Mortgage by Randy ===============================================================================
monthly update to our clients, colleagues, family & friends
By: Randy Mitchelson, July 2010
In Issue 28 We Touch On:
Bad Credit Mortgages
Strategic Defaults
Lead Paint
Mid month travel has delayed the release of this month’s newsletter, but the extra few days have allowed me to reflect upon a topic that may hit home for some. One of the reasons that I was inspired to earn my mortgage license was to be able to help people. Being on the inside of various mortgage lenders throughout my career gave me unique insight into how many good borrowers get railroaded or turned down altogether by banks too big to get out of their own way. I have enjoyed serving in that role since 2005. Recently however, I have seen fewer and fewer “good borrowers”. I have little sympathy for people who create their own avoidable problems and choose to cut corners. Despite their begging “you have to help me”, they do not deserve the undivided attention of a professional to help them, unless they are willing to help themselves. It reminds me of a quote that one of my colleagues passed on to me years ago: “Bad planning on your part does not constitute and emergency on my part.” My advice is to make good choices and when in doubt, seek the opinions of trusted advisors (preferably qualified and licensed ones). This applies not only to your finances but to life in general.
The current newsletter and all prior newsletters are archived at the Mortgage by Randy blog. Bookmark it and share with your friends and family. You can make your own comments and feedback as well. Time for the news…
Mortgage Market: The Cost Of Bad Choices When Real Estate Financing Is Needed
So many people are shocked when they learn about the costs of getting a mortgage which is specifically designed for people with bad credit that I thought I’d publish a typical scenario in hopes of 1) scaring my good credit readers into doing everything in their power to sustain their positive credit history and 2) forewarn my bad credit readers with some accurate facts so that there should be no surprises if and when you pursue a mortgage.
The first thing to be prepared for with a bad credit mortgage (but not the worst), is the interest rate. A typical price on a bad credit mortgage is between 10-14%.
The second thing that catches bad credit borrowers by surprise is the loan term. Bad credit mortgages are designed to be short term sources of financing (to allow you time to rebuild credit and reapply for a traditional loan). Bad credit loans are usually 2-10 years with a balloon at the end.
The third thing that borrowers must realize is that large down payments are required for purchase of property when you have bad credit. If it takes 20% down payment for a good credit borrower to qualify for best pricing at a bank, what do you think a bad credit borrower needs? On a good day, 40%, but it could be more depending upon property type and other conditions. For borrowers seeking to pull cash out of an existing property, there can be no other mortgages and do not expect to access more than 50% of the value of the property.
The fourth thing, and the most painful, about a bad credit mortgage is the cost to do the loan. You can expect to pay all the normal and customary fees (title work, taxes, processing, etc). In addition, the fees owed to the broker(s) and lender can easily range from 6-10% of the loan amount.
For bad credit mortgages, it is simply supply and demand. There are very few places to get these types of loans and there is a lot of demand for them so the price is high and the terms are strict. When there is nowhere else to turn, these loans are a great option, but the borrower should have the mindset and a plan to rebuild their credit and exit the loan within a few years.
Personal Credit: Impact Of Strategic Defaults On Future Mortgage Qualification
A new financial term has been invented. A “strategic default” is defined as an action by a mortgagor to deliberately allow their mortgaged property to enter foreclosure despite having the financial means of keeping the mortgage current. Some property owners that have good jobs and good income and good credit, but fell victim to buying at the market peak, are opting to walk away from an underwater property and try to purchase a new one at today’s much lower prices. The moral debate behind a strategic default is a topic for another time. Lenders are getting wise to this game and adjusting the borrower credit requirements to qualify for a new mortgage.
Each lender can set its own rules but borrowers with derogatory foreclosure or pre-foreclosure events in their credit history can typically expect to run into the following challenges when trying to get approved for a new mortgage:
-Unless the foreclosure was the result of documented extenuating circumstances (a nonrecurring event beyond the borrower’s control, such as a divorce, illness, job layoff, etc.), borrowers should expect to be required to meet a 7-year waiting period.
-Borrowers will be limited to the lesser of 90% LTV or max product eligibility
-Purchase of principal residence only
-Limited or no cash-out on refinances
-Credit scores of at least 680 will be expected
Even if extenuating circumstances apply, the rules are strict. Minimum credit scores of 620 (with minimal record of late payments), for example, will apply, and the waiting period is likely to be 3 years.
