Before discussing whether or not the adjustable rate mortgage (ARM) is dead, let’s first check out what ARM is all about. We can define an adjustable rate mortgage as a home loan wherein the interest rate on the mortgage note adjusts periodically. These adjustments depend upon factors like 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). As per the report of the Mortgage Bankers Association, presently ARMs account for just 5.5% of mortgage applications.

Are there any benefits of ARMs?
There are two major benefits of adjustable rate mortgages. Let’s check out what they are and if people can take advantage of those benefits these days:

• Low initial rate: ARMs initially have a low rate. This means the borrower will have to pay a smaller monthly payment than a FRM of the same size. Thus, it becomes easier for a borrower to qualify for a loan as well as afford the loan.
• Low interest rate: ARM is attractive to borrowers if one believes that the interest rates will remain low over the years to come or will fall lower.

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The burst of the housing “bubble” has caused many a change in the housing and mortgage market. Many of the first time buyers are now skeptical about their chances of getting a home loan in this depressed economy, even though they possess good credit scores. Here’s what one such first time buyer has described about his situation and asked the community whether he stands a chance to qualify for a mortgage:

The poster says the 3 credit bureaus list his credit scores as 682, 686 and 639. He has worked hard to improve his credit, which now has 2 derogatory items listed. One of them is a collection since 6/04, while the other is a charge-off on an auto loan since 8/06. The poster has an income of $25,500/year. He asks the following queries:

1. Do I have a chance to qualify for a loan?
2. What interest rate can I expect on the loan?
3. Which is the best bank to get my loan from?
4. Do I qualify for any first time buyer program that does not require a down payment

The poster does have a chance to qualify for a home loan. His credit scores are good enough to help him meet the lender-specified credit requirements for a mortgage. However, the only problems with his credit are the 2 derogatory items – the charge-off and the collection. No lender would want to get him approved for a loan until the two negative items are removed from the credit report.

How do you remove negative items from credit?

The poster owes a total of $19k on the collection and the charge-off. So, does this mean he cannot qualify for a loan unless he comes up with $19k cash? Not necessarily. If he does not have the cash to pay off the debts, he can try and set up a repayment plan to pay off the negative items. He can pay off the debts through monthly payments. But if he sets up a repayment plan to pay off those 2 items today, will he be able to get a loan tomorrow? Well, the answer would be “no”. The lender would want to check if he has lived up to the terms of the repayment agreement.
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With the crisis in the real estate market, the American dream of homeownership has come to an abrupt end. Lots of people have lost their homes in foreclosure and many more are delinquent on their mortgage payments. Most people are facing such a situation mainly due to job loss. However, there are some homeowners who can afford their mortgage but are struggling to make their payments.  Such borrowers are tempted to walk away from the property in order to make a fresh start.

However, walking away from property is not a very good option in my opinion as it would ultimately lead to foreclosure. Take a look as to how it can affect you:

Credit effects: If you walk away of the property, it will result into foreclosure. The lender would sell off the property to recover his dues. You would be responsible for paying the deficient amount. It will lower your credit score by 250 points and you won’t be able to get a loan for the next 3-4 years. Moreover, the foreclosure would remain on your credit report for the next 7 years.

Tax penalty: If your lender forgives the deficient mortgage balance resulting from the sale, then you will have to pay taxes for that forgiven amount. The balance amount would be considered as your income and the IRS will charge you the income tax. However, with the Mortgage Debt Relief Act in vogue, you won’t be liable for paying the taxes on the deficient amount from the sale of your primary residence if the debt was incurred between 2007 and 2012. After that, the taxes are planned to kick back in.

So, you must be thinking that there’s no respite. No one’s there to help you from this mortgage mess, isn’t it? However, that’s not the case. You can get help provided you take the right step at the right time. Just have a look:
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Given the depression in the economy, many borrowers are uncertain as to whether they can meet the stringent underwriting guidelines and qualify for a particular loan program. Debt-to-income (DTI) ratio is one of the key factors that determine a borrower’s eligibility for a mortgage. In a forum discussion at MortgageFit one of the posters asked the community about her chances of qualifying for a home loan with a high DTI ratio in this market.

The poster’s husband is an army veteran, looking to buy a home for the first time and requires a loan worth $150,000. The poster and her husband have credit scores of 730 and 760, with a monthly income of $7,700. They have cash savings of $9k. But they are concerned about their DTI ratio, which is around 37-39%, if they add monthly payment of $1100 for the mortgage and taxes. Their monthly payment towards debt obligations is $1730, including child support, student loans, etc. She asked the following questions:

1.    Whether they qualify for a mortgage with a DTI ratio of 37-39%
2.    If they should first refinance to pay off a personal loan of $25k before applying for a home loan.

