There are few advantages to a financial meltdown, but they do exist. One of them is the significant drop in mortgage interest rates that generally comes hand in hand. You could save thousands of dollars by refinancing your mortgage now interest rates are at an historical low. The question is: can you? This article will look into the three factors that will determine if you are eligible for a mortgage refinance.
First of all, it is worth spending a paragraph on explaining the difference between a loan modification and a mortgage refinance.
Loan modifications are an emergency measure designed for people who cannot pay their mortgage. It reduces the interest rate, extends the length of a mortgage, and in some cases reduces the principal balance of the loan. This measure will have a negative effect on your credit score because you failing to pay the mortgage you signed for. Mortgage refinance is generally not an emergency measure but a strategic move from your current mortgage to another mortgage with lower interest rates. There is no negative credit score impact, because the first mortgage is paid in full before signing a new one. Loan modifications are for homeowners in trouble, while mortgage refinancing is for borrowers that can afford their payments, or pretend to do so, and want a better deal.
So what factors determine if you should refinance now? You should investigate three areas of your personal circumstances: 1) Your credit score, 2) Your home equity, and 3) If you actually save enough money for it to be worth the effort.
Let us look at these factors individually, and see how they relate to the larger picture of mortgage refinancing.
Credit Rating.
When you look for a mortgage refinance you are in effect looking for a lender that offers you a better deal on your mortgage. For a lender to invest in you, you must go through the same procedure as when you got your first loan. The lender will need to make sure you are a reliable borrower and worth the risk. The best way to assess if you will qualify is how good your credit score is. If you do not have a good credit rating, refinancing is simply not an option.
Home Equity.
You need to have some equity on your home for a lender to even consider refinancing your home. The equity on your home, that is the difference between its current value and your mortgage’s balance, is the collateral security you provide your new lender. If it is not large enough, you will not get many lenders willing to take the trouble.
Is it worth it?
There is no point in refinancing a mortgage for the sake of refinancing. You must make sure it actually saves you money. Mortgage refinancing initially cost you money; you only reap the benefits after years of a reduced interest rate. If you are not planning to stay long in your home there might be no sense in refinancing. However if the circumstances are right you could actually save thousands of dollars on your mortgage, and be one of the few that benefited from the financial meltdown.
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Loan Modifications can be a way to save your home from an imminent foreclosure. It will also affect your credit score, and this could affect your chances of getting another loan or when applying for a job. This makes many people think twice before applying for a loan modification. The truth is that you could end up without being accepted for a loan modification but still suffer a drop on your credit score. There is also the time wasted applying and waiting for a response. Some troubled homeowners automatically assume they are not eligible for such a modification. A good way to make sure you are even eligible for a loan modification under the HAMP program is to visit http://makinghomeaffordable.gov/modification_eligibility.html and see if you pass the program’s requirements. This will help you save time and your credit rating without asking for an outright modification. The requirements are straightforward and will give you a clear understanding of your position. This questionnaire will also help you get used to the kind of question you will be asked if you go ahead with the modification. Use it as a trial run that has no negative consequences on your record. The questionnaire is set as a test that tells you if you are eligible for a HAMP modification based on the information you provide. What questions are asked? There are only 5 questions that determine your eligibility. 1) Is your home your primary residence? 2) How big is your mortgage? The key question here is if it is below the $729,750 mark, the maximum mortgage size to fall in the HAMP program. 3) Are you struggling with making payments toward your mortgage? You guessed! If you say no here you will not qualify. I tried! 4) Was your mortgage contracted before 2009? This is also a key question as all loans after this date do not qualify. 5) The final question relates to your debt to income ratio. That is how much money you owe in relation to how much you make. The key question is if it is higher than 31%. If your debt to income ratio is not higher than 31% HAMP cannot help you. You will have to find some other kind of alternative. Put simply you must answer yes to all five questions to be eligible. If you knew anything about the HAMP program you probably did not get much out of that questionnaire. However, after you determine if you are eligible for a loan modification you can download an RMA form at http://makinghomeaffordable.gov/docs/RMA%20Interactive%20-%20Updated%2011.10.09.pdf . This form will help you collect the information you need to apply for a modification. You can then contact a free counselor and ask for advice on your particular case. Unfortunately qualifying for a HAMP loan modification is the easy part. The hard part is getting your lender or servicer to approve it. There are also grey areas when applying for a loan modification, which makes the questionnaire we looked at above a little bit of an oversimplification. However, it is a great place to start. As you can see the process is not that difficult, you can do it yourself and save yourself a small fortune instead of spending your last dime on a foreclosure rescue company. Nevertheless, you must accept that applying for a loan mod is going to be complicated and require a lot of your time and patience. If you do not have either you might still want to use a paid company.
