Dennis' Mortgage Blog

Question of the week:  Last week you addressed paying down a mortgage early, can you discuss the effects of not making timely payments on a mortgage or other debt?

Answer:  There is perhaps no area in lending that has more false information than credit reporting and credit scores.  I will try to be brief (a chorus of “yeah sure!”) and address two separate issues here: 1) delinquent debt leading into mortgage qualifying and 2) delinquent on a mortgage.

Delinquent debt  Guidelines for credit scores for mortgage qualifying have gone up, as well the pricing matrices have changed so higher scores receive better pricing.  Because of this credit scores, while always important, have become more important in qualifying and funding mortgage applications.  Many times I am meeting clients for the first time and they say they pulled a credit report from one of the free on-line services and their score is XXX, when I pull our credit report we often have a different score on all three credit bureaus because of the nature of the reports.  Sometimes our scores are lower and sometimes they are higher, but our scores matter and the ones from the free report do not.  Why? Because we have to use a company that is registered with the lenders, Fannie Mae, Freddie Mac and FHA so their reports are accepted for lending purposes.  Getting a free report on line is nice for a snapshot of what you owe and what may be reporting as negative, but you cannot get a mortgage from one; every mortgage originator must pull their own report and cannot use someone else’s report.

If you have had some challenges in the past and have delinquencies on your report address them right away.  Too many times I have met with clients with a poor credit history and they have just walked away hoping to buy again in the future, “when things get better.”  Walking away does not make the poor credit history go away and puts you farther from home ownership.  I have had many clients over the years with poor credit histories who have said, “what can we do to put our credit in a position to buy a home?”  Together we have created a plan and when the clients followed the plan they put themselves into the homes they own today.  They confronted their poor credit, made all their payments on time, had the patience and commitment to stay with the plan and are now homeowners. 

Good credit starts today and is every day.  This means if you want to become a homeowner and have late payments on credit cards, auto loans, student loans, etc. you have to begin making every payment every month.  The longer your history of late payments, a thirty day late one month with one creditor, a thirty day late the next month with another creditor, two months later another thirty day late, the longer this string of late payments the harder it will be to get beyond that history and show a history of timely payments.  Start this month, make all your payments on time.  Then go back and start working on the late payments.

Regarding outstanding collections for medical bills, phone bills in college, ex-boyfriend’s car payment, etc. confront those debts.  Contact the companies, tell them you are working on clearing up your credit and bad accounts and want to work with them to bring this to a zero balance.  Be friendly, courteous and personal, workers at collection agencies and delinquency departments get yelled at all day every day, when they come across someone accepting responsibility and being friendly they are much more inclined to work with you.  Most companies have room to negotiate, be the person that they want to negotiate with.

Bad credit can prevent you from buying a home today, but focus on the vision of homeownership not when that vision will come to pass.  You spent some time getting bad credit, you will have to spend some time getting good credit and until you do you will remain a renter.  I realize this message is not for most of the people who read my weekly updates, but many of you may know someone who can use the advice.  As I said, I have many clients over the years who are homeowners today because of the work and effort they put into a plan we developed together, I am always willing, and enjoy, working with families to put them on the path of homeownership and be able to someday in the future call and say, “congratulations we just funded your loan, you are a homeowner.”

Delinquent mortgage  Late payments on mortgages, including home equity lines of credit, are harder to overcome and because of the size of the payments in relation to the household budget are much harder to make up.  Most people who miss a mortgage payment are going to miss more than one, and until they are paid current on all mortgage payments, including late charges, have what are known as “rolling 30’s” or 60’s, meaning because they made Septembers payment in October, unless they make another payment in October for October their November payment is the October payment 30 days late, and it goes on.  In this current economy many people are missing mortgage payments, and many are not missing them but just not making them.  So the question becomes:  Which is the best route for me to take, foreclosure, deed in lieu of foreclosure or short sale?

I wish I had a stock answer to this question, unfortunately I do not have a crystal ball and do not know how lenders are going to treat this current mortgage environment two, three, five years down the road.  Will they be more forgiving of mortgage delinquencies and foreclosures because of the current environment and prevalence of foreclosures and delinquencies?  No one knows, and we will not know until we start submitting mortgage applications with those delinquencies on the credit reports.  Here is what I do know mixed with my opinion. 

