Financing your dream home has become way too expensive these days. Adding to that, lenders have tightened the underwriting standards, making home loans unaffordable for most Americans. Be wise in picking up the right mortgage plan, so that you don’t have to regret it later.

When you analyze your financial position, income and contingencies, oftentimes it becomes quite confusing to select a mortgage suitable to your needs. Comparing the three most popular home loans should help you better assess your expectations, budget and choose the right home loan.

Conventional Loans

Conventional loan is one of the most popular mortgage types in the US. You have to pay the principal loan and interest in fixed monthly installments over an agreed period of time, usually 30 years. The government neither makes nor insures conventional loans, instead they fall into the guidelines of government sponsored enterprises (GSEs) – Fannie Mae and Freddie Mac.

A good thing about conventional loan is that you have to pay a fixed amount of money every month from the beginning to the end, irrespective of future economic scenario. It is best suited for those willing to stay in the house for a long time. You can obtain the conventional mortgage loan from a bank,  a credit union, a savings and loan or even through a mortgage broker. Loan-to-value ratio and the term of the loan are two very crucial points. Loan-to-value (LTV) ratio shows what percentage of the total house value will the financer be putting. For example, if a cost of a house is $100,000. Let’s say, you pay $5000 upfront and ask the bank to pay $95,000 over 30 years, then the LTV ratio is 95%.

Interest rates vary depending upon your credit score. Though the average American FICO score is 620, the higher the score the lower your interest rate. To keep the transactions on safer side, ensure than all your monthly mortgage expenses (the principal and interest, insurance and property taxes) should not be higher than a specified percentage of your monthly income (usually 28% ratio).

Pros

Since conventional loans require a higher down payment, you have the opportunity to build up home loan equity pretty fast. On the other hand, there is always a stability because you very well know what your monthly mortgage payments will be for years to come. So you can plan your finances accordingly.

Cons

If you want the best interest rates, you’ll have to have a great credit score. Otherwise the interest rates would be high making it difficult to afford the payments every month for thirty years.

Who Should Go for Conventional Loans?

It is best suited for people with excellent credit score and able to put 5 percent or more in down payments.

Interest-Only Mortgages

The homeowners’ addiction to anxiously look for new and better ways of purchasing a home gave rise to interest-only home loans. For the first few years, your monthly payments will consist of only the interest, and no payment of the principal is made. For example, if you take out a 10/20-year interest-only mortgage, for the first 10 years you’ll be paying a small amount consisting of only interest. From 11^th year the payment of principal sum begins which would obviously be higher.

Of course, you do have the right to pay more than the interest during initial years if you want to. You are likely to qualify for a bigger home loan because of the lower monthly payments.

Benefits

People are attracted to interest-only mortgages because they can buy more than one house or an expensive one at relatively lower monthly payments. It gives you the opportunity to  invest the free up money for better returns. As lenders expect you to pay only the interest, you can pay the principal whenever convenient to lessen the burden in future.

Pitfalls of Interest-only Mortgages

Though they seem pretty attractive, there are certain pitfalls of interest-only loans that you should be aware of.

v  There is always an uncertainty whether your income will increase enough to make increased monthly payments for the principal amount.

v  You can’t be sure that the free up money invested in some other property or financial market would fetch superior returns.

v  Since you pay only interest for the first few years, you don’t actually reduce the loan. If unfortunately the value of home falls over the years, you’ll still owe the principal amount to the bank. When you sell such a house at decreased price, you have to pay the difference from your pocket, apart from the interest you paid for years. For example, you purchase a home for $200,000 where the lender pays 80% (160,000) of this value. If the price of this home comes down to $150,000 after ten years, you have to pay the difference ($10,000) from your own pocket to the bank when selling the house, no matter you paid interest on this money for a decade.

Who Should Take out an Interest-only Mortgage?

The first time homebuyers are highly encouraged to go for this type of loan. New homeowners generally struggle to make monthly payments because they are not accustomed to paying mortgage which is slightly higher than renting a house. A lower monthly payment scheme helps them adapt to the situation.

Investors prefer this over other mortgages to increase their property by paying the minimum possible installments.

Adjustable Rate Mortgages (ARM)

As the name itself suggests, ARM is the loan in which interest rate becomes adjustable after a specified period of time. In the beginning, the interest rate is fixed for certain period like 2, 3, 5, 7 or 10 years. At the end of this term, the mortgage rate is adjusted up or down based on the changes in economic index over time.

Though the interest rate changes periodically, the time span established to pay off the complete loan is not altered.