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Troubled homeowners are so worried about losing their home they will do anything to save it. This generally ends up including a loan modification. Loan modifications are a way of reducing monthly payments by a) reducing interest rates, b) extending the tenure of the loan, and c) in some rare cases even by reducing the principal balance of a mortgage.
However, many home owners are starting to realize that interest rates and mortgage payments are not the only things that are being lowered. The credit score of homeowners is being reduced by up to 100 points just for entering a loan modification program. 100 points in a scale that generally goes from 300 to 850 points is a significant blow to a homeowner that has taken good care to protect his credit rating.
The big question is: is it fair? Should it be done?
The main argument housing counselors are putting forward against this practice is the lack of transparency. Most of the times troubled homeowners that ask for a loan modification feel like they are doing the right thing by trying their best to pay for their mortgage despite financial problems. When they realize that there credit score has been hit despite their efforts the sometimes feel cheated.
Are they justified? It seems reasonable to me that lenders and mortgage servicers provide clear information on the consequences of taking on a loan modification. But would a troubled homeowner applying for a loan mod change his mind just because he realizes his credit will be affected? If they do, it probably means they did not really need it to start with.
Why should a loan modification affect your credit rating?
Credit scores and rating are in place to do one thing, help banks and lenders know how reliable a borrower you are. Reliability in this industry is proven by your credit history that is how good you have been at paying your debts, your income and your commitment to the security of the loan, in this case your home.
A credit score is a numeric value assigned to you that qualifies your credit history and how desirable you are as a lender. Now, let us try and detach the emotional aspect of being a troubled homeowner and think about the consequences of a loan modification. A loan modification will in the vast majority of cases mean a reduction in interest, principal balance, or both. This means the bank is losing money. Losing money the borrower agreed to pay. By applying for a loan modification the borrower is stating he or she is struggling to make the payments they agreed to make. Shouldn’t that affect their credit rating, their reliability as a borrower?
Even though applying for a modification will take a chunk from your credit rating it is probably going to shade into insignificance compared to the effect falling behind in your mortgage payments and God forbid, foreclosing on your home. These actions can leave your credit score in tatters for years, and fade into insignificance when compared with a 100 point hit.
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For borrowers, Federal Housing Administration changes are on the horizon. Some of the new policies are effective next month, and are all part of a plan to bolster FHA’s reserves.
Last year, FHA insured one-third of all approved mortgages. The capital-reserve ratio is no longer at the Congress-mandated 2 percent threshold. FHA Commissioner David Stevens even voiced his intention to hire a chief risk officer, a position the administration has never had since its 1934 inception.
“To be clear, the fund’s reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new Congressional action,” Stevens said in a September press release.
In efforts to avoid a bailout, the FHA will make a series of policy changes:
• The up-front mortgage insurance premium (MIP) will increase to 2.25 percent from 1.75 percent. This change is effective starting April 5.
• To qualify for the FHA’s 3.5 percent down payment program, borrowers must have a credit score of at least 580. Those with a sub-580 score have to put down at least 10 percent.
• Seller concessions will be reduced to 3 percent from 6 percent, meaning buyers will not be able to inflate a home’s appraised value in efforts to pay off their closing costs.
• The FHA will implement an array of enforcements on FHA lenders, such as publicly reporting lender rankings and seeking legislative action that would make mortgagees for loans they give and underwrite.
“When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history,” Stevens said in a January press release.
In addition to upping the MIP, the FHA is requesting legislative action to increase the maximum annual MIP. Should such legislation pass, the FHA plans to shift some of the up-front MIP to annual MIP, allowing borrowers to pay off the increase in monthly payments.
With less than a month before the MIP jump is effective, the other policy changes have no definite start date, but the FHA plans to implement all changes by this summer.
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If you do not qualify for a loan modification, and foreclosure seems unavoidable, there are steps you can take to make the most of a bad situation. One of these options is arranging with your lender for a Deed in Lieu of Foreclosure.
