Some reverse mortgages may be getting cheaper. The Department of Housing and Urban Development (HUD) plans to modify the Home Equity Conversion Mortgage (HECM), the nation’s most popular reverse loan program.

Convert home equity to cash

Reverse mortgage loans allow people 62 and older to convert some of their home equity into cash. The proceeds can be used for any purpose and are paid out in a lump sum, through a line of credit, or a combination of both. Although reverse mortgages have helped many seniors supplement retirement income, some of the biggest complaints about these loans are the high upfront fees.

Upfront cost of reverse mortgages reduced

The National Reverse Mortgage Lenders Association revealed the HECM modifications in a press release. Under the proposed changes to the HECM program, the upfront cost of getting a reverse home mortgage would be reduced if borrowers applied for the HECM Saver. The HECM Saver would decrease the upfront cost of Mortgage Insurance Protection (MIP) to 0.01% of the property’s value. The HECM Standard would keep the upfront cost of MIP at 2% of the property’s value, or 2% of the maximum FHA loan limit of $625,000, whichever is greater. HECM Saver borrowers would receive less money than if they applied for a HECM Standard.

“We applaud HUD for undertaking the analysis required and re-engineering the HECM program to create options that will make it a viable solution for more older homeowners,” Peter Bell, President of the National Reverse Mortgage Lenders Association, said in a statement. “The upfront mortgage insurance premium has been a deterrent to some prospective borrowers, particularly those needing less than the full amount available under the traditional HECM Standard program. This new variation, the HECM Saver, presents a sensitive response to their needs.”

Reverse mortgage pros and cons

Anytime you apply to borrow a large amount of money there are going to be pros and cons. Evaluate your situation carefully before committing to a reverse home mortgage. There may be other solutions that can help improve your cash flow. A knowledgeable housing counselor can help you learn more about reverse mortgages so that you can make an informed decision about tapping into home equity.

Do you need to improve your credit score to qualify for a mortgage loan? Whether you want a mortgage to refinance or purchase a home, it’s important to straighten out your finances before filling out a loan application. Here’s what you need to do.

• Ditch credit card debt. This is one of the smartest things you can do to boost your credit score. Mortgage lenders won’t approve you for a home loan if your debt-to-income ratio is too high. Debt payments should account for no more than 36% of your income, and mortgage debt shouldn’t be any higher than 28% if you expect to qualify for the best mortgage rates.
• Pay your bills on time every month. Consistently being late with bill payments lowers your credit score. Read your monthly statements carefully so that you are aware of the date and time that payments are due. Payment history accounts for 35% of a FICO score.
• Avoid running up balances on existing credit cards or lines of credit. Even if you have enough income to pay off your debts at the end of the money, running up credit lines may mark you as a credit risk with mortgage lenders. Put the kibosh on new purchases at least until after you get approved for a mortgage.
• Check your credit report for errors. It’s not uncommon to find inaccurate or outdated information on credit reports. Dispute any problems that you find with the credit agency by calling and following up with a letter. If necessary, contact creditors to straighten out problems. Review your report again after your dispute has been settled to make sure everything has been updated.
• Keep your oldest credit lines open to show that you have an established credit history. While it makes sense to close unused credit lines if you don’t want to be tempted by them because of a history of overspending, wait to do so until after you get a mortgage. If you’ve had a long history of managing credit well, it can help lift your credit score.

Free Credit Reports

Request a free copy of your credit report at www.annualcreditreport.com. You can get one free copy every 12 months from Equifax, Experian, and TransUnion. Review it carefully and take time to fix any problems in order to qualify for the best possible deal on a home loan.

Home equity loans have a higher delinquency rate than all other types of consumer loans, according to data from the American Bankers Association. According to an article in the New York Times:

Lenders wrote off as uncollectible $11.1 billion in home equity loans and $19.9 billion in home equity lines of credit in 2009, more than they wrote off on primary mortgages, government data shows. So far this year, the trend is the same, with combined write-offs of $7.88 billion in the first quarter.

Home Equity Loans and Falling Property Values

Some homeowners who’ve fallen behind on home equity loans are likely to threaten bankruptcy if lenders try to collect. Also, because property values have dropped so much, many borrowers don’t see the point of trying to pay off home equity loans. Some homeowners are even willing to walk away from their homes and let them be foreclosed upon rather than pay off home equity loans and mortgages.

