As we all know by now, common sense didn’t have much to do with the way loans were being given out a few years ago, so now the Fed has decided to make a rule about it.

Under the new rule, which takes 474 pages to explain, creditors would be prohibited from “making a mortgage loan unless the creditor makes a reasonable and good faith determination, based on verified and documented information, that the consumer will have a reasonable ability to repay the loan, including any mortgage-related obligations (such as property taxes).”

Should lenders fail to follow the rule, they could be liable for the consequences.

However, like most of the rules regarding banks, this one is so full of exceptions and vague descriptions, that it looks like a waste of 474 pages of paper and the hours it took to compile them.

For starters, the rule doesn’t spell out any guidelines with regard to what constitutes a “reasonable ability to repay the loan.” Lenders must use their own judgment and “good faith” to make that determination.

And then there are the exceptions. Pursuant to the Dodd-Frank Act, this rule would apply to all consumer mortgage loans except equity lines of credit, timeshare plans, reverse mortgages, and temporary loans. In addition, it wouldn’t apply to balloon-payment mortgages in rural or underserved areas.

And, if the mortgage term is longer than 30 years, or if the points and fees exceed 3% of the total loan amount, the loan is exempt from the rule. To make it even less effective, the underwriting doesn’t apply to adjustable rate mortgages that reset after 60 months.

That means lenders can still qualify someone on a low introductory rate, as long as the rate doesn’t reset in the first 5 years.

What does all this mean to you? Not much.

It simply means to go on doing what you’re doing – be vigilant in keeping your credit scores over 780, save money for any future down payments, and use your own common sense in determining whether a specific mortgage loan is a good financial move for you.

Our opinion? If the banks knew they wouldn’t be “bailed out” after their lending mistakes, all loans would be based on common sense and good judgment.

CreditScoreQuick.com

In a news release on April 21, FICO announced a new analytic advance. This one will help lenders identify those borrowers who are most likely to choose strategic default over continuing to make payments on their homes. Note that these are borrowers who have the ability to make the payments, but choose to walk away instead.

Apparently, the plan is for lenders to seek out these homeowners with an offer of loan modifications – even though they haven’t requested it.

Why are they so concerned? Because the number of strategic defaults is rising. According to studies from the University of Chicago, by last September 35% of all loan defaults were strategic. This contrasts to 26% just 18 months earlier.

Add to this a study by CoreLogic stating that 11.1 million residential mortgages in the U.S. (23.1%) have negative equity, and lenders are looking at a huge pool of homeowners who just might strategically default.

35% of 11.1 million is 3,885,000 homeowners who can pay, but may choose to walk away.

So in addition to having negative equity, what are the indicators that a homeowner may choose strategic default? They’re hard to believe…
•    High credit scores
•    Low revolving credit balances
•    Few instances of exceeding credit card limits
•    Low retail credit card usage

In other words, people who appear to be the perfect borrowers.

Unfortunately, those who choose strategic default could be in for a rude awakening. They believe that the only consequences will be to their credit scores, but that may not be the truth.

Lenders in most states can sue the homeowner for what is known as a “deficiency.” This is defined as the difference between the balance owed at the time of default and the amount realized by the bank when the house is re-sold. Of course, all the costs of foreclosure, maintenance, and selling are deducted from the sale price before the figure is computed.

Thus, strategic default can saddle a homeowner with a huge debt. So think it over carefully and consult with your attorney and financial advisor before making this move.

CreditScoreQuick.com

Q:

My lender reports my line of credit under my revolving credit even though it is secured by my home. Is this correct? Additionally, they have suspended my account due to my property value decrease. Can they still classify it as a revolving line of credit if I cannot access the funds? Is there anything I can do to get this changed? Thanks!

A:

A line of credit is a revolving account so categorizing it as such is accurate.  Regarding their decision to suspend your line of credit, you’re not alone.  Many consumers have seen their equity lines either suspended or reduced because of the drop in property values.  The reason they’ve done this is because the pricing of that kind of line of credit is determined, in part, on the fact that your home has equity securing the line.  If that’s not the case any longer then the lender is at risk.
If you believe your home’s value fully secured the line of credit you can plead your case with the lender and even order your own independent appraisal as support.