Basic Terminologies You Must Know

Index

It is an interest rate derived from a number of averaged returns. They are generally published in various newspapers and lenders use them to adjust the borrowing rates monthly, quarterly, half-yearly or annually. The four most common indices are:

1. Monthly Treasury Average
2. Cost of Savings Index
3. London InterBank Offered Rate (LIBOR)
4. 11^th District Cost of Funds

Ask the lenders to show how each of these indices has performed over the years. You are encouraged to choose an ARM in which the index used has been closest to stable over the years.

Margin

It is the percentage point added to index to determine the actual interest rate you have to pay. In simple terms, margin indicates the lender’s cost of doing business and the profit he will make in the transaction. It always remains the same for entire life of your mortgage loan.

Interest Rate = Index + Margin

Adjustment Period

It’s the time period for which interest rate remains unchanged and the changes will take place only after that period is over. For example, you might have noticed that ARMs are generally attached with figures like 5-2 ARM mortgage. Here the first figure (5 in this case) tells that the initial interest rate will remain unchanged for five years from the day you signed the mortgage loan.

The second digit (2) refers to how frequently the interest rates will be adjusted after the initial period is over. In the above example, the mortgage rate will be adjusted every two years after the initial period of 5 years.

Adjustment Cap

An adjustment cap is a limit of percentage points by which your monthly payments can either increase or decrease at each adjustment period.

ARM is easily affordable, especially at a time when the interest rates and housing prices are skyrocketing. But there are a few problems associated with it. First, people find is hard to understand how the index works because there are many variables considered to calculate the monthly payments. Second, unlike conventional payments, there always looms uncertainly over what the future payments would be.

Don’t hesitate to acquire information from lenders on each of home loans to compare and choose the right mortgage type for you.

A distressed homeowner has many ways to sign away the ownership of his house and short sale has been a hot buzz in the real estate market for over a decade. Many people use short sale as an option to avoid foreclosure and get rid of the upside down . In a short sale, the lender allows you to sell the house for less than what you owe them. The deficiency (difference between debt owed and price of short sale) is generally forgiven by the lender or, if you have assets, the bank will require you to pay the shorted difference by selling off your personal assets.

However, the United States is not a fairy tale land, so short sale is not as easy as it seems in this country. Before anything else, you have to qualify for a short sale. The qualifications? You must be in financial trouble like unemployment, medical emergency, death or bankruptcy; you must have defaulted on payments or you are on the verge of default, you have no assets to sell off and pay the debt.

If you are fortunate enough (or ruined enough?) to get qualified, you have to submit all your financial records including hardship letter, tax returns, proof of assets and annual income to assure the lenders that you are really in a big trouble. When the buyer purchases your house with consent of the creditor, you think everything is past now. But that past is going to trouble you for years to come, simply because it badly lowers your credit score which has become necessary for everything from job application to purchasing cars or financing a new house.

How Does Short Sale Affect Your Credit Score?

A popular misconception in our society is that short sale is less damaging to the credit score than foreclosure, therefore we interpret short sale as being less offensive. However, lending experts and Fair Isaac do not differentiate between short sale and foreclosure or deed-in-lieu. They all generally lower your credit score by 85 to 160 points.

What makes the fall more drastic is your degree of delinquency on payments before the derogatory event took place. If you stay current on payments or just slightly delinquent, expect the damage to be minimal on your credit score. Every time you miss a payment, the more negative impact on your credit score will be, no matter whether your house is foreclosed or sold in a short sale. Practically, if your payment is 120 days past due, even short sale is automatically displayed as foreclosure on your credit report.

How Can You Minimize the Impact on Your Credit Score?

Though completely avoiding the downfall is next to impossible, there are certain ways you can minimize the impact of short sale.

1- Negotiate with your lender for short sale when you foresee a possibility of default on mortgage payments in the coming months. Be proactive to find a buyer and contact the lender regarding the issue well before you miss the payments. Without a buyer, lenders are highly unlikely to entertain your proposal.

2- Credit bureaus evaluate your case based on how the lender or bank reports the short sale. So, negotiate with the lender to report it as “settled as agreed” or “paid in full.” It will lower your score by only 85-160 points.

Pros and Cons of Short Sale

Despite knowing that there is no basic difference between foreclosure and short sale as far as impact on credit score is concerned, why do people still prefer to go for a short sale? And if you happen to be one of them, you must know various pros and cons of short sale.

Pros

1- An escape from foreclosure. Foreclosure is a tedious and stressful process for the homeowner as well as the lender. The public announcements, events and auction notice on the front door of house, all drag your sense of pride and name to the streets. Nothing could be more embarrassing. Lenders have to pay for various costs without any surety that the auctions will fetch at least the invested amount.

