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Foreclosure and Your Credit Score

May 10th, 2009    Subscribe To Our Feed

In today’s environment, millions across the nation are being faced with the harsh reality of foreclosure. These individuals are also dealing with how a foreclosure will affect their credit score. Lower credit scores can result in being denied credit, such as car loans or credit cards, and you can also face much higher interest rates for loans and insurance.  Believe or not, your credit score can also have an impact when you are applying for jobs.  Your potential employer may refer to your credit score to determine your trustworthiness and whether you are a responsible employee.

A foreclosure will drop your credit score typically by 200 to 300 points.  That means if you had a credit score prior to your foreclosure of 700 points, which is considered good, you could end up with a score as low as 400 points after your foreclosure.  The minimum FICO score is 340. Even though a foreclosure can remain active on your credit report for seven years, it won’t ruin your credit score for life. If you keep up on your other credit obligations and remain in good standing with those obligations, your credit score can rebound in as little as two years.  Remember that the foreclosure is only one negative mark so if you don’t default on your other credit obligations you credit score will be less damaged.

One recommended way for improving your credit score is to keep only a minimum number of credit cards and make sure the balance on those cards stays low.  Remember the impact a foreclosure has on your credit score diminishes over time.  Some credit organizations might approve a new mortgage in as little as five years.  Start rebuilding your credit by prioritizing your spending based on needs such as shelter, food and medical expenses and reducing your spending in areas such cable TV, cell phones, eating out or entertainment.  There is a light at the end of the tunnel.

Mortgage Foreclosure Process

April 27th, 2009    Subscribe To Our Feed

The actual foreclosure process differs from state to state so if you are facing a potential foreclosure, research your state’s laws and practices.  Technically, the mortgage foreclosure process can start after missing a single mortgage payment but this is not very likely.  You can expect to start receiving phone calls and letters if you miss a second payment and things will get really bad after missing a third payment. Don’t ignore the problem if you are facing foreclosure, it will only make matters worse.

The mortgage foreclosure process will process in one of two ways: judicial sale, which requires that the process goes through the court system, or power of sale, which can be carried out entirely by the mortgage holder.  All fifty states allow for a judicial sale, but only twenty nine allow power of sale.  If your state does allow a power of sale, the loan papers will usually state that this method can be used. Power of sale is typically faster than the judicial route.

Following are the steps for each type of mortgage foreclosure process:

Judicial sale:

• The mortgage lender will file suit with the court system.
• You’ll receive a letter from the court demanding payment.
• Typically, you’ll have 30 days to respond with payment to avoid foreclosure.
• At the end of the payment period, a judgment will be entered and the lender can request sale of the property by auction.
• The auction is carried out by the sheriff’s office, usually several months after the judgment.
• Once the property is sold, you’re served with an eviction notice by the sheriff’s office, and you must vacate your former home immediately.

Power of sale:

• The mortgage lender will serve you with papers demanding payment.
• After an established waiting period, a deed of trust is drawn up that temporarily conveys the property to a trustee.
• The trustee will sell the house at public auction for the lender.
• Many times, these foreclosures are subject to judicial review to make sure everything was carried out legally.
• There is usually a requirement for the lender to post a public notice of sale for the auction.

Both of these types of mortgage foreclosure processes require that any other parties involved be notified of the proceedings.  For example, if the homeowner took out another loan using the house for collateral, this lender must be notified.  There can also be a deficiency judgments made against the homeowner if the sale of the property is less than the total amount owed on the mortgage. The homeowner will be held responsible for any delta between the two amounts.

There is one type of foreclosure that is almost obsolete.  It is called strict foreclosure. In this type of foreclosure, once judgment is made on the lawsuit, the property is automatically assumed by the mortgage holder.  Only Connecticut and Vermont still allow this particular type of foreclosure.

FHA Mortgage Rates

March 27th, 2009    Subscribe To Our Feed

Federal Housing Administration (FHA) mortgages have helped Americans for years obtaining their dream of owning a home. FHA has also helped create jobs and provided reasonable mortgage rates, financing for military housing and financing for low income and elderly individuals.

The FHA actually does not set mortgage rates, because they don’t loan money. The FHA purchases loans from commercial lenders when those loans meet FHA standards. Those standards include the acceptability of the buyer, the appraisal of the property and certain properties of the loan’s financial structure. 

The most popular FHA home loan is the 203(b). This is a fixed rate loan that works well for first time home buyers because it allows them to finance 97 percent of their homes value. The 203(b) home loan is also the only loan in which 100 percent of the closing costs can be a gift from a relative, non-profit organization or a government agency.

You don’t need to meet minimum income requirements to qualify for a FHA loan, but debt ratios specific to the state in which the home you which to purchase have been put into place to prevent borrowers from getting into a house that they can’t afford. Debt ratios are a close analysis of income and monthly expenses.

Currently the average FHA mortgage rate on a 30 year mortgage in the United States is 5.44 percent. The current FHA mortgage rates range nationally from a high of 8 percent to a low of 4.75 percent, which is reportedly the lowest interest rate for a home loan in 52 years.

Short Sale - What is it?

February 20th, 2009    Subscribe To Our Feed

The definition of a short sale is an arrangement between a current home owner and the lender who lent the owner the money to buy the home to accept an offer that is something less than the total amount currently owed to pay off the house.  The difference between the amount owed and what the bank agrees to collect on the short sale is called a deficiency.  If the lender does not agree to a short sale and the home goes into foreclosure, the bank will repossess the home, sell it and any difference (or deficiency) between the bank’s selling price and the original loan amount will be the foreclosed homeowners responsibility. For example, the loan on the house is $200,000 but the bank sells the house for $150,000, there is a deficiency of $50,000 that the foreclosed homeowner will be required to pay unless they can get the bank to forgive the deficiency. Never assume that a debt that is owed the lender is gone unless the details of the release of that debt is in writing.