Author:

John Ulzheimer

www.JohnUlzheimer.com

If you’re a first time home buyer wanting to invest in Colorado real estate, there has never been a better time than the present to take the plunge. Historically low interest rates are beckoning first time home buyers across the country to make the transition from home renter to property owner. Even though property buying time is ripe on the real estate market, there are some things you should keep in mind when you begin your search for your first home.

Prep Work

Your prep work to get you ready to buy your first home should start way before you’re actually in the market to do so. The first thing to educate yourself on is your credit score. If it’s not that great, do what you can to repair any negative marks you’ve accumulated on  your report. This will serve you well when applying for a mortgage.

Start A Savings Account

Set aside some savings to be dedicated for your home purchasing ventures only. You’ll need enough money for your down payment in addition to other fees associated with closing on a home. Not having enough money at the signing can be a real deal breaker for some first time home buyers because they did not anticipate the added expenses in advance.

Buy Within Your Means

This piece of advice is akin to ‘live within your means’ and should be heeded at all times. Know what you can afford before you begin your search. When you’re looking for a home, it’s easy to get enamored with a property because of its beauty, its layout or the neighborhood. When you go with your realtor to view available listings of Colorado real estate, always be aware of your budget and remind yourself of it regularly. Knowing what you can spend will deter any surprises later on that could result in you losing your home to foreclosure and other financial hardship-related events.

Take Advantage Of Special Offers

There are a number of financing perks available to first time home buyers that other property buyers aren’t privy to. These special financing programs offer loans and other incentives that greatly reduce the amount of money you need up front in order to get into your home. Do your research with the Federal Housing Administration (FHA) and other government-sponsored buying programs for plans that will make your transition to home owner an easier one.

Stand Your Ground

Falling for high-pressure sales tactics is the easiest way for a home buyer to get in over their heads. First time home buyers are especially susceptible to falling for these tactics because they are anxious and want to make the right decision while getting the best deal. One way that you can avoid this situation is to never agree the same day to purchase a home. Take your time. Sleep on it. Then decide whether it’s such a good deal. True, the home might not be there by then, but neither will the headache of having purchased a home you really didn’t want or really couldn’t afford.

Guest Post by Summit Realty…

When you’re carrying debt, you’ll want to repay it as soon as possible – and there are various solutions available that could help you do this.

But while debt solutions can help you to clear your debts, they do come with their downsides too – such as they effect they can have on your credit rating.

Here, we’re going to take a look at how two of the common debt solutions could impact your credit rating.

Debt consolidation

A debt consolidation loan is, in simple terms, a new loan you can take out to repay your existing debts in one go. You’ll then be left with just one debt to one creditor – and make just one payment per month instead of several.

A debt consolidation loan would only be appropriate for you if you are actually able to manage your debts as they stand, but would like to simplify your finances and/or reduce the amount you’re spending each month.

If you like, you can arrange to repay your debt consolidation loan over a longer period of time than your original debts – this can allow you to pay less each month. However, it’s important to understand that by doing this you’ll be in debt for longer and will pay interest for longer too, so you could pay a fair bit more in total.

What effect will debt consolidation have on my credit report?

A debt consolidation loan won’t actually damage your credit rating – providing you can repay it, that is.

In fact, as long as you keep up with your repayments and repay the loan as you have agreed to, a debt consolidation loan could have a positive impact on your credit report – as you’ll be showing that you’re able to maintain your repayments and repay the money you’ve borrowed.

Debt management

While a debt consolidation loan may be suitable for someone who can manage their debts as they stand, a debt management plan would only be suitable for someone who can’t.

It involves (either you or a professional debt management company) speaking to your unsecured creditors, asking them to agree to changes to the original repayment agreements (a reduction in the monthly repayment amount, for example, and/or freezing/reducing interest and other charges on your debts).

