Attorney and credit repair expert Edward Jamison has warned us about important changes to loan rates for those with medium credit and moderate equity in their properties.
Jamison reports that Fannie Mae and Freddie Mac have announced loan price increases for borrowers with credit scores below 680 on loans with LTVs less than 70%. (In other words, less than 30% equity or down payment.)
In case you aren’t familiar with Fannie Mae and Freddie Mac, they are government-sponsored enterprises (GSE’s) that make loans and loan guarantees. They help keep the money flowing in the mortgage market.
Not every lender relies on their “conforming” loan guidelines, but many do because they want to package and sell their loans on the secondary market. (Yes, that ties into all the “mortgage turmoil” news lately.)
So back to the news: In an investor conference call Mike Quinn, SVP Single-Family Risk Officer for Fannie Mae said, “we announced a meaningful, across-the-board increase on loans having credit scores below 680 and LTVs above 70%. These changes in underwriting and pricing will help control losses and maintain appropriate levels of profitability through this cycle.”
And in a letter posted on their website, Freddie Mac said they will be charging from .75% up to 2.0% depending on the borrower’s credit score for loans submitted with less than a 70% LTV and credit scores below 680.
The following table illustrates the rates and costs for a borrower with a loan amount of $300,000.
Credit Score: Below 620
Delivery Fee Rate: 2.00%
Cost: $6000
Credit Score: 620-639
Delivery Fee Rate: 1.75%
Cost: $5,250
Credit Score: 640-659
Delivery Fee Rate: 1.25%
Cost: $3,750
Credit Score: 660-679
Delivery Fee Rate: 0.75%
Cost: $2,250
This is big news! If your credit score falls below one of those thresholds and you don’t have enough equity in your home (as many don’t these days) you may find it more expensive to refinance — or buy a home — especially if you aren’t taking advantage of the latest technology to search home loan rates and seek out alternatives.
The New York Times warns that foreclosure fees are often wrong. These improper fees can be a few hundred dollars to a few thousand (or worse!). If you are falling behind on your mortgage or facing foreclosure, I highly recommend you read the article.
Borrowers Face Dubious Charges in Foreclosures
By GRETCHEN MORGENSON
Published: November 6, 2007
As record numbers of homeowners default on their mortgages, questionable practices among lenders are coming to light in bankruptcy courts across the nation.
A reader using the FreeRateSearch.com site asks:
Q: Should the monthly debt for rate search include credit card minimum payments, student and auto loans only, or must it include other debts such as first mortgage payments, utilities, insurance, etc.?
A: The FreeRateSearch.com engine automatically calculates your debt-to-income ratio for your new proposed mortgage loan so don’t include it. You only need to list other non-mortgage debt payments (such as credit card minimum payments, student and auto loans). Utilities are never included in calculating mortgage debt ratios.
“Jason” asks us:
My wife and I are contemplating refinancing our mortgage to payoff our credit card & auto loan debt. We are in the 1st year of a recent home purchase and have a loan balance of 154,500 @ 5.875% for 30 yrs. (fixed). Our current monthly payment is $913, and with the other debt added in, comes to $1325 monthly. Our credit card debt is $7,300 (paying $150 monthly), and the amount owed on the auto loan is $13,200 (paying $260 monthly). We plan on staying in our house for at least the next 20 years.
Jason: This is a great question. There are several things you need to think about here. First is the fact that you have a great 30-year fixed rate loan. I’d hate to see your interest rate go up and it very well could. Use our system to find out what’s available to you today.
Secondly refinancing will carry closing costs. If you opt for a “no closing cost” option, closing costs will be built into the loan and you will pay a higher interest rate. That could become more costly in the long run.
Finally, you may not have enough equity to do what you consolidate, pay closing costs, and keep your home loan balance below 80% of your home’s value, which is recommended in today’s market.
I’d recommend you do a couple of things instead. One is to get your FICO scores and if they are not as high as you would like, start working on getting them there. The higher your scores, the more negotiating power you have with creditors and the easier it is for you to get better rates.
Second, negotiate the lowest rate possible on your credit card. Call and ask! If your current issuer won’t budge, consider getting a card you can use to transfer the balance.
Third, look for any extra money you can to retire the credit card debt more quickly. Your payments are currently too small to make much of a dent in the balance. Track your spending to see where you can make some changes. Consider selling things you don’t need anymore on ebay etc.
Finally, given what you’d told me, if you really want to use home equity I would recommend a home equity loan or line of credit over refinancing the entire loan.
A reader asks:
Q: Our mortgage is in my name only because my wife has bad credit and any re-finance would also be in my name only. Can I use her Social Security income in my annual income amount?
A: No, you cannot include your wife’s income if she is not on the loan. But if you do include your wife on the loan, there is no reason her Social Security income cannot be included if it can be verified.
A New York Times article this week discussed research that shows African Americans and Hispanics are more likely to get higher cost loans. Though the conclusions are somewhat controversial (is it discrimination, redlining, a function of aggressive marketing, or something else?) it’s not the first time this disparity has been raised. In fact, you’ll find a variety of studies here that show that women, African Americans, and Hispanics are more likely to get a higher cost loan, when better loans are available.
Our data, gathered from hundreds of subprime programs monitored over the past three years, go even further: we have found that most consumers who got adjustable rate subprime loans (ARMs) could have qualified for a comparable or even better fixed rate loan. However, either they or their loan officer did not know a less risky loan was available. This means that a significant part of the current subprime mess could have been avoided, had the search tool we make available at FreeRateSearch.com been available to consumers then.