Walking away from a contract with a lender may seem like a good way to save money, but knowing all the downstream risks is important. Getting into a new mortgage, no matter how good your credit and income are will take several years so plan on either 1) renting during the waiting period or 2) coming to the table with a significant down payment (40% or more) and plenty of reserves in the bank to qualify for a specialty mortgage on a new property.
Economy & Financial Insights: Low Interest Rates May Persist Into 2011
Unemployment remains high. We are digging out of a big hole of job losses. State and federal taxes are being increased on small businesses which curtails their hiring. Economists estimate that our country must create 300,000 jobs a month for five years to get us back to where we were in 2007! This is not realistic.
The trend in inflation is down. Mid-term elections are on the horizon which will partially serve as a referendum on Obama-era policies like health care and government ownership of private industry (auto, mortgage, insurance, banking, etc.). As a result, the Federal Reserve has little reason to begin raising interest rates. We seem to be in a prolonged “wait and see” period. Use this time wisely to pay down debt before rates reverse and lock in low rates on mortgage, auto and credit card loans.
Question of the Month: What Should I Know Before Buying An Older Home?
Buying an older home and modernizing it can be a rewarding project, but if you need mortgage financing there are special considerations to factor before signing a contract. For example, homes built prior to 1978 will be required by some lenders to have a lead paint inspection by an approved appraiser. Another thing to check ahead of time is if the property will be insurable. Some insurance companies have rules based on the age of the home and the type of construction. No insurance, no mortgage. Or the insurance might be so expensive that you can’t afford the mortgage. Too many times, eager buyers sign a sales contract and commit earnest money to a deal before doing their homework on a property. Consult with professionals before taking a leap of faith.
Giving Back: Supporting Our Communities – We Surpassed $1,000 In Savings For College
Do what 9 million Americans and I have done - join Upromise, a rewards company that gives you money for education when you shop online, buy groceries, travel, even fill your gas tank. With hundreds of participating partners, Upromise helps people like us pay for future college costs or eligible student loans. Our account is now at $1,017.83 which will be gifted to our niece and nephew when they go to college. In this economy, who couldn't use a little extra help? Joining is free and takes just a few minutes. If you want more information, send me a note.
Need volunteers? Do you have a fundraising event upcoming? Do you have a personal web site where you are raising donations for your cause? Submit the information to randy@mortgagebyrandy.com by the 5th day of each month and we will do our best to include your information in the next issue.
After a hot, hot trip to Williamsburg, Virginia, it’s almost time for my visit to New York City for a trade show, but not before I catch a Rays game in St. Petersburg and enjoy a long weekend at Disney.
Randy
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Mortgage by Randy newsletter, Copyright 2010 Randy Mitchelson. All Rights Reserved.
Randy Mitchelson is a licensed mortgage professional. All material presented herein is believed to be reliable but we cannot attest to its accuracy. All material represents the opinions of Randy Mitchelson. Recommendations may change and readers are urged to check with their financial advisors before making any decisions. Opinions expressed in these reports may change without prior notice. Mitchelson can be reached at 239-851-6738.
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You have permission to publish this article electronically or in print as long as the following is included:
Randy Mitchelson, of Estero, Florida, is a business professional, entrepreneur and author with over 15 years experience in financial services. Mitchelson has served in leadership roles for Global & Fortune 500 firms like Bank of America, KeyBank and CIBC.
As a member of National Association of Mortgage Brokers, Randy has earned the Lending Integrity Seal of Approval. He educates both individuals and groups about credit scoring by conducting personalized credit report reviews, action plans and one on one consultations. He is author of the free monthly newsletter, Mortgage by Randy as well as the Daily Dollar newsletter. A licensed mortgage professional, Mitchelson also founded Trinity Home Financing, LLC.
He is owner of Estero, Florida based National Web Leads, LLC, an internet lead generation service matching consumers with lenders for auto, cash advance and other financial products. Through its network of partners, National Web Leads delivers innovative Web 2.0 performance marketing solutions to advertisers and affiliate marketers.
Mitchelson earned his BS and MBA at Rensselaer Polytechnic Institute in Troy, NY. He is a founding member and Finance Chairman of the Southwest Florida Regional Technology Partnership Inc. and Vice President for the Michelle’s Angels Foundation Inc. He is married to Susan, a Pharmacy Supervisor in the Lee Memorial Health System in Fort Myers, Florida.
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