Your creditors aren’t obliged to agree to any changes to your original agreements, but they’re more likely to if they see a debt management plan as your best route out of debt.

It’s important to understand that arranging to repay your debts over a longer timeframe may increase the overall cost – unless your creditors agree to freeze/reduce interest sufficiently.

This is only a brief run-through of what this solution is about, so to find out more about debt management, click here.

What effect will debt management have on my credit report?

By entering a debt management plan, you’ll be defaulting on your original agreements with your creditors.

This will be shown on your credit report and may affect the cost and/or availability for six years.

Since regulators began making new credit card regulations a couple of years ago, the changes just seem to keep coming.

Here are a couple that you need to know to protect yourself…

Minimum Purchases:

It is now legal for merchants to set a minimum purchase amount for credit card transactions. Some have already been doing that, but until now, it was in violation of credit card network rules.

The reason for the new regulation is to give relief to the merchants. In some cases, merchants have actually losing money on sales. They have to pay a “per swipe” fee plus a percentage, so they go in the hole every time you charge an 89 cent candy bar.

Rules say the minimum cannot exceed $10. So if you plan to make small purchases, put some cash in your pocket, or plan to use your debit card.

But watch out… this may change soon, as retailers also have to pay when you swipe that debit card. New debit card regulations are in the works that may extend the minimum purchase to them as well.

Changes to existing credit card accounts:

You’ve probably read that under the CARD Act, your credit card issuer must give you notice of changes to your account 45 days before making the change. That’s true – but only certain changes fall under the rules. This includes changes to your interest rate or to the fees that were disclosed when you opened the account.

They do not have to give you fair warning if they close your account or reduce your credit line!

To avoid damaging your credit scores with an over-limit notation on your credit report, and to avoid the embarrassment of a turn-down at the check-out counter, be sure to check your credit limit regularly. Even if you pay by mail, set up your on-line account so you can have fast access to your account before you go shopping.

Unfortunately, consumers with good credit scores are very likely to be caught in this trap. One of the primary reasons for credit line reductions and account closures is inactivity on the account. Now that they are not allowed to charge an inactivity fee, credit card issuers are choosing to simply “get rid” of unprofitable cardholders.

If you’ve been “saving up” credit on an unused account with the idea of having it there just in case you need it, make a small change in your habits. Every month or two, use that card for some of your normal everyday purchases. Then pay it off when the bill arrives.

CreditScoreQuick.com

Protect your Credit Scores

Today a high credit score is more important than ever. In addition to affecting what you pay for new credit, a low score can make it difficult to rent a home, hook up utilities, or even get a new job.

Since one of the ways to raise your credit score is to have more credit than you use, smart consumers are adding credit cards, then using them sparingly.

Adding a credit card is a good credit move, but do be careful.

Every time you make application for credit of any kind, the credit issuer will check your credit report and scores. And each time they check, your score will take a small hit. The last thing you want to do is cause anyone to check your score if they aren’t going to extend the credit.

This, by the way, is the reason why you should never give your social security number to a car dealer, a furniture salesman, an apartment rental manager, etc. unless and until you have definitely decided to make the purchase or rent the unit.

So – before you apply for a new card, get a copy of your free credit report with scores. Then do your research.

Most credit card issuers publish their guidelines, telling what level of credit-worthiness is required for each of their cards.

Each card issuer has it’s own definition, but in general you can expect that
•    Great = 760 – 850
•    Very good = 725 – 759
•    Good = 660 – 724
•    Not Good = 560 – 659
•    Bad = 300 – 559

To be on the safe side, make sure your score is above the bottom number in this chart before making application for a card in that category.

If you’re under 21:

You probably know that under the Credit CARD Act of 2009, in order to get a credit card you must have either sufficient income or assets, or a co-signer.

However, issuers aren’t required to offer to co-signer option and some do not. Thus, before you submit an application, check their policies. If you need a co-signer and they don’t allow it, don’t apply.

CreditScoreQuick.com