Most short sales are arranged when a seller owes more on their house than they can sell it for in the open market, or in other words, they are upside down in the house. The owner of the house then attempts to make an arrangement with their lender to sell the house for less than is owed on the existing loan.  Despite popular belief, a home owner does not have to be behind on their mortgage payments to request a short sale. They just have to demonstrate that the house can’t be sold for what they owe.

A short sale is not some magical alternative to foreclosure where the money you owe just simply disappears.  The short sale process can also be very time consuming; it will not go as quickly as any other sale; there will be a lot of back and forth negotiations. You need to remember that the bank’s position in a short sale is to get as much money as possible.

Before a short sale is approved, the home owner will be required to submit an application, hardship letter, financial statements, tax returns, pay stubs, the purchase agreement from the potential buyer, payoff letters from any other lenders involved and other documents depending on the lender. Once the lender receives the information packet, they will probably respond within 4 weeks with the terms they will accept for approval.  Very rarely will their approval be a total write off of the money that is owed on the loan. As a homeowner, a short sale might be an alternative to foreclosure or bankruptcy. Look at all of the available options before making a decision.

Foreclosure Misconceptions

January 28th, 2009    Subscribe To Our Feed

There are many foreclosure misconceptions for both buyers and sellers such as their rights, responsibilities and the overall foreclosure process.

Foreclosure Misconceptions #1 - The bank wants your house back: Banks don’t want your house back, they want to money that was loaned to you to buy your house. Foreclosures are time consuming and expensive for banks so this is typically the last resort. Most lenders today will work with homeowners to keep them in their house and avoid a foreclosure.

Foreclosure Misconceptions #2 - Bankruptcy Stops a Foreclosure: A bankruptcy does not stop a foreclosure, it only temporarily delays it. A bankruptcy is not a strategy to stop foreclosures.

Foreclosure Misconceptions #3 - Even if I get the money after the foreclosure process has started, I’m too late to stop it: Most states have laws that require foreclosure proceedings be stopped if the homeowner has the money to cover all back payments, late fees and legal fees that are owed.

Foreclosure Misconceptions #4 - The bank will take all my stuff: If your home is foreclosed on by the bank they can’t take any of your personal property. However, any fixtures, floor coverings, appliances and anything else permanently attached to the house must stay.

Foreclosure Misconceptions #5 - Once the bank takes back my house, I’m no longer involved: After foreclosure, if the bank sells the house for less than you owed on the mortgage, you will still be responsible for the difference or “deficiency.” And the bank can also collect interest on this amount. Consult a bankruptcy attorney to see if a deed in lieu of foreclosure or chapter 7 bankruptcy will clear you of owing a deficiency.

Foreclosure Misconceptions #6 - Foreclosed properties are in bad neighborhoods: In today’s declining economic climate, foreclosed properties are appearing in every community and every part of town. Foreclosures are ranging from town houses to extravagant vacation getaways.

Foreclosure Misconceptions #7 - Foreclosed properties are typically in poor condition: Usually this isn’t the case, however there could be significant maintenance and structural issues hidden behind an attractive facade. Do your research before purchasing any foreclosed property, being sure to find out how long maintenance has been deferred before the house was listed on the market, as well as how long it’s been sitting empty.

Foreclosure Misconceptions #8 - Financial irresponsibility is always the source of foreclosure: This couldn’t be further from the truth in today’s economic environment. All it takes is the loss of a job, an unexpected health issue or other life emergency to put a previously solid financial picture in jeopardy.

Foreclosure Misconceptions #9 - Foreclosure guarantees bargain pricing: Before falling completely in love with what looks like a can’t miss deal, be sure you know the property’s true market value so you are not paying for more house that you are getting.

Foreclosure Misconception #10 - A loser price equals higher equity: This is one equation that won’t pan out if a property involves unpaid taxes, mechanics’ liens or an expensive string of repairs, all of which subtract from the equity and add to the overall cost of the house. Do your research before you purchase a foreclosed house.

Purchasing Foreclosed Homes

January 12th, 2009    Subscribe To Our Feed

A foreclosure means that a homeowner has been unable to make the mortgage payments and the lender has taken the property back.  Purchasing foreclosed homes from the lender is less risky than attending a foreclosure auction and making the purchase there.  In most cases you can’t view or inspect the property prior to the auction, where once the lender has taken the house back it is typically listed with a local real estate agent and therefore you can view and inspect the property prior to purchasing foreclosed homes.

An advantage to purchasing foreclosed homes is that the lender wants to recover as much of its investment as quickly as possible.  This means that the property could be listed at a significant discount, sometimes 30 percent or more.  Find a real estate agent who is experienced in foreclosures.  Some lenders will not accept an offer from an unrepresented buyer.

If you are interested in purchasing foreclosed homes search the real estate magazines, newsletters, newspapers and the Internet.  You can also call lenders and ask them to provide you with a list of real estate owned (REO) properties.  Government agencies such as Fannie Mae (fanniemae.com) and the Department of Housing and Urban Development (hud.gov) also advertise foreclosed homes for sale.  You can also check local public records because lenders deciding to foreclose must file a notice of default in the local county clerk’s office.

Before purchasing foreclosed homes, inspect them as closely as possible.  Some foreclosures are in good shape where others are behind in routine maintenance.  Work with a real estate agent to check comparable home prices and make sure the asking price for a foreclosed home is a bargain.

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Copyright © 2009 Steps of Foreclosure

Credits: Work From Home | Matteo Turchetto | Andreas Viklund