Credit may be on your mind for a number of different reasons. You may want to raise your credit score, remove damaging credit information, polish up your credit if you're thinking of buying a home, purchase auto insurance, or maybe you've been denied a job because of credit information you weren't aware of. Credit is even a strong consideration for couples thinking of someday getting married and in a peculiar way, is the populist screening tool of choice. If your credit has you on the outside looking in, or if even if you think it's fine, here is some information you should know.
The economic crisis has not only reduced the pool of people that qualify for credit, it has also reduced the availability of credit for people that in fact have excellent credit. How? If you have a tall credit line on a credit card that you keep open just in case you may need it someday, you should check to make sure your tall skyscraper credit line has not become a 5 story walk-up. Banks are abruptly reducing unused portions of your credit limit regardless of your credit history, simply to make funds available in this tight lending market. As more and more banks go bankrupt, over 100 deposit instituions gone in 2009, banks find sources from which to borrow from scarce.
Since credit card companies communicate with one another, as one credit card goes, the others follow. None of them want to be left holding the proverbial bag. If a lender knows that your other cards reduced your credit line, it will do the same because no credit card wants to find itself being your single access to tall credit. So, your excellent FICO score has now become an average FICO score because in reducing your credit limit, the ratio of your balances to credit limit is not as sexy.
The credit bureaus figure your score, in part, by the amount of credit you have available against the amount of credit you actually use. The more credit you use (max-out your card) the lower your credit score will be, regarless if you pay on time. Most people with excellent credit scores above 740, utilize less than 25% of their credit limit month to month.
If you have an outburst of anger and request that they close your card after betraying you, unfortunately this will lower your credit score even more, because you would be removing an open "tradeline" in good standing from the algorithm that the credit bureaus use to score you. Part of the reason your credit (FICO) score was so high was because you received little shiny stars for keeping the account in excellent standing over the years and if you close it, the credit bureaus will essentially strip you of those little shinny stars you earned. So in this instance, you may still have "good credit" from a payment history perspective, but you may no longer have an impressive credit score, which unfortunately would be a result of no fault of your own.
For those of you seeking to repair your credit, you should know that credit repair is free if you do it yourself. You should start by obtaining a free copy of your credit report at http://www.annualcreditreport.com/. They will try to solicite you to obtain your credit (FICO) scores, but I recommend you decline that option because that's not going to help you much and your free report will no longer be so free. There are also a number of different scoring models that are applied so you never know which one a prospective creditor may use. Besides, getting your score is not as important as the information on your credit that creates your score.
If you simply seek to raise your credit score and you already know what your score is, you can start by paying down your credit card balances to below 30% of the limit, if at all possible. You can also open a secured credit card if you need some credit points to qualify for a particular loan program, like an FHA or Ginnie Mae loan. A secured credit card can raise your score 10 to 30 points once the account posts to your credit report, depending on other factors. This may not likely work if you are seeking to bring your score into the high 600's or 700's but if your score is in the 500's, you'll see more movement with a secured card.
Disputing information on your credit for free will involve writting letters to the credit bureaus and your creditors, and being very specific about what you need. Pay close attention to collection accounts, charge-offs, paid balances incorrectly reporting as delinquent, and any other information that you do not recognize. Submitting dispute letters with the bureaus over reported late payments, especially on older accounts, may be fruitful as creditors can often neglect to respond to disputes filed with the credit bureuas. It's also not uncommon that credit information pertaining to someone else gets erroneously plugged onto your credit report, especially if you have a common name like Jose Gonzalez. (Sorry Jose).
Saturday, November 14, 2009
Friday, November 6, 2009
Requesting a Loan Modification
When requesting a loan modification from you lender, you should be very specific about what you are looking for and why your loan should get modified. You should absolutely make your modification request in writing and do not accept any final determination from your lender verbally or over the phone. Calling up your lender and saying "I would like to modify my loan" may not suffice. Keep in mind, modifying your loan is not a profitable venture for your lender so they are not likely to hire a staff to accomodate the increasing number of modification requests. A modification is a loss mitigation practice or damage control and the person that so happended to take your call, may not be incentivised to help you. So the more specific and orderly you can be the better chances you have of floating your request to the proper administrator that can make a decision.