2- In a short sale, you need not pay the transfer taxes, commission, sales fee, etc. that often adds up to 8% of the selling price. It all is paid by either buyer or the lender. More importantly, you are blessed with the right to negotiate with creditor and buyer on who pays for what and how the lender will report to credit bureaus.

3- The two largest mortgage investors in the United States – Fannie Mae and Freddie Mac – restrict themselves from lending you only for two years if you opt for short sale. A homeowner who suffers foreclosure cannot borrow for five years. That is, with a short sale you can re-qualify for a new loan to own a new house much sooner.

4- When your credit report shows a foreclosure, you’ll face trouble getting a loan from credit cards or to finance a car, etc. whereas people look favorably at short sale. There exists a disgrace for foreclosure in our society, which is not the case with short sale.

5- Creditor can forgive the difference between debt and selling price.

Cons

1- You have no guarantee that the creditor will approve your proposal for short sale. Everything remains uncertain until approval, and banks are notorious for not approving the short sale to the point it becomes only option except foreclosure.

2- If you have some property, jewelry or bank balance, the lenders are unlikely to forgive the loss (difference between debt owed and selling price). In that case, they can force you to compensate for the loss by selling your personal property.

3- Even if the bank somehow forgives the loss, it may issue a 1099 for the forgiven amount, which is sent to IRS. According to IRS, the forgiven amount is a taxable income so you have to pay taxes on that amount.

4- Short sale is absolutely not a short process. It consumes a lot of time to put together all the papers, financial proofs and other documents. The lender scrutinizes everything before giving a nod.

Short sale affects your FICO score as much as a foreclosure. The further fall in your credit score depends on how punctual you have been on your payments. It has its own pros and cons, and the process involves many details that an average homeowner is unaware of, so you are advised to consult a professional having successful track record with short sale.

Empower – Educate – Take Action

H & I Credit Solutions

In this post-crisis economy, unemployment rates are at record high, stock markets are constantly plunging, people are under financial strain, many of us are falling behind on their mortgage payments and are fearing the risk of foreclosure. To avoid foreclosures, the US government came with an ambitious plan – loan modifications (lower monthly payments for longer period of time), which later turned out to be insufficient to stabilize the situation.

But actual problem is that the failure to make mortgage payments severely hurts your credit score. You’ll be surprised to know that about 10% of all the mortgages are non-performing, i.e., were past their due dates. You can easily guess that millions of homeowners are on the verge of default. The drastic fall in credit score due to failure to pay mortgages (more than 100 points) may take years to recover (doesn’t matter if you check your credit score 200 times a day, it just won’t). Lower consumer credit means you either have to pay higher interest on any future credit or you get no loan at all. A high credit score is essential to fetch lowest interest rates.

What Factors Affect Your Credit Score?

Missing the mortgage payments when they are due is what lowers your credit score in the first place. Some score cuts are expected and known to the homeowner, whereas others come as a surprise. Let’s have a look on the consequences.

Foreclosure

Foreclosure is when the bank/lender takes possession of the house when the homeowner fails to pay home loan installments for 120 days, to sell it in an auction to the highest bidder. Banks are in no hurry to foreclose your house unless you have missed several payments. Late payment has negative impact on your credit score because the lender reports each late payment to the credit bureaus.

According to FICO, foreclosure and bankruptcy are considered the most troublesome events by credit bureaus and they damage your score the most. When unfortunately your house if foreclosed, the higher your score, the harder you’ll fall. A low credit score drops by 85 to 100 points, the average score would plunge about 120 to 140 points and a prime credit score falls by 140 to 160 points.

Don’t ignore the letters of notice sent by the creditor if you want to avoid foreclosure, because when you do so, the bank files a notice of default to protect its own interests. Receiving a letter at this moment from the lender might be embarrassing but you can’t ignore it. Call or write to your bank explaining your hardship, monthly income and expenses and other details.

The lender then evaluates your situation and may propose one or more options to help you. It may be a repayment plan called forbearance or bank may spread out the missed payments over the coming months. For example, if you have missed the payment of $3000, the lender can add $250 to each future installment for 12 months. Just a little proactive approach can prevent the loss of about 150 points on your credit report.

Short Sale

A short sale, quite a recent phenomenon, is a deal between the bank and homeowner that the homeowner will sell the house for less money than actually owed. Though it is sometimes considered a major derogatory incident, the impact of short sale is less severe than foreclosure on your credit score. You have to submit all the financial details to lender and get the short sale approved by them. They will check your financial status to see how much of the difference (between actual amount owed and price of short sale) you can pay or the bank has to suffer the loss. If you are found to be eligible to pay the difference, the bank is likely to force you to pay the difference in order to minimize its loss.

