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HUD plans to modify reverse mortgage program

August 27th, 2010

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.

Fix Your Credit Score Before Applying for a Mortgage

August 19th, 2010

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.

High delinquency rate on home equity loans

August 14th, 2010

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.

4 steps to getting a mortgage

August 5th, 2010

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.