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.

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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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Home Buying--Getting Ready

Buying a home is one of the largest financial transactions that most of us will make in our lifetimes. Especially considering the new and higher standards of mortgage approval, it is a very good idea to take the time to prepare before buying a house. Here is a quick checklist of some of the most important and relevant things you can do to prepare:

Know what is on your credit report before you apply for the loan. You can use the free annual credit report option and pay a little extra to get your three FICO scores and all three complete credit reports. This can be done online in a matter of minutes. It is a good idea to do this prior to making a loan application, because it will allow you the opportunity to anticipate and deal with any issues on your credit report that could otherwise slow your loan process down and cause you to miss a sales contract closing date.

Budgeting: Knowing what your FICO score is will allow you to have a hypothetical conversation with a loan officer and find out what kind of rate, payment and down payment you would have on your purchase loan. This will allow you to factor in and budget for the money out of pocket, the new monthly mortgage payment, and will give you a rough idea of what price range you should be looking in when you are shopping for your new home.

Down Payment: Another result of the mortgage meltdown is that it is very hard if not impossible to buy a house with no down payment. Unless you are able to qualify for a VA loan, you will have to make a down payment of at least 3% of the purchase price. Depending on the price of the home, even 3% can be a large amount. Plan for this and be aware that most lenders will require valid documentation of where the down payment is coming from and some will even require that the down payment funds will have been in your account for at least 30 days.

Reserves: In addition to having funds available for the down payment, many lenders also require verification that you have reserves---money in the bank---sufficient to cover two months of payments on the new loan including principle, interest, tax and insurance---your loan payment plus escrow, in other words.

Pay off Debt: Be aware that lenders will look closely at your debt to income ratio. Anything that shows on your credit report as an open account with a balance will be factored into your monthly outflow. Most lenders will require that your monthly outflow including your new mortgage payment be less than 45% of your gross monthly income. If you can----keeping in mind the down payment and liquid reserve requirements---pay off as much existing debt as you can a full month before you start applying for mortgage financing. This will give your credit reports time to update and reflect your new, lower debt load. This can also have the affect of improving your credit score.

These are just a few of the most important things you can do to prepare yourself for the home-buying process.

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Closing Costs--How to Avoid Them

Mortgage closing costs can sometimes be an ugly surprise, especially when you are the buyer in a purchase transaction. Knowing how the closing costs work in a mortgage purchase transaction can save you a lot of grief and can potentially save you a lot of money. Here are a couple of key things to understand about the closing costs in a purchase transaction:

The closing costs cannot be financed into the loan amount on a purchase mortgage.

In a refinance transaction, the entire amount of the closing costs can be added to the loan amount, so there is no need for the borrower to pay any money out of pocket.

In the purchase transaction, the buyer must pay his or her portion of the closing costs out of pocket, in certified funds at the closing.

To avoid having to pay for the closing costs out of pocket, the buyer can ask the seller to pay for the closing costs. If the seller agrees, the closing costs that the buyer would normally have to pay are simply deducted from the amount that the seller would net from the sale of the house.

Aside from getting the seller to agree to pay closing costs, there are two other important factors at play in this situation. For this to work, the sellers will sometimes increase the sale price of the house to compensate for the closing costs they are paying for.

In this situation, it is essential that the house appraise for enough to cover the original sales price plus the closing costs.

Also, almost all lenders will limit the amount of closing costs that the seller can pay for the buyer. Typically, the limit is either 3% or 4% of the total loan amount.

As long as the closing costs can be limited to 3% to 4% of the loan amount and as long as the home will appraise for enough, a buyer can ask the seller to pay all closing costs and increase the total sales price to compensate. The moral of the story is that the buyer does not have to come up with any money at the closing.

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Homeowner's Insurance Deductible--Quick Tip

A growing trend in the insurance industry is to place--sometimes mandatory--a wind and hail deductible that is a percentage of the coverage on the structure on homeowners insurance policies. For example:

A house is covered for $200,000
The deductible is $1,000 for all perils except wind and hail, for which there is a 2% deductible.
For a wind or hail claim, the deductible is 2% of $200,000---$4,000.