Short sale is an absolutely legitimate process. It gains momentum when the home sales are plunging, prices falling and the lender is financially weak enough to say – something is better than nothing.

Unlike foreclosure, you get an opportunity to frequently communicate with the bank. In the process you negotiate the reduced pay-off as well as how the lender will report to credit bureaus. You can save as much as 35 points if your bank reports short sale as “Settled as Agreed.” So, feel free to negotiate.

US Government’s Mortgage Assistance Program

To help the troubled homeowners, the Obama Administration extended hands with its flagship ‘Making Home Affordable’ program. You have to go through a trial period of three months to enroll the program. As soon as you enroll for the Making Home Affordable (MHA) program, you get a nasty surprise: drastic fall in credit score. Almost 100 points!

According to homeowners and housing counselors, it’s just unfair. Why should you suffer such a huge loss for doing the right thing? Many homeowners around the country are angry because it comes almost as surprise. But the credit rating agencies justify the fall stating that people look for financial assistance only when in severe financial trouble. So any request for loan modification means a sharp decline in your credit rating. You’ll notice its consequences when getting new loan or applying for a job.

To tell you the truth, Obama Government is fully aware of the MHA assistance lowering consumer credit. According to officials, it is still far better than foreclosure which crushes your credit score so much that it may take years to recover.

Loan Inquiries

Loan inquiries are likely to hurt your score for one year. First, when you check you your score thousands of times, the score won’t be affected at all. But if a potential creditor checks your score that will have an effect. According to credit rating agencies, many potential creditors inquiring your credit score indicates you must be starving for cash and panicked, so you are trying to fetch credit from any source you can find.

If you really want to go on a spree of loan shopping, do it all within a window of two weeks. All the inquiries in that period are considered as one by FICO.

The current mortgage crisis in the US has made consumers unable to make payments on time and the default rate is expected to go higher than it is now. You should be patient and persistent to successfully handle the situation without hurting your credit score.

Empower – Educate – Take Action

H & I Credit Solutions

This is a very simple process, but you have to be patient. Let’s first establish what a HUD home is.
A HUD home is a home that consumers have lived in and then defaulted through their FHA loan. HUD actually takes the home and pays off the remainder loan amount, then sells the property. HUD homes are a great way for consumers to obtain a home and consumers may pay less than market value.

There are some things that you must know if you are interested

• Anyone has the option to purchase a HUD home
• You must obtain a HUD registered real estate broker that can bid on the property for you
• Homes are sold AS IS through the HUD program
• FHA loans are available for HUD properties
• Homes are sold through listing agencies

You can find some great deals when you are in the market. HUD homes are a great place to start. The only thing that can be frustrating is that you have to bid on the house. It’s almost like bidding on a car in a car auction. You don’t know how bad the other person may want the item.

Normally, just like with any item that you have to bid on, there is a starting bid. This means that HUD will place a starting bid on the property. So, let’s say the home is worth $170,000.00 and foreclosed. HUD pays off the remaining balance $160,000.00 and auctions the starting bid for $120,000.00. This is just an example not actual numbers.

You can search for HUD home at the following like below

http://hudhomestore.com/HudHome/Index.aspx

More information on HUD

http://en.wikipedia.org/wiki/Hud_homes

Empower – Educate – Take Action

H & I Credit Solutions

Rapid Rescoring is an amazing service that will actually allow negative items to be corrected in 72 to 120 hours. Rapid rescoring itself does not boost your credit score. The purpose of a rapid rescore is to make changes to a consumer’s credit report in a very short amount of time.

Most consumers who want to dispute items on their credit report that are inaccurate will normally write a dispute letter, and wait for 30 to 45 days. Once the results come back they will see the changes.

Rapid rescoring assists consumers who are purchasing a home but need help in obtaining the right credit score to get approved.

Example: Let’s say your middle score is 615; most lenders can only approve you if your credit score is at 621. Obviously you need assistance in a quick score boost in order to obtain the loan.

If you pay off a credit card because your utilization is 90 percent, it can have a huge positive impact on your score. Let’s say you make a payment to your 2 credit card companies to pay off your balance. Your new balance is now zero. You have two options depending on how pressed for time you are.

1. Wait for the Credit Bureaus to update your report
2. Rapid Rescore your credit report to show the updates

As you can see, having a lender request a rapid re-score can assist you in achieving a mortgage. The mortgage lender can have your new scores back in as little as 72 to 120 hours and have you walking out with a loan.

Empower – Educate – Take Action

H & I Credit Solutions