Settling Unpaid Debt

In some cases homeowners have arranged debt settlements for home equity loans. Before going this route keep the following things in mind:

• You must be behind on home equity loan payments before the lender will talk debt settlement
• In some cases your loan must already be in collections to work out a settlement
• Even if you settle a home equity loan, you may owe taxes to the Internal Revenue Service for the forgiven portion of debt
• Debt settlement is going to ding your credit score

Sell Your Property

It may make more sense to do whatever you can to sell your property and get rid of your home mortgage and home equity loan. Of course the housing market isn’t doing so great in many places, but you may be able to get your mortgage lender to agree to a short sale. A short sale occurs when the mortgage lender agrees let you sell for less than what you owe on your home loan. The holder of your home equity loan would have to agree to a short sale as well.

It’s possible that there is a home buyer out there who would be thrilled to get your house at a bargain price. In the long run it would be better to sell your home this way than to end up in foreclosure or bankruptcy, or spend more time stressing over all your unpaid loans.

You’ve probably heard a lot of doom and gloom about the prospects of getting a mortgage these days. But just because mortgage lenders have gotten more strict about lending money doesn’t mean you can’t get approved for a home loan. Use the following tips to improve your chances of getting a home loan before filling out an application.

1. Get your finances together. Before you even approach a mortgage lender about getting a loan it’s important to make sure you have a strong financial profile. Pay off as much debt as possible to lower your debt-to-income ratio. Mortgage lenders are unwilling to lend money if you already have too much debt relative to the amount of income you have to pay it back. Generally, it’s recommended that you have no more than 36% of your income going to debt, and only 28% of it should be for mortgage payments.
2. Sock away money for a down payment. The more money you have saved up the better off you are. Aim to save a down payment of at least 20% to avoid mortgage insurance (MI), which is paid on top of principal and interest payments. Also, a larger down payment is viewed favorably by mortgage lenders.
3. Review your credit report. Your credit report is a key piece of information that determines whether or not you get approved for a home mortgage. This information helps determine what credit score you receive. Credit reports should be reviewed carefully before applying for any type of loan to make sure all the information is accurate.
4. Put together a team of experts. A real estate agent with access to the Multiple Listing Service (MLS) can help you hunt for a home, but there are other professionals you should consider working with. An attorney who specializes in real estate can review all of your contracts and handle the processing of important documents. You should also find a qualified housing inspector to make sure there are no structural problems or other issues with the property you plan to buy. Even if you haven’t found a house to purchases yet, assemble your team to avoid wasting time when you find a property.

Getting the right mortgage to buy a home requires careful planning and preparation. Current mortgage rates are at all time lows, but if you aren’t properly prepared you won’t be able to take advantage of them. If you are ready to begin comparing mortgage rates you can do that here.

blog for week ended 7/30/10:

http://www.loanbiz.com/blog/

Borrowers are going to continue having a tough time getting approved for  mortgage loans, according to Michael J. Williams, Fannie Mae’s CEO. Many potential home buyers have been turned away by mortgage lenders looking to minimize their risks as the economic crisis has lingered.

Mortgage Loans for the Next Generation

“A solid majority of renters assume it will be tougher for their kids to buy a home–and they’re right, too,” Williams said at a recent Women in Housing and Finance event. He added: “Across the board, we see a much deeper understanding of how credit, income, job security and a down payment could stand in the way of buying a home.”

Qualifying for a Home Loan

So what can be done to improve your chance of getting approved for a home loan? Let’s look at each of the key areas Williams mentioned.

• Credit. You must clean up bad credit and so that mortgage lenders view your situation in favorable terms. Pay off debt, fix mistakes on your credit report, and avoid being late with monthly payments on bills.
• Income. The days of the getting a home loan without proof of income are over. Whether you are buying a home or refinancing an existing mortgage, be prepared to provide payment stubs, W-2 forms, tax returns, and proof of other assets.
• Job security. Although the media tends to focus on the doom and gloom of high unemployment rates, the fact of the matter is that most adults are still employed in some capacity. The longer you have been employed in a job, the more that helps your mortgage loan application. Try to avoid changing jobs if you plan to apply for a home mortgage.
• Down payment. The amount of money you have to use as a down payment is just as important as what mortgage rate you get. That’s because the more money you have to put towards a home, the less your monthly payments will be. Putting down at least 20% as a down payment also helps you avoid paying mortgage insurance.