What does this mean?
It means you hand over the deed, or ownership, of your house to the lender in exchange of clearing your debt. The homeowner loses his home but is left without a debt while the lender takes immediate control of the house.
What advantages does this option have?
In certain circumstances a Deed in Lieu of Foreclosure can have significant advantages for both the lender and the buyer.
1) The lender can take immediate control over the property. A much more efficient method than foreclosure proceedings that can take years to finish.
2) The borrower foregoes his home but is left without any debt.
3) Lenders can save themselves a lot of money in court expenses, time and other complications if they avoid a typical repossession procedure.
4) Borrowers that avoid a foreclosure will remove the stain on their record and in some cases avoid bankruptcy.
What are the requirements for a Deed in Lieu of Foreclosure to be carried out?
1) The market value of the home must be less than the current balance of the mortgage.
2) There must be no third party credits secured by the home, like a second mortgage or a secured car loan.
Although it might seem counterintuitive for a homeowner to let his home, probably his largest investment, go without anything to show for it, it can be a much better alternative than a long and painful foreclosure. Borrowers don’t have to see their credit score hurt and can start again elsewhere, while lenders can cut their losses and try to make the most of a bad loan without having to continue spending money and resources.
In what circumstances should a homeowner think about handing a Deed in Lieu of Foreclosure?
Obviously, homeowners that are going through financial difficulties and cannot afford their monthly mortgage payments. However if they still have some sort of income then they may well qualify for a home modification or some other option. This path is more suited for homeowners that either cannot afford any kind of loan modification or feel that their home is too underwater, worth less than the mortgage balance, to be worth saving.
How is it done?
Both parties must agree to sign an Agreement in Lieu of Foreclosure. This document transfers ownership to the lender. In some cases the homeowner might pay a certain amount of money to reduce the loan and make sure her credit score is not affected. Once the document is signed the lender will issue a waiver to deficiency judgment, which will be used if the sale of the house is below the value of the mortgage. After this an escrow service executes the agreement; releasing both the lender and the borrower from their mortgage contract.
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Do loan modifications affect your credit score? Should they? Why should you care?
Credit scores are a numerical value credit bureaus place on a borrower as a way of measuring their reliability. It is in the interest of lenders to report any delinquent activity to the credit bureau. In fact some would argue that it is in the interest of everyone as delinquent borrowers make loans more expensive for everyone by forcing lenders to increase interest rates to pay for bad loans. This is why potential borrowers that have bad or low credit scores find it harder to get loans approved or have to pay a premium for the privilege.
Borrowers that don’t make one or various payments are marked by a special code that informs other lenders of the situation. Borrowers that are granted a reduction of their loan balance or monthly payments due to financial difficulties are also marked with a special code called AC. This code can reduce the credit score of a borrower by anything between 30 and 100 points and tells lenders that the borrower had only made a partial payment.
The problem arose when troubled borrowers entered the loan modifications sponsored by the government and were granted loan modifications without ever having missed a payment but were still marked with AC as it was the closest fit in the “system”.
The Obama Administration felt it was unfair to harm the credit scores of borrowers that sought a loan modification. Therefore a new code “CN” was thought up which will not have an impact on credit scores for now.
The question is if this will change. Will the code CN affect the credit score of borrowers in the future? This is still to be determined. It will depend on if FICO, the company behind the most popular credit score formulas, decides the appearance of CN in a credit report increases the chances or is predictive of delinquent behavior.
It is worth noting that borrowers that enter into a loan modification are asking for a reduction of their loan and are therefore not wonderful news for lenders that are looking for reliable customers. It is not at all clear to me why it is wrong that their credit score is somewhat affected.
However what is certain, and this is what worries the Administration is that borrowers with a good credit history will shy away from a loan modification that threatens their credit. Lenders might argue that borrowers who feel they have a choice and prefer not to enter into a loan modification that would damage their credit don’t really need it and can very well pay the full loan, thank you very much.
How you feel about the matter may very well depend on which side of the fence you are looking from. The Obama Administration wants to give HAMP the best chance possible and is eager to erase any bad publicity the program attracts even if this means fudging credit reporting codes. Whether these measures are long lasting or not will depend on the performance of borrowers that enter into a loan modification, it must be said at this stage that things don’t look all that good.
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