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:

Help from the Government: If you are facing difficulty in paying off your mortgage dues, contact your lender for a Home Affordable Modification Program (HAMP) or the Home Affordable Refinance Program (HARP). Both these programs are designed in such a way that it would help you in saving your property.

Reverse Mortgage: If you are 62 years or more of age, then you can apply for a reverse mortgage in order to save your property. However, in order to get a reverse mortgage, you should have some equity in the property. This would help you get a tax free income and won’t be liable to pay off the dues monthly.

Short sale and deed in lieu: These are two other options to avoid foreclosure. In both the processes, you’ll have to transfer the property to your lender who would sell it off and recover his dues. However, in a short sale, you would be responsible for the deficient balance and your credit would get lowered by 80-100 points. In deed in lieu of foreclosure, you won’t be responsible for the deficient amount but your credit would get lowered by 250 points.

]]> http://www.mortgagefit.com/blog/walkaway-affect/feed/ http://www.mortgagefit.com/blog/dti-va-fha/ http://www.mortgagefit.com/blog/dti-va-fha/#comments Thu, 12 Nov 2009 12:37:37 +0000 samantha http://www.mortgagefit.com/blog/?p=128 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.

DTI requirements for various mortgages

The poster’s DTI ratio could be slightly on the border line for conventional loans. But it does not disqualify her and the husband for a home loan. A typical conventional loan requires a DTI ratio of 28/36. This means the front end DTI ratio (percentage of the payment towards PITI as compared to the gross monthly income) should not exceed 28%. Likewise, your back end mortgage debt ratio (percentage of payment towards all debt obligations including PITI as compared to the gross monthly income) should be somewhere around 36%. But in most cases, the lenders are flexible enough to allow for a slightly higher DTI ratio. Lenders even allow borrowers to have DTI ratio as high as 45-50%. However, the interest rate on the loan will be high and the borrower will be asked to put down a large payment upfront.

Why VA loan is best suited for the poster

The allowable DTI ratio for FHA mortgages is 31/43. In case the poster and her husband want to go for an FHA loan, their debt-to-income ratios will not be an issue. But they need to pay a minimum of 3.5% down payment for the loan. They will also have to pay mortgage insurance premium of 1.75%, in case the down payment amount is less than 20%. Since her husband is an army veteran, in my opinion, a VA loan is best-suited for poster’s situation. VA requires a back-end ratio of 41%. Thus, the poster’s DTI ratio of 37-39% will not be a problem.

The best part about VA loans is that the borrower is not required to pay any mortgage insurance and he can obtain a loan with a zero down payment. However, the laws do require a veteran to pay a funding fee. For first time borrowers, the funding fee is 2.15% of the loan amount for 0% down payment. The fees are reduced to 1.50% and 1.25% respectively, if down payments of 5% or more and 10% or more are made. Given the poster has a cash savings of $9000, she can put down something around 6% and reduce the amount of funding fee. As far as refinancing the current mortgage to pay off the personal loan of $25k is concerned, I’d say it is not required. They can simply keep paying the personal loan as per the repayment plan. Their DTI ratio is well within the standard value required by VA and they should not have any problem in qualifying for the loan.

To refer to the discussions on this topic, you can follow the link given below:
http://www.mortgagefit.com/homeloan/dti-ratio-credit.html .

What is a will?

A will is a legal document which can help you in dividing your assets amongst your heirs as per your wishes. You would decide as to “who” would receive “how much” of your property. Along with this, you can also name the executor of the will and guardian to the minors in this legal document. A will is advantageous because it helps you control your assets even after your death.

How do I draft a will?

You can contact your attorney and get the will drafted by him. It should be signed in the presence of two witnesses to become legal. If you do not want to take the help of an attorney, you can draft it yourself. Holographs or handwritten wills are accepted in most of the states. You may even use the “do-it-yourself” will-maker which is available both in print and in electronic version to draft your will.

Are wills too costly?

Wills do not cost much. A simple will (no trust, estate value less than $3.5 million) drafted by an attorney may cost you less than $100. If your estate value is more than $3.5 million, then federal estate taxes at the rate of 4.5% will come into play.

What if I die without a will?

If you die intestate, the administrative bond will come into play. An administrator would be appointed by the court in order to distribute your property. He/she will have to post a bond which will ensure that the administrator doesn’t loot the estate. The cost of the bond is paid from the estate. For every $100,000 in the estate, the cost of the bond would be $100 per year.

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.

DIL is the last option for the poster

In this situation, the poster hardly has any option, which can help him avoid foreclosure on the property. A loan modification can help in reducing the monthly mortgage payments. But since he is out of state, modifying the loan will be of little help to him. A short sale is not an option as no buyer would like to purchase a property in an area destroyed by hurricane. Thus, a DIL seems to be a last resort for the poster.