Short sale  First, the sooner and cleaner you can get clear of a mortgage that you no longer can afford to pay the better.  It creates a clean break on your credit report and the calendar starts to work in your favor as you get further away from the delinquency.  In this regard, keeping a mortgage current through a short-pay situation will show no rolling delinquencies, will show the mortgage paid on time and a settlement deficiency on the credit report.  People who closed on a short sale one year ago are now one year into no mortgage delinquencies, if they made payments timely into the short sale they have no mortgage payment delinquencies and the one month reported deficiency settlement.  While this is not great, or good, it is becoming better due to the passage of time, as well their credit score is not negatively impacted by both the settlement of the balance due and  delinquent monthly payments.

Foreclosure The foreclosure process can take quite a long time, especially in California.  Because of the regulations governing foreclosure the lender must meet certain deadlines and wait certain periods of time before actually foreclosing on a home.  I have seen some cases where people have been in their homes for well over a year before the bank has foreclosed.  To get to a foreclosure a borrower must miss at least three payments before the bank files a Notice of Default, or NOD.  Once the NOD is filed the bank must wait another three months before filing a Notice of Intent To Sell informing the borrower of a date, time and place they will be selling the home at foreclosure, this date must be at least 30 days from the giving of the notice.  The purpose of these time frames is to give the borrower time to bring the mortgage current and avoid foreclosure.  Note, to bring the mortgage current all back payments, penalties and fees must be paid to the lender.  As well these notices are public, you see them in every daily and weekly newspaper, so anyone going through the process is inundated with mail, calls and people knocking on their door looking to buy the property. 

Because of the length of time it takes to get through a foreclosure process the borrower has a significant amount of 30, 60, 90 and 120 day late payments reporting on their credit report.  These continue until the foreclosure is finished, at which point a foreclosure is reported on the credit report.  Only then can the borrower begin to start a history of good credit.

Deed In Lieu of Foreclosure  This process involves the borrower deeding the home directly to the bank and avoiding the prolonged foreclosure process.  Sort of like a short sale in that there is no lengthy period of missed payments, sort of like a foreclosure in that the whole balance is reported delinquent and foreclosed.  Down the road I am not certain which will be better in the eyes of lenders.  If someone is unable to proceed with a short sale, I would advise them to contact the lender and/or an attorney and work out a deed in lieu of foreclosure process to avoid the lengthy foreclosure process and build up of negative credit that results.

While it is sad that we must discuss these various issues, it is an issue that is prevalent in the economy and region.  Before making a decision as to which route to take consider the current and future ramifications of any decision using facts and information, as hard as it is try to keep emotions out of the decision.

(You said you would be brief!)  Sorry!

Have a question for me?  Ask me!   

Time is running out on the IRS tax credit!  If you are considering purchasing a home this year, are qualified and wish to take advantage of the IRS credit hurry and get into escrow.  All escrows must be closed by the end of business on November 30, 2009.  Are you qualified?  Click this link IRS Form 5405 for Frequently Asked Questions click here IRS FAQ

The stock market seems to have had a good week, sucking investments from the bond and mortgage markets.  As a result we have seen a bump in rates.  Between earnings and economic reports investors are buoyed by the economic future enough to get into the riskier markets of stocks and out of the safer investments of bonds.

Core inflation increased more than expected.  This is the key indicator for interest rates, and as Fed Chief Bernanke has said they, the Fed, will be aggressive in regards to inflation and keeping it under control.  What aggressive means will be seen as the trillions of dollars of debt are being financed by the government and the money poured into the economy. 

Further pressuring rates is the slow down of the Fed’s purchasing of mortgage backed securities.  As they pull back over all demand drops, prices drop, rates increase.  The most mitigating factor that I can think of to offset some this pull back is the huge amounts of cash sitting in the depositories.  Despite the billions of dollars from the TARP program banks have not loosened credit and are sitting on large reserves.  When will they begin to use the cash and when they do will it be investments or loans?  Despite common thought, bankers are not stupid; seeing inflation on the horizon they will benefit their stockholders most by making investments that excel in periods of inflation. 

For the week despite the flow into stocks by investors rates stayed pretty flat for conforming loans and a slight uptick for the government loans.

Rates for Friday October 16, 2009:

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.75%                              FLAT

30 year conforming-jumbo 5.125%                   FLAT

30 year FHA    4.875%                                    UP 0.125%

30 year FHA jumbo 5.25%                              UP 0.125%

Remember we have true, honest to goodness quality Jumbo rates again! Call for quotes as they vary depending on LTV, FICO and loan amount. 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

Great week in most of Southern California with the rain.  Good time to look at property after it rains so you can see leaks, puddles, and other water issues that we do not often have the opportunity to with prolonged periods of dry weather.

We missed the rain having spent the week in Rancho Mirage, where it has been cooler than normal but very nice!  Thanks to George and Sandy for watching Harrison!

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com ; feel free to forward the link to family and friends who may be interested in past commentaries.

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