As you can see, a wind and hail claim might not go so well for you if you had to pay the first $4,000 of it. There are a few insurance companies that force the 2% wind and hail deductible on customers and other companies have it as an option. If possible, this is a good thing to avoid, as it makes the claims potentially so much more expensive for you.

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Auto Insurance Tip---Uninsured Motorist

If someone with no auto insurance slams into your car, what happens? The short version is that hopefully, you have a low comprehensive deductible and you also have Uninsured Motorist coverage.

When you are in a wreck and it is the other driver's fault, their insurance pays to fix your car, to rent you a car while your car is being fixed and to pay for your bodily injury and the bodily injury of your passengers. If the at fault driver has no insurance, and if you have Uninsured Motorist coverage, it will pay for your bodily injury and your passenger's bodily injury. Your only other recourse in this situation would be to go after the at fault driver in civil court.

Uninsured Motorist coverage varies from state to state. Some states will only offer Uninsured Motorist bodily injury, which does not pay to fix your vehicle when damaged by an uninsured driver. Some states will offer both UM bodily injury and UM property damage.

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Homeowner's Insurance Basics

Homeowner's Insurance is a type of insurance that virtually all homeowners have, but that almost no homeowners pay attention to except when they are buying or refinancing a home. It is important to understand the basic terminology of homeowner's insurance to avoid gaps in coverage and to avoid over paying for coverage you don't need.

Dwelling Coverage (Coverage A): The dwelling coverage is the part of the homeowners policy that covers the main structure.

Contents/Personal Property (Coverage B): The contents coverage covers your personal property, all the stuff in your house and in separate structures.

Personal Liability: This is a standard part of almost all homeowners policies that gives you coverage for personal liability arising from accidents that occur on your property.

Deductible: The deductible is the amount deducted from the money you are paid for a claim. Traditionally, homeowners deductibles are either $500 or $1000.

Replacement Cost: Replacement cost is the cost to replace an item or rebuild the structure at today's prices.

Actual Cash Value (ACV): The opposite of replacement cost. ACV allows for depreciation. For example, if your 10 year old TV was stolen from your house and your contents were covered at ACV instead of replacement, your claim would get you reimbursed for the TV minus depreciation.

Loss of Use: This covers your lodging & living expenses while your house is unlivable due to damage.

This is a list of the most common and important terminology in a homeowners insurance policy. There are many more features to homeowners insurance, but this will give you a good start on understanding the basics of a homeowners policy.

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Mortgage Closing Costs 101

At some point in time, virtually everyone will have to deal with a mortgage. A mortgage is usually the largest financial transaction that we make in our lives. Understanding all the costs associated with a mortgage transaction is very important.

Points: Points are fees that are either paid to the lender or to the mortgage broker. Points are assessed as a percentage of the loan amount.

Origination Fees: If the points are paid to the broker, or to a mortgage company, they are called a loan origination fee. This is the primary way that brokers and mortgage companies make their money.

Discount Points: If the points are paid to the lender as discount points, this means that the borrower is paying an extra fee to get a lower interest rate. This is also known as "buying the rate down".

Appraisal Fee: When the property is appraised, the Appraiser charges a fee, usually $350 to $500. In many cases, the mortgage company or mortgage broker will require that this fee be paid up front by the borrower.

Processing Fee: This is a flat fee charged to "process" the loan---handle all the paperwork, etc. This fee can range anywhere from $150 to $500.

Underwriting Fee: This is a flat fee charged by the lender to underwrite the loan. This fee is usually seen on loans that are originated by a broker and underwritten by a wholesale lender.

Title Insurance: This fee is universal for mortgages in all states. Title insurance insures the borrower against defects in the title of the property. On all loans, a title company will do a title search, verifying who is on the title to the property and how many liens of what amount are on the property. Title insurance rates will vary from state to state and company to company, but they are all based on the loan amount---the larger the loan, the more the title insurance will cost.