I have heard countless times over, homeowners complain that the lender told them they can't do anything. The most popular reason of declination given verbally over the phone by a lender is "you must be behind on your mortgage before we can help you". It is very true that lenders commonly give homeowners this reason as a basis for a denial, but the reality is that the lender will not issue such a reason for declining a modification in writng. In most instances, that type of a denial is a result of an underpaid and under-experienced employee effectively getting you off the phone. Your modification request should be well thought out, written and delivered to the lender in the mail. They must reply to your correspondence in like fashion.
Specific requests that you can make really depend on your situation. For example, if you are in an adjustable rate mortgage and can no longer afford the mortgage payment because your payment keeps going up, you can ask the lender to permanently fix your interest rate at a rate that you can afford. Take for example, if your interest rate is currenlty 8%, you can request that the lender reduce that rate to 5% and make it fixed. Obviously lowering your interest rate would lower your monthly payment.
If you are seeking a modification because you were laid off and do expect to be working again in a few months, you can request a temporary modification. For example, you can request that your lender modify your payment to interest only for a certain period of time, such as 2 years for example. Depending on the size of your mortgage, converting your payment to interest only can dramatically lower your payment. On a smaller loan balance, an interest only payment would not make much of a difference than your regular principle & interest payment. For example, a 30 year loan of $200,000 at the rate of 8% would have a principle & interest payment of $1467. An interest only payment on the same loan amount of $200,000 would be $1333, which is a difference of only $134. A much larger loan balance, let's say of $400,000 at the rate of 8% has a principle & interest payment of $2935. An interest only payment for that same $400,000 loan at the same rate of 8% would be $2666. That would be a difference of $268.
Another option you can request is a deferred interest option. This simply means that the lender can actually lower your payment to an amount that is even lower than the minimum amount of interest owed for the month. A deferred interest rate could reduce your payment to a payment equivalent to the rate to 3% or even 2%. For example if you have a rate of 8% and defer interest due so that your new payment is equivallent to a loan with a payment with a rate of 3%, you are deferring a portion of the interest due every month. You propose to pay the deferred interest amount as part of the loan balance and once your financial situation changes. The lender will like to hear that you have a solid plan and intend to repay any amount outstanding. A lender may agree to such a payment if there is otherwise no potential for them to currently receive a normal payment from you. In their eyes, a smaller payment is much better than no payment at all especially if it's only for a short period of time. If you can show in good faith that your income will rebounce once again, this may be a very attractive alternative for them to avoid the costly process of a foreclosure.
Pushing delinquent payments to the back is probably the most popular consideration today. The problem with this is that lenders realize it may be too popular and homeowners may be too quick to ask for such an arrangement. Many homeowners that are facing foreclosure ask to "push delinquent payments to the back" to attempt to avoid the sale of their home in foreclosure. The lender may be willing to accomodate you but if there is no evidence that you have the ability to pay the regular monthly payment, why should they even bother? Lenders also like to see a good faith gesture on your part if they are going to consider deferring any number of mortgage payments. If you are seriously behind on the mortgage by more than 3 months, it would be strongly advisable that you attempt to come up with a portion of the delinquent amount owed. Depending on the particular hardship you are having would determin if this is at all possible, but contributing upfront to a delinquent balance does make for a stronger loan modification request.
The benefit of the modification you are requesting should be clear, which means that you should really make it your business to fully understand the loan you currently have. Before asking for a modification, go pull out your loan documents from the last closing you had and get your hands on a document called a Note. Your note spells out all of the particulars and details of your current loan. I can't tell you how many homeowners I've spoken with that do not know what they're interest rate is while they are actually seeking help with their loan. You should be very knowledgeable regarding those loan details and this will greatly help you to to frame out the details of the modification that you are requesting. Most mortgage notes are titled, Mortgage Note, Adjustable Rate Note or Balloon Note.
Let's say for example you already have an interest only payment and you would like to request a modification because you can't afford the payment. If you call up the lender and simply ask for a loan modification to lower your payment, the lender is not likely going to accomodate you because they'll see that you already have a reduced payment. You failed to take the time to fully understand your current loan and did not give them a practical plan. They are not going to think too much for you. There are literally hundreds of thousands of people requesting loan modifications and with the execption of a handful of the much larger banks, they are not hiring extra personnel to handle the increase in modification requests. You should give them as little work as possible.
Imagine how many resumes are forwarded to companies in this employment market where there is an over 10% unemployment rate as of November 1, 2009. The prospective employer is obviously going to be much more selective with the resumes that he/she decides to review. Consider your modification request a resume during a very difficult time of unemployment.