DIL and foreclosure proceedings

It is also not necessary for the lender to start the foreclosure proceedings before approving a deed in lieu. After all, DIL is an option to avoid foreclosure. If a borrower is behind on his payments and fears a possible foreclosure on his property, he can request a DIL. He does not have to wait for the lender to start foreclosure proceedings before negotiating the DIL of foreclosure.

How to convince the lender to accept a DIL

The poster needs to talk to the loss mitigation department of the mortgage company and do constant negotiations with them to convince them to allow a DIL. He should first list the property on the market to see if it sells. If it does not, in the next few months, there is a possibility that the lender would accept the DIL request, because often lenders want to see a property listed for at least a certain number of months before agreeing to do a DIL.

To know more on this topic, you can refer to the following discussion:
http://www.mortgagefit.com/problems/dil-fha.html .

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.

Are there any steps taken to encourage modification?
As per a new report published by the National Consumer Law Center (NCLC), some steps have been suggested to encourage modification. Some of them are as follows:

• To fund loan mediation programs.
• To mandate loan modification before foreclosure.
• To provide principal reductions on existing loans though HAMP.
• To regulate loan originations.
• To report loan modifications in a transparent and uniform manner.
• To limit fees charged to borrowers.

On 9th October, 2009, in the Southern District of New York, such a ruling was given by the federal bankruptcy court. As per nytimes.com, a lender called PHH Mortgage could not prove that it holds the mortgage for a borrower’s property. As a result, the judge simply wiped out $461,263 mortgage debt on the borrower’s property. Yes, you’re correct in thinking - the mortgage debt disappeared due to a court order.

Why can’t the lenders confirm the mortgage? Well, the notes have gone missing as a lot of mortgage securitizations occurred during the housing boom. Banks loans were sold off to the investors but the notes were never properly recorded during the boom.

However, do you think it’s fair to erase the borrower’s debt completely? I don’t think so. It has to be accepted that the borrower owed to money to a lender. The court should rather come up with an alternative plan wherein the borrowers will have to make payments for a certain period of time to the court.  Meanwhile, the lender will get some more time to prove the ownership of the mortgage. If the lender can’t prove it after a certain period of time given by the court, the judge may erase the debt. This will help the court remain fair to both - the borrower and the lender. What do you say?

The poster received a verbal agreement from the second lender for a trial modification plan. He paid the first trial payment on time as per the agreement. But the next month when he pulled his credit report, he found the loan account has been charged off. On contacting the lender, the poster learned that the former had again reinstated the loan. The second lender then asked him to make the next trial payment by Oct. 27, 2009, else he would again charge off the debt.

Following are the questions the poster asked the community:

1.    Does he have any ground against the second mortgage company that charged off the loan even after approving a trial loan modification?

2.    If the lender charges off the debt after Oct. 27, 2009, can the poster still negotiate with the mortgage company for loan modification?

3.    In case the second lender forecloses on the property, will the first cancel negotiations for the modification?

Trial modification plan & mortgage charge-off

It seems the second mortgage company erroneously reported the debt to the bureaus as charged off. It could also be possible that they charged off the debt as they thought they could not recover the balance on the loan. Though the poster paid his first trial payment in good faith, he has no ground against the second lender as there is no written agreement for the loan modification. The second lender is not legally bound to offer modification as the verbal agreement is not legally valid. So, the lender reserves the right to charge off the debt to whoever they want.

Negotiations for modification after charge-off

When the lenders think they will not be able to recover the outstanding amount of the mortgage, they often charge off the debt and report it as their loss to the IRS. Once they charge off the debt, they will no longer collect the payments; rather the lenders sell off or assign the debt to a collection agency. Thus, the poster will not be able to negotiate with the second mortgage holder regarding the loan modification. He will have to talk with the collection agency (CA). The CA can either modify his debt or do a settlement with him. Through settlement, the poster can convince them to accept a short payoff to clear the debt.

Chances of foreclosure by second lender

In case the second lender decides to foreclose on the property, there will be no need for a modification on the first mortgage and the first lender will definitely cancel negotiations for modifying the loan. However, if the property is underwater, it is unlikely that the second lender will foreclose. They hold a second lien on the property and whatever money they get from the foreclosure auction will first be used to satisfy the first mortgage. Whatever remains in excess from the sale proceeds will be used to pay off the second loan.

To know more on this issue, you can refer to the following page:
http://www.mortgagefit.com/second/loanmodification-chargeoff.html

As a first step to your retirement planning, you should start investing in the retirement plans offered by your employer. You can also start investing in IRAs. Estate planning is an important aspect which you should decide upon before you retire. Apart from this, allocation of assets in bonds, stocks and cash will also help you in getting a secured retirement income.

Here’s a checklist which can help you prepare yourself for this important financial goal in a better way:

• Accumulating emergency funds: It is essential to build up enough emergency savings which will help you in dealing with sudden monetary crisis after your retirement. Investing in insurance is also a good way to save yourself from unforeseen circumstances. You may even consider working part-time in your early retirement years in order to increase your savings.