Yes, it’s going to be difficult going forward to get approved by a mortgage lender. But that doesn’t mean you have to give up your dream of getting a home loan. If you’re confident you can get approved now, you can begin comparing mortgage rates here.

Low mortgage rates should bring out a stampede of home buyers looking for a deal with housing prices so much more affordable than a few years back. But that’s not happening as many potential buyers stay on the sidelines or can’t get approved for a home loan.

Mortgage Rates at All-Time Lows

Despite the fact that current mortgage rates are averaging 4.56% for a 30-year fixed loan — the lowest level ever — consumer confidence and home builder confidence have dropped. Mortgages rates for 15-year fixed loans are averaging 4.03%.

Frank Nothaft, Freddie Mac’s vice president and chief economist, said in a statement:

The decline in mortgages rates over the past few weeks echoes the recent signs of weakening confidence in the strength of the economy, particularly the housing and consumer sectors. For example, homebuilder confidence declined in July to lows not seen since April 2009, as measured by the NAHB/Wells Fargo Housing Market Index, following the large drop in housing starts reported for June.

Falling Home Values

Home values throughout much of the country have fallen and are expected to show more declines, although some economists say the worst of the housing crisis has passed.

Consumer confidence fell as many folks continued to worry about unemployment and overall conditions in the economy. The Conference Board’s Consumer Confidence Index dropped to 52.9 in June from 62.7 in May.

According to Lynn Franco, director of the Conference Board Consumer Research Center:

Consumer confidence, which had posted three consecutive monthly gains and appeared to be gaining some traction, retreated sharply in June. Increasing uncertainty and apprehension about the future state of the economy and labor market, no doubt a result of the recent slowdown in job growth, are the primary reasons for the sharp reversal in confidence. Until the pace of job growth picks up, consumer confidence is not likely to pick up.

Current Refinance Rates

Despite the concern about the economy, some homeowners are taking advantage of the low mortgage rates to refinance home loans. Doing a home refinance could make sense if it can significantly lower your monthly payments or get you out of a mortgage with adjustable rates.

You can begin gathering quotes for mortgage refinancing here. If you have a stable income, strong credit score, and equity in your home you may be able to qualify for a home refinance despite concern about where the economy is heading. 

When you apply for a home equity loan the lender requires that your home be used as collateral. This type of loan is considered a second mortgage.

Decline in Home Values

Some homeowners have had a difficult time qualifying for home equity loans during the credit crunch because of falling home values. But if you have good credit and a decent amount of equity, there is a chance you can get approved to borrow money.

It’s never a good idea to borrow money if you don’t need to. But if you are house rich and cash poor, a home equity loan can be useful if you need to make home improvements, pay college costs, or even consolidate high-interest debt.

When considering a home equity loan keep in mind the following pros and cons. Pros include:

• Home equity loans usually have much lower interest rates than credit cards and rates are often fixed.
• Interest paid on home equity loans is tax deductible.
• Depending upon how much equity you have you may qualify for a sizable amount of money.

Among the cons of getting a home equity loan are:

• If your property values declines significantly, you could end up owing more on your mortgages than your home is worth. This is commonly referred to as being upside down on a mortgage.
• Borrowing money by using your home as collateral is risky. If you can’t afford to keep making payments on a home equity loan, you could end up losing your property.

Access to a Line of Credit

Keep in mind that home equity loans differ from home equity lines of credit (HELOCs). A line of credit also allows you to tap into your home equity, but it is set up so you can draw on the money as you need it instead of taking a lump sum. Both home equity loans and HELOCs usually have shorter terms of repayment than first mortgage loans.

Tighter Lending Standards

Some people who were previously approved for HELOCs have had their lines of credit frozen because banks have tightened up on lending. In other cases people who have strong credit histories have been denied HELOCs because banks are reluctant to extend credit.