In the above example, taking the time to review your mortgage note and understanding that your interest only payment is already a reduced payment should help you to better lay out a plan. In this example, you would tell them in your written request, "I understand that I already have an interest only payment". Letting them know that you understand that there is less room for them to work will make them more attentive towars you. If you're in a reduced or interest only payment already, you should clearly explain the change since the time of your last closing that caused you to no longer affording the payment. Also, explain what in your future is going to be different that will allow you to afford a normal payment once the temporary relief period you're requsting expires.
Generally speaking, lenders do not like to factor future events into lending decisions that they make today, but loan modifications are a much different type of lending alternative.
Not being able to afford your mortgage payment alone is really not a good reason to modify. No longer able to afford the mortgage payment because your household income has abruptly decreased is much more meritorious. Not being able to afford your mortgage because you have too much credit card debt or too high a car payment is neither a good enough reason to modify. You presumably had those other credit obligations when you closed on the loan, but if you accrued additional debt regardless of whether it was for legitimate reasons or not, the lender is not going to take those other credit expenditures under consideration. They would take the position that you should neglect your credit cards and car payment to maintain your mortgage.
Also, if you have financed an expensive vehicle and have a new monthly car payment after you closed on your mortgage you're now seeking to modify, it may be a hard sell to convince your lender to reduce your mortgage payment so that you can better afford your Cadillac.
If the lender feels that with your regular income you can't afford your current payment which is already reduced to interest only, they will probably determine that you should not have qualified for the loan in the first place. This is a harsh reality caused by the plethora of subprime loans that gave loan options with little consideration to income.
Under no circumstances should you ever threaten a lender with walking away or in some way abandoning the home. It's generally not illegal to make these kinds of threats but the lender will simply not respond and such a threat will not be fruitful for you in getting the asisstance you're looking for. Many homeowners are aware of the complex and costly nature of a foreclosure action an threaten the lenders with foreclosure as to create an incentive for the lender to help. This will not work. Although foreclosure is costly to the lender, they will not be afraid of adding one more foreclosure proceeding to their calender.
I have heard countless times over, homeowners complain that the lender told them they can't do anything. The most popular reason of declination given verbally over the phone by a lender is "you must be behind on your mortgage before we can help you". It is very true that lenders commonly give homeowners this reason as a basis for a denial, but the reality is that the lender will not issue such a reason for declining a modification in writng. In most instances, that type of a denial is a result of an underpaid and under-experienced employee effectively getting you off the phone. Your modification request should be well thought out, written and delivered to the lender in the mail. They must reply to your correspondence in like fashion.
Specific requests that you can make really depend on your situation. For example, if you are in an adjustable rate mortgage and can no longer afford the mortgage payment because your payment keeps going up, you can ask the lender to permanently fix your interest rate at a rate that you can afford. Take for example, if your interest rate is currenlty 8%, you can request that the lender reduce that rate to 5% and make it fixed. Obviously lowering your interest rate would lower your monthly payment.
If you are seeking a modification because you were laid off and do expect to be working again in a few months, you can request a temporary modification. For example, you can request that your lender modify your payment to interest only for a certain period of time, such as 2 years for example. Depending on the size of your mortgage, converting your payment to interest only can dramatically lower your payment. On a smaller loan balance, an interest only payment would not make much of a difference than your regular principle & interest payment. For example, a 30 year loan of $200,000 at the rate of 8% would have a principle & interest payment of $1467. An interest only payment on the same loan amount of $200,000 would be $1333, which is a difference of only $134. A much larger loan balance, let's say of $400,000 at the rate of 8% has a principle & interest payment of $2935. An interest only payment for that same $400,000 loan at the same rate of 8% would be $2666. That would be a difference of $268.
Another option you can request is a deferred interest option. This simply means that the lender can actually lower your payment to an amount that is even lower than the minimum amount of interest owed for the month. A deferred interest rate could reduce your payment to a payment equivalent to the rate to 3% or even 2%. For example if you have a rate of 8% and defer interest due so that your new payment is equivallent to a loan with a payment with a rate of 3%, you are deferring a portion of the interest due every month. You propose to pay the deferred interest amount as part of the loan balance and once your financial situation changes. The lender will like to hear that you have a solid plan and intend to repay any amount outstanding. A lender may agree to such a payment if there is otherwise no potential for them to currently receive a normal payment from you. In their eyes, a smaller payment is much better than no payment at all especially if it's only for a short period of time. If you can show in good faith that your income will rebounce once again, this may be a very attractive alternative for them to avoid the costly process of a foreclosure.