• Social security income: You will have to apply for social security income 3 months before the date from which you want to collect the benefits. You can apply for the benefits as early as 61 years and 9 months of age. You may even collect your deceased spouse’s social security benefits at the age of 60. If you’re disabled, then you would be able to receive the benefits at the age of 50.

• Beneficiary designation: Make it a point to update beneficiary designations on your financial paperwork and retirement account. Consult a lawyer who can help you review your powers of attorney, will, trust, as well as beneficiary designations. This will help you know whether or not you and your beneficiaries are appropriately protected.

• Balance your asset allocation: Balancing your asset allocation in stocks, bonds, and cash in a better way would help you increase your retirement income and thus safeguard your future. You may even consult a financial advisor in this regard.

• Healthcare: Research and review your healthcare options once you retire as it won’t be covered by your employer any longer. Make sure that you’ve long term health insurance coverage for yourself.  Remember that your Medicare application process, timelines, and premiums may vary depending upon your age and social security income. You may have to pay higher premiums if you apply late.

• Debt free retirement: Make sure that you pay off your car before your retirement. Also, reduce your mortgage debt as much as possible before you retire. Paying off your credit cards with higher interest rates earlier would also help you in lead a better life after retirement.

Her husband asked a few queries, which are as follows:

(1) Can the second mortgage company send the debt to a collection agency 2 years after the property was foreclosed?
(2) Is he or his wife still liable for the second mortgage debt?
(3) Can the collection agency file lawsuit and garnish her wages to recover the debt?
(4) Can they come after his salary as they are now married even though the debt was incurred when she was still single?

It’s not surprising that a borrower’s debt has been sent to collections. Lenders often do that for accounting and other reasons, whenever they feel like they’ll not be able to collect the debt from the borrower. But what surprised our poster is the fact that the lender charged off the debt to the collection agency almost 2 years after they sent his wife a 1099-A form!

1099-A form and cancellation of debt

When someone receives a 1099-A form, it does not necessarily imply his/her debt has been cancelled. Lenders send a 1099-A form whenever they foreclose on a property abandoned by the borrower. It is often confused with a 1099-C form, which is sent to the borrower for cancellation of debt. Based on the information provided in the 1099-C form, the IRS levies taxes on the cancelled debt as they consider it the borrower’s income.

Collection after foreclosure on property

The lender can send the debt to collections even after 24 months have passed since they foreclosed on the property. The Statute of Limitation (SOL), as applicable in the state of Georgia for written contracts is 6 years from the date of last payment. Thus, the lenders can surely come after the wife till the debt account is past 6 years. The poster’s wife is definitely liable for the amount of the second mortgage, but the poster himself is not. He did not sign on the mortgage promissory note which is why he does not have any liability towards the loan in any way. This, I believe, answers the third and the fourth questions as well.

Collection agency can garnish wages

The collection agency can sue his wife, obtain judgment against her and garnish her wages if she fails to pay off the debt she is still responsible for. Though, they cannot come after the husband’s salary or assets for this debt, since he neither borrowed nor co-signed on this loan for his wife. Moreover, the debt was incurred prior to his marriage. So, he cannot be held responsible for it.

Settlement with a collection agency

It is most likely that the collection agency would be ready to do a settlement with the wife and agree on a short payoff. The original lender would never have charged off this debt to the collection agency, had they considered this debt recoverable. They sent it to collections only because they had little hope of recovering this debt. Thus, the wife should now start negotiating with the collection agency and try to settle the debt for an amount less than what is actually owed on it.

To know more on this issue, you can refer to the following page:
http://www.mortgagefit.com/second/collections-deficiency.html

How do lenders scam seniors looking for reverse mortgage?

Some of the reverse mortgage lenders market their products as retirement income. Though the cross-selling has been banned by the Congress in 2008, yet the lenders have been selling annuities along with reverse home loans. Some of the brokers are even seeking higher fees which have led to long-term annuities. In my opinion, this is inappropriate for the seniors as it would tie up their retirement savings for years to come.

It is true that reverse mortgage plays an important role in order to help seniors get mortgage. But it’s important that there should be transparency so that consumers are protected. The government should not only enforce the rules regarding transparency but also ensure that the rules are being followed by the lenders.

How can this subprime fiasco be avoided?

In recent times, the popularity of reverse mortgage has grown by a large extent. As a result, a number of loan professionals are trying to persuade the senior citizens to go for reverse home loans. NCLC has thus suggested about increasing borrower counseling and deciding upon a standard for lenders and brokers.

As per a new rule in the industry, principal limit for Home Equity Conversion Mortgage has been lowered by 10% since October 1st, 2009.This rule has been introduced to tackle the estimated deficit of $798 million from depressed home prices. The new rule will probably help lenders to recover their dues easily and reduce the chances of another subprime disaster.

It is expected that this year, the number of reverse home loan applications would be at an all-time high. If we do not take consumer protection and transparency seriously, there are chances that we would face another sub-prime fiasco soon.