Shop around to compare home equity loans to find the best deals. Familiarize yourself with all the terms before signing up.

Think the rich are immune to the housing crisis? You would be wrong. According to the New York Times, “more than one in seven homeowners with loans in excess of a million dollars are seriously delinquent.”

Walking Away from Home Loans

CoreLogic compiled data that indicate that people with less expensive homes are more likely to continue making payments to mortgage lenders. “Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment,” the article states. Sam Khater, CoreLogic’s senior economist, was quoted as saying, “The rich are different: they are more ruthless.”

Strategic mortgage defaults have become more common as the housing market has struggled to recover. Some homeowners have simply stopped paying on mortgage loans because  they see no point in putting money into properties that have lost significant value. It’s not that they can’t afford to make payments on home loans, they just don’t want to.

Falling Home Prices

According to a recent article on Freddie Mac’s Web site, many strategic defaulters live in states where housing prices have suffered huge drops. Walking away from homes, the article argues, hurts entire communities in the long run:

That’s because strategic defaults affect many other families and communities. And these costs – or as they are known in economic jargon, externalities – are not factored into the individual borrower’s calculations.

Let’s start with the neighbors. When strategic defaults occur, homes go into foreclosure and sit vacant for some period of time. We know from experience that foreclosures and vacancies drive down the property values of everyone else in the neighborhood. Thus, strategic defaulters, in effect, deplete the personal wealth of their neighbors. 

Average Joe and Jane

Ultimately, it’s the average homeowner who is likely to be affected the most. A middle-class family that loses a home through foreclosure is likely to struggle for years to rebuild a stable financial situation.

Defaulting on Mortgages and Still Living Large

When people with million-dollar properties default on home loans, they often continue to have access to other financial resources and investments. They may even have a second or third home to move into and continue to live a pretty comfortable lifestyle.

Avoid Defaulting on a Mortgage

Whatever your income level or home’s value, it’s best to do everything you can to avoid defaulting — strategically or otherwise. Alternatives to strategically defaulting include resigning yourself to making mortgage payments even if you’ve lost a lot of home equity and waiting for the market to recover.

You could also try to refinance your mortgage loan to lower your payments and interest. Finally, if necessary, do whatever is necessary to sell your home to get rid of mortgage payments.

About 65% to 75% of mortgage loans modified through the government’s loan modification program but not backed by the federal government are expected to go into default, according to a report from credit-rating agency Fitch Ratings.

Too Much Debt

The report said that the main reason many home loans modified through the Home Affordable Modification Program (HAMP) are expected to go bad is because borrowers don’t receive help with other debt problems.

“Many of these borrowers still have very heavy levels of other debt, auto loans, credit cards and other expenses” Diane Pendley, a Fitch managing director, told CNNMoney. “We’re talking borrowers who don’t have cash reserves. If they did, they wouldn’t be in this position in the first place. It doesn’t take much for them to get in the same situation again.”

Mortgage Lenders Foreclose

A homeowner who defaults on a home loan that has been modified is likely to face foreclosure.  Mortgage lenders are probably not going to give homeowners a second modification deal.

Asking for a Short Sale

Homeowners who find themselves in the position of defaulting on a mortgage loan that was previously modified, may be able to negotiate a short sale. A short sale occurs when a mortgage lender agrees to let you sell a home for less than what is owed on it. Mortgage lenders sometimes agree to short sales rather than deal with foreclosing on a property mortgage loan.

If you are about to default on a home loan that has been modified consider the following things that could help you arrange a short sale:

• Mortgage lenders are more likely to approve a short sale if you already have a buyer lined up
• It may take several attempts to contact your mortgage lender before getting approval for a short sale
• You must provide all documentation requested as soon as possible if a short sale has been approved

Arrange a Deed-in-Lieu Deal

In some cases you may be able to get your mortgage lender to agree to a deed-in-lieu deal. That occurs when you give back your property to the lender because you can’t afford to make monthly payments on a home mortgage. The mortgage lender is then free to sell the property to try and pay off the balance of your home loan.

There is  no guarantee that your mortgage lender is going to agree to a short sale or deed-in-lieu. But if you truly believe that you are going to default on a home loan that has already been modified, contact your mortgage lender to discuss your options.