Pushing delinquent payments to the back is probably the most popular consideration today. The problem with this is that lenders realize it may be too popular and homeowners may be too quick to ask for such an arrangement. Many homeowners that are facing foreclosure ask to "push delinquent payments to the back" to attempt to avoid the sale of their home in foreclosure. The lender may be willing to accomodate you but if there is no evidence that you have the ability to pay the regular monthly payment, why should they even bother? Lenders also like to see a good faith gesture on your part if they are going to consider deferring any number of mortgage payments. If you are seriously behind on the mortgage by more than 3 months, it would be strongly advisable that you attempt to come up with a portion of the delinquent amount owed. Depending on the particular hardship you are having would determin if this is at all possible, but contributing upfront to a delinquent balance does make for a stronger loan modification request.
The benefit of the modification you are requesting should be clear, which means that you should really make it your business to fully understand the loan you currently have. Before asking for a modification, go pull out your loan documents from the last closing you had and get your hands on a document called a Note. Your note spells out all of the particulars and details of your current loan. I can't tell you how many homeowners I've spoken with that do not know what they're interest rate is while they are actually seeking help with their loan. You should be very knowledgeable regarding those loan details and this will greatly help you to to frame out the details of the modification that you are requesting. Most mortgage notes are titled, Mortgage Note, Adjustable Rate Note or Balloon Note.
Let's say for example you already have an interest only payment and you would like to request a modification because you can't afford the payment. If you call up the lender and simply ask for a loan modification to lower your payment, the lender is not likely going to accomodate you because they'll see that you already have a reduced payment. You failed to take the time to fully understand your current loan and did not give them a practical plan. They are not going to think too much for you. There are literally hundreds of thousands of people requesting loan modifications and with the execption of a handful of the much larger banks, they are not hiring extra personnel to handle the increase in modification requests. You should give them as little work as possible.
Imagine how many resumes are forwarded to companies in this employment market where there is an over 10% unemployment rate as of November 1, 2009. The prospective employer is obviously going to be much more selective with the resumes that he/she decides to review. Consider your modification request a resume during a very difficult time of unemployment.
In the above example, taking the time to review your mortgage note and understanding that your interest only payment is already a reduced payment should help you to better lay out a plan. In this example, you would tell them in your written request, "I understand that I already have an interest only payment". Letting them know that you understand that there is less room for them to work will make them more attentive towars you. If you're in a reduced or interest only payment already, you should clearly explain the change since the time of your last closing that caused you to no longer affording the payment. Also, explain what in your future is going to be different that will allow you to afford a normal payment once the temporary relief period you're requsting expires.
Generally speaking, lenders do not like to factor future events into lending decisions that they make today, but loan modifications are a much different type of lending alternative.
Not being able to afford your mortgage payment alone is really not a good reason to modify. No longer able to afford the mortgage payment because your household income has abruptly decreased is much more meritorious. Not being able to afford your mortgage because you have too much credit card debt or too high a car payment is neither a good enough reason to modify. You presumably had those other credit obligations when you closed on the loan, but if you accrued additional debt regardless of whether it was for legitimate reasons or not, the lender is not going to take those other credit expenditures under consideration. They would take the position that you should neglect your credit cards and car payment to maintain your mortgage.
Also, if you have financed an expensive vehicle and have a new monthly car payment after you closed on your mortgage you're now seeking to modify, it may be a hard sell to convince your lender to reduce your mortgage payment so that you can better afford your Cadillac.
If the lender feels that with your regular income you can't afford your current payment which is already reduced to interest only, they will probably determine that you should not have qualified for the loan in the first place. This is a harsh reality caused by the plethora of subprime loans that gave loan options with little consideration to income.
Under no circumstances should you ever threaten a lender with walking away or in some way abandoning the home. It's generally not illegal to make these kinds of threats but the lender will simply not respond and such a threat will not be fruitful for you in getting the asisstance you're looking for. Many homeowners are aware of the complex and costly nature of a foreclosure action an threaten the lenders with foreclosure as to create an incentive for the lender to help. This will not work. Although foreclosure is costly to the lender, they will not be afraid of adding one more foreclosure proceeding to their calender.
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