Closing Fee: This is a fee paid to the person or company who "closes" the loan, or who sits down with the borrowers and explains what documents they are signing. This fee is usually $150 to $250.

Filing Fees: All states and counties have fees associated with filing a mortgage, based on loan amount. Some states will have an additional mortgage tax.

Yield Spread Premium(YSP): YSP is a fee paid from the wholesale lender to the broker or mortgage company. The YSP is a bonus that the wholesale lender pays the broker or mortgage company for selling the customer a higher interest rate than they qualify for. The YSP is paid outside of the loan and is not part of the loan amount. In most states, mortgage brokers have to disclose a range for the YSP, but many mortgage bankers and mortgage companies do not have to disclose the YSP at all.

This is not a comprehensive list of closings costs, but this does cover the most common and most important types of closing costs. Keep in mind that closing costs will vary by loan type, by state, and by the broker or mortgage company doing the loan.

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Auto Insurance Basics

Auto insurance is something that we all have to have, by law, but not all auto insurance is created equal, and different people have different needs when it comes to insuring their vehicles. Here is a quick guide to the basics of auto insurance terminology:

BIPD(Bodily Injury Property Damage) This is the basis of all auto insurance policies. BIPD is the liability coverage that all drivers are required by law to carry. On insurance forms, BIPD is expressed by three numbers such as 25/50/25. This means:

$25 thousand dollars of liability coverage for bodily injury that YOU cause to one person

$50 thousand of coverage for bodily injury that you cause per occurance---multiple people

$25 thousand for property damage that you cause.

So, the basic 25/50/25 liability insurance is to protect you from liability caused by your accidents. The mimim limits will differ from state to state, but by law, all drivers must at least carry the state minimum liability insurance.

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Tips to Save Money

Saving money, cutting costs, and budgeting are all very popular buzzwords lately, and with good reason. There is a wealth of information available online and in print about personal finance, and much of it is relevant and useful. However, many people are able to save significant amounts of money on their own by following a few basic, and sometimes mundane steps:

1. Avoid Eating Out: While taking yourself or your family out to dinner on a regular basis obviously costs quite a bit, even eating out for lunch or breakfast on a regular basis can funnel away significant amounts of cash over time. Assume that the average lunch during the work week will cost you $7.00. That's $35/week, $151/month, $1820/year. Think about how much more quickly you could pay off your credit card debt by putting an extra $151 per month toward it, or the impact of making one or two extra mortgage payments per year with the $1820. That $7.00 a day five days a week could be put to much better use.

2. Use a List: Don't go grocery shopping without a list. Plan out what you need before you go and avoid impulse purchases. Planning out a shopping list helps avoid unnecessary purchases and can save a shocking amount of money.

3. Shop in Bulk: Invest a couple of hundred dollars in a large deep freeze and shop in bulk. Buying in bulk saves money on the quantity discount and it saves money by cutting down trips to the store.

4. Plan Meals: When you are cooking at home, time becomes an issue. Planning out a weekly menu fits right in with shopping in bulk, not eating out, and using a list. Having a weekly menu makes it a lot easier to plan ahead for meals to be cooked at home and allows you to budget your grocery money better.

5. Cut Utility Costs: There is a long list of ways to cut utility costs, but investing in a programmable thermostat, making your home air-tight, and getting a tankless hot water heater are some popular and effective methods of saving money on utilities.

6. Insurance: Make sure you are getting a good deal on your home and auto insurance. Most insurance companies will give substantial discounts for writing your home, auto and sometimes life insurance as a package. If you have your insurance policies scattered out among different companies, consider combining them at a lower price at one company. The savings can be surprising.

These are just a few basic money-saving tips, but if take to heart, they can be effective. A big component of saving money and cutting costs is planning and discipline. Planning out a budget and sticking to it instead of spending blindly, paycheck to paycheck can make a huge difference.


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