It’s true that things have changed a lot in the mortgage industry since the sub-prime mortgage crisis. Qualifying for a new loan is not as easy as it was 4-5 years back. But the poster and her husband have impressive credit scores, despite the fact that most of the borrowers are facing problems with their credit due to pay-cuts, lay offs and other financial reasons. For FHA or VA loans, a minimum score of around 620 is required. For conventional loans, the requirement is something around 720. So, they qualify not only for FHA and VA loans, but also for conventional loans, in terms of credit scores.

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There are millions of people all over the world who die without a valid will. Their heirs may face serious problems while dealing with their property or how they should divide it amongst themselves. Thus, it’s very important to draft a will before death and divide the property amongst the heirs. So, let’s have a look as to what a “will” is all about:

A will is a legal declaration by which a person names one or more persons to manage his/her estate. It also provides for the transfer of his/her property at death.  You can draft a basic will for yourself by using a good self-help book or software. With the help of a will, you will be able to achieve the following:

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There was a forum discussion, where the poster wanted to do a deed in lieu of foreclosure on his house as he had to leave the property and move out of state. His house was destroyed by Hurricane Ike and he had to relocate to a different state for a new job. The poster could not afford to make payments on the mortgage anymore and wanted to sign over the property to the lender through deed in lieu. But the lender said a deed in lieu was not possible since the loan was insured by FHA. The lender further said that he could not approve the DIL even if the poster qualified for it, until foreclosure proceedings had started. The poster had the following questions:

1.    Does having an FHA loan disqualify him for a deed in lieu?
2.    Can he do anything to speed up the foreclosure proceedings so that the lender can offer a DIL?

The poster is no doubt stuck in a bad situation. On one hand, his house has been devastated by Hurricane Ike and may not sell in the market for a fair price. On the other hand, he cannot get rid of the property through a DIL as the lender would not approve of it.

A deed in lieu in this situation can be quite helpful for the poster. It will enable him to sign over the property to the lender. The lender can then sell off the property and recover the outstanding balance on the mortgage. Though it will affect his credit in a negative way, yet it will at least help him get rid of this property and move on with life.

FHA guidelines regarding DIL

There is no FHA rule or guideline that disqualifies a borrower for a deed in lieu of foreclosure. FHA lenders do accept deed in lieu requests if the borrower has exhausted all his loss mitigation options. FHA does not also have its own criteria to determine if a borrower qualifies for a deed in lieu. It is completely at the lender’s discretion if he would allow the borrower to deed over the house to him. The lender assesses the borrower’s extent of hardship, financial situation, etc. in order to check the borrower’s eligibility for the DIL. Thus, FHA does not have any rule that prohibits deed in lieu on FHA loans. In fact in 2006, when Hurricanes Katrina, Rita and Wilma wrecked havoc in many of the states, HUD extended special DIL authority to lenders to help borrowers affected by the hurricanes in major disaster areas. This may not apply to the poster’s situation. But it certainly goes on to prove that a DIL is possible on FHA loans.

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If you’ve defaulted on your loan payments, you must be thinking of applying for a loan modification to save the property. We, the borrowers, think that it would be beneficial for the lenders and mortgage servicers to modify the loan rather than foreclose. But in reality, things are different.

As per a new report of the consumer advocacy group, mortgage servicers make more money if they foreclose the property. So, who are the mortgage servicers? They are the companies who collect the monthly dues from the borrowers and distribute it amongst the investors. It has been noted that the homeowners, lenders and investors generally lose money on a foreclosure whereas mortgage servicers do not.

What do homeowners think of foreclosure?
As homeowners, we think that a foreclosure would not be a good option for the lenders and investors. Both of them would lose money if they foreclose the property. It is believed that if a lender forecloses the property, he will have to settle for 20-30 cents on a dollar.

What do mortgage servicers think of forceclosure?
The loan servicers have different priorities and thus, do not think of foreclosures in the same way as the borrowers. Servicers do make profit when a property is foreclosed unlike loan modification wherein the servicers may face a loss. Also, the incentives offered to servicers in order to help avoid foreclosure are much less compared to the profits they make by foreclosing a property. This is one of the reasons which resulted in the $75 billion program to limit foreclosures by the Obama Government. The money would be given to servicers who would modify home loans.

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