevent you from getting home and auto loans and can even prevent you from getting certain types of jobs. The main point is to be aware of the timetable and the potential negative affects of paying off old bad debt accounts as opposed to just letting them fall off at the seven year mark.

By Personal Financial Guide

Refinance and Rescission---Mortgage Tip

Refinance mortgage transactions are different from purchase mortgage transactions in a number of ways, but the two most important differences are:

How the closing costs work

Rescission period.

In a refinance mortgage, your closing costs can be included in the loan amount and do not have to be paid separately as they usually do in a purchase mortgage transaction. This allows you to refinance your home for a lower interest rate or to consolidate other debt and not have to pay any money out of pocket.

In a refinance mortgage, there is a mandatory 3 day cooling off period called the rescission period. During this time, the borrower has the right to rescind or back out of the loan with no penalty. Although the borrower has signed all the paperwork and the loan is closed, the loan funds are not disbursed and interest does not start accruing until the rescission period is over. For example, if you sign all of your final loan paperwork on a Monday, your loan is not funded until Friday. The 3 day rescission period does not include the day you sign your paperwork.

It is very important to factor in this three day cooling off period when you do your refinance, especially if you are paying off other debt with the loan.


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Credit Card Basics

Credit cards can be useful tools or they can be your financial downfall. Credit cards are a quick, easy way to establish credit history, but can easily get out of hand and become the very thing that destroys your credit.

The basic problem with credit cards goes back to how easy they are to use. Too many people over use their credit cards and quickly find themselves maxed out and with a moderate to large sized loan to pay back. Credit cards that are maxed out are usually difficult and expensive to pay back. The outstanding balance is on a line of credit, so there is no set amount of time in which the balance must be paid off. This means that when the balance is paid down, credit becomes available and typically gets used again by the cardholder, thereby maxing it out again. Also, the minimum monthly payments on a maxed out credit card have very little impact on the princple balance.

What is the moral of the story?

Simply put, don't max out your credit cards. Don't treat your $5,000 credit limit as if you have an extra $5,000 to spend. Rather, regard it as a safety net to be used in emergencies. In a perfect world, that is the way to handle your credit cards. In a perfect world. Most people, however, end up maxing out their credit cards at some point and end up making only the minimum monthly payment. Again, the credit cards make spending money very easy and most credit cards have a healthy interest rate as well as various fees that make it difficult to get paid off.

If you are one of these people, the best thing you can do is to put all of your disposable income that you can into gettng that card--or cards--paid off as quickly as possible. Having a balance on a credit card that is more than half of the total limit has a negative effect on your credit score. When you pay your balance down below the 50% mark and when you pay it off entirely, you will see an increase in your credit score.

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Auto Insurance Tip--Avoid Coverage Gaps

Auto insurance rates go up if you have a gap in coverage. In other words, if you do not have auto insurance in force for a period of time, you will pay a higher rate when you get new insurance because of that gap.

A common mistake that people make is to cancel their auto insurance policy when they have been in an accident that is the other driver's fault and their car is totalled out. In some cases, people will take awhile to get a new car or use the settlement money for other purposes and either cancel or let their existing insurance policy on the wrecked car lapse.

While it is true that it does not make sense to maintain coverage on a wrecked, undrivable vehicle, it makes less sense to cancel the policy, wait, and then get a new car with higher insurance rates because of that gap in coverage. To avoid this, keep the policy in force on the original vehicle, even if it is wrecked, until you get the new vehicle. Then, simply have your insurance agent swap out the vehicles and you will not pay a higher rate because you kept continuous coverage.

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