We wish it could have been rolled out sooner. But even now, we find that home loan shoppers are sometimes skeptical of our system, having had poor online mortgage shopping experiences in the past. The fact is, though, if you know the best par loan rates available for you, it puts you in an excellent position to avoid being misled and overcharged.
You can read a good post on the New York Times article at Creditbloggers.com.
We get lots of questions at FreeRateSearch from homeowners wondering whether they should refinance now or wait until their adjustable rate loan resets. Some of them are concerned because they have a prepay penalty that will make it more expensive to refinance now. Others just aren’t sure if they need to refinance now or can wait.
MSN Money expert Liz Pulliam Weston is warning homeowners not to wait. In her article, Time to Refinance Now, she explains that there are several dangers in waiting, not the least of which is the fact that if home values continue to fall, you may not have enough equity to qualify for the best loan. She says “the risk is in waiting, not acting.”
I would add that with the economy shaky, waiting may also put you at risk of a layoff or pay reduction that could make it more difficult to qualify.
If you are thinking that you need to refinance, don’t wait. Get the ball rolling and find out what’s available now now.
A frustrated homebuyer-to-be asks:
Q: My credit score is not good. Most of it is because I have two accounts that are the same on my credit report, and two that are paid off but still on my credit report. How can I get someone to help me finance a home? I pay bills on time but at that time in my life I had a sick fiancée to care for.
A: Negative information does not haunt you forever. Under the federal Fair Credit Reporting Act, late payments can be reported for seven years and collection accounts may be reported for up to seven and a half years, whether they are paid or unpaid, Bankruptcies can remain for ten. But the good news is, the older that information becomes, the less important it is to your credit. Accounts in the past two years typically carry the most weight.
I don’t know how recent your problems were, but I suspect part of the trouble you are having is that you don’t have current positive references on your file. I would recommend you check your credit reports and scores.
With your three bureau credit reports and scores in hand, you can use FreeRateSearch.com to find out what home loans may be available. After you complete your initial mortgage rate search, you can also try “what if” scenarios by changing the information you submit — what if you increase your income, for example, or reduce your proposed loan amount? This may help you find a loan that works for you.
Most mortgage lenders like to see at least four current credit references paid on time. If not, you may need to start with a secured credit card.
I would also recommend you dispute the account that is being reported twice. If there is a duplicate account for the same item, one should be removed.
If you really focus on your credit, and make sure your other qualifications are strong (down payment, steady income, etc.) you should be on your way to becoming a homeowner.
In response to the credit crisis, The Center for Responsible Lending is urging citizens to ask their elected officials in Washington to support support legislation aimed at giving homeowners with predatory loans a fair chance to avoid foreclosure.
Rep. Brad Miller (D-NC), a member of the House Financial Services Committee and Rep. Linda Sánchez (D-CA), Judiciary Subcommittee Chairwoman on Commercial and Administrative Law have introduced HR 3609-Emergency Home Ownership and Mortgage Equity Protection Act to prevent hundreds of thousands of Americans from losing their homes by allowing them access to bankruptcy relief.
Currently, when a homeowner enters bankruptcy, the bankruptcy judge can allow them to restructure and catch up on delinquent mortgage payments. But the judge cannot order modification of the terms of the mortgage itself to keep the homeowner in their home, even if the loan was a predatory one with a huge jump in the interest rate or payments. No one wins, though, when lenders must foreclose.
Other types of debts can be restructured or reduced in bankruptcy, and in the past restructuring of mortgage debt was allowed.
According to the Center for Responsible Lending, the benefits of this legislation are:
* No cost to the US Treasury. This is not a bailout program.
* Narrowly targets families who would otherwise lose their homes but can repay at least some of their debt in a Chapter 13 program.
* Saves American families not facing foreclosure $72.5 billion in wealth by avoiding 600,000 foreclosures by their neighbors.
* No negative effect on home credit. When bankruptcy laws permitted loan modifications on a family’s primary residence between 1978 and 1993, there was no evidence of market impact. Similarly, loan modifications permitted from 1978 through the present for loans secured by family farms, commercial real estate, investment properties and vacation homes have produced no negative effects. All these types of secured debt, plus credit card receivables and car loans, are readily securitizable, notwithstanding the ability of judges to modify loans in chapter 13.
* This solution is better for lenders. Guarantees lenders at least the value they would obtain through foreclosure, since a foreclosure sale can only recover the market value of the home. In addition, saves lenders the high cost and significant delays of foreclosures.
My personal view is there is an urgent need to pass this kind of legislation. What do you think?
Q: Right now I have a ARM on my mortgage. It ends in April. When do you think I should refinance my mortgage? Do I take the risk of waiting and going to the rate in April or should I refinance now?
A: Is there a prepayment penalty on your current loan? If not, I see no reason not to look into refinancing right now. Even if you do have a prepayment penalty you may need to consider refinancing sooner.
Keep in mind that if home values continue to decline in your areas it may be more difficult to refinance in the future, depending on how much equity you have n your home. Liz Weston wrote an excellent article on this topic for MSN Money. Additionally, we have no idea where rates will be by spring, but by all indications they are likely to be higher.
Use the search feature on Lender Rate Match to find out what loans may be available to you. Then talk with the lender and ask him or her to run a “break even” analysis for you if there is a prepayment penalty. You’ll have a better idea of whether you should refi now or risk waiting.
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