Your credit score, a numerical rendition of your creditworthiness – or lack thereof – should be at 760 or above if you want the best interest rate, according to FICO, the leading credit scoring system provider.

Mortgage lenders as well as other creditors take a hard look at your credit score when you want to borrow against your home, refinance or buy anew.

If you are struggling financially as a homeowners you may be considering some of the new ways to make your mortgage more affordable, but beware.

Look beyond the savings you can net on a mortgage modification, workout or short sale and carefully consider how those savings could affect your credit score.

According to FICO, if you:

It’s not everyday you go looking for a mortgage.

It’s not a trip to the mall.

It’s a methodical, step-by-step process requiring planning, time, effort and attention to details.

Here are some guidelines for beginners, especially first-time home buyers — assuming you’ve already laid the groundwork by inspecting your credit report.

  One of the first steps to take as a potential home buyer is to get pre-qualified for a loan. This step helps both you and your lender learn just how much home you can afford. And you should begin this process before you even start looking for a home.

According to the Federal Housing Administration (FHA), their pre-qualification essentials include:

 
• Having a steady employment history, at least two years with the same employer. 
• Consistent or increasing income over the past two years. 
• Credit report should be in good standing with less than two thirty day late payments in the past two years. 
• Any bankruptcy on record must be at least two years old with good credit for the two consecutive years. 
• Any foreclosure must be at least three years old with good credit for the past three years. 
• Mortgage payment qualified for must be approximately 30 percent of your total monthly gross income.

 

Other lenders’ ideas regarding pre-qualification are all similar to those outlined above. A mortgage lender will look at your credit report, earnings, debts, and savings in order to see how much home you really can afford.

Why is this important? In recent years there has been a “mortgage crisis,” where the industry was rampant with fraud and with loans that put homeowners into situations they could not afford. As payments rose, homeowners found themselves unable to meet their monthly obligations. According to Realtytrac.com and their U.S. Foreclosure Market Report, in January 2010, one in every 409 households in the country had received a foreclosure filing.

Since pre-qualification for a home loan typically costs you nothing, but gives you both a goal of what homes are in your affordability range, as well as how much money you should look to have saved for a downpayment, you can hardly wait to take this step.

What if the home you want is out of your reach? Experts recommend reducing your debt and saving up a larger amount for your down payment. Let’s say your dream home is $225,000, but you only qualify for a $180,000 loan. If you have a downpayment of $45,000, then you are ready to make a move!

During the pre-qualification process, you will be expected to provide the following information:

 
• your gross monthly income 
• your total monthly payments (car payments, credit cards minimums, child support payments, student loan payments, any other monthly debts)

 

The lender will be looking to see that your debt to income is below about 40 percent, and the lower the better. So, if you are looking to buy in the near future, be sure to talk to your lender soon!

Written by Carla L. Davis

  Buying a home is perhaps the most arduous, expensive and, ultimately, valuable acquisition you’ll ever complete

Just one mistake could mean disaster — perhaps the worst mistake you’ll ever make.

In order to avoid titanic trip ups during such a trying transaction, buyers should get to know the most common home buying blunders.

To know them is to avoid them.

  Looking for a new home can be exciting and frustrating. You can help alleviate the frustration by paying close attention to five key areas of the homes you’re considering buying; it may save you money in the long run.

Don Walker is an inspector and owner of Ace Home Inspections. He says there are five areas in homes that he frequently reports problems with. They are electrical, foundation, plumbing, the attic, and landscaping.

Electrical

Walker says sometimes homeowners assume with newer homes that all will work just fine but that’s often not the case. “I inspected a brand new house—four years old but the electrical was all done incorrectly,” says Walker.

Having a complete home inspection will help to rule out any problems and point out any areas of concern. However, even as you’re browsing homes, buyers can start to make note of the key areas that Walker mentioned, such as the foundation.

Foundation

Walker says a four-year-old home he inspected recently was already showing trouble signs which could result in a costly repair project. “It was a model home. What the homeowners did was plant trees for shade to make it look really nice, but they planted the wrong trees and they’re going to crack the foundation and it’s going to cut the property value down by $50,000,” says Walker.

Walker says in the case of that home, the trees were causing micro-fractures in the tile in various locations of the home. “As you walk through the house, 21 feet in and 30 feet deep, there’s just too much root invasion and it’s going to ruin their tile,” explains Walker.

He says some tell-tale signs with this home were the minor cracks in the foundation that were causing a lifting and separation of the foundation. Also, the windows were not opening and closing properly, “which means the foundation is moving.”

However, just because you see cracks doesn’t mean there is a foundation problem. “Most people don’t understand that there are natural cracks in a house. That’s why when we do an inspection report we have to look at it and say ‘Okay, this is a typical crack and this one is an untypical crack,’” says Walker. He says some cracks may lead to other problems while others won’t.

Plumbing

Walker says another big area of concern is the plumbing. It’s an area that you can’t always spot as easily but it can create expensive repairs if plumbing issues go either undetected or are not properly fixed. “Mold forms underneath sinks when people have a leak and they fix the pipe but they don’t take care of the mold,” says Walker.

He says things like caulking the sink can help prevent mold. “That’s my number one thing I always find—bad sinks,” says Walker.

He says that when you look at the sink, look behind it and most of the time you will discover a little crack. “What happens is, when you wash dishes or you wash your hands in the bathroom or the kitchen, the water gets in that crack and seeps down. Once the water gets behind the cabinet it’s in a perfect position to create mold,” says Walker. The dampness, humidity, and lack of light can turn that area beneath the sink into a mold-breeding ground.

Attic

“You can tell everything about the house by the attic,” says Walker. He says other areas of the home can be covered up if a repair had occurred. For instance, if there was a leak and it damaged a wall, with the right contractors and repairs it can be made to look like new and, hopefully, function like new. But Walker says the attic is sort of the eyes to the soul of the home. “In the attic you can tell where all the damage has been,” says Walker.

“If you’re in a 20-year-old house and you see that the insulation is brand new, you know that there was a water leak because it had to be replaced,” says Walker. He adds, “You can tell if the roof is good because you can look right at the wood.”

Landscaping

“There should not be moisture or plants next to your house,” says Walker. He says there should be a 12 inch barrier between the landscape and the house. Walker says otherwise you run the risk of having the foundation crack and affect the home. What happens is, as the landscape that is too close to the home is watered, the foundation and soil expand. Then, when no watering occurs, the foundation dries up and shrinks and this can cause it to crack.

Remember, knowledge is power, so learning about the home before you close the deal on it will keep you from making a mistake that may cost you extra out-of-pocket money later.

Written by Carla Davis

There is no question there have been hundreds of tantrums regarding the control of inventory REO agents have had in the past couple of years. Many who had those tantrums failed to create the relationships early enough to get a foothold on any meaningful accounts is the main reason. Other reasons follow – many discovered that being a rock and roll REO agent requires a lot of patient capital; extremely disciplined work standards and the fact REO agents resign themselves to server side applications that keep them at the keyboard for hours on end.

Well, times are changing and I’m going to make a short explanation of why door knocking is vogue…

Lenders statistically net more money on a Short Sale than on a REO. That is the shift that is taking place and the key to capitalizing on this requires an effort similar to what successful REO agents did; simply create the relationship before anyone else!

The only way you are going to find out who these sellers are is to find them prior to the Notice of Default (NOD) being filed. Once that happens, they are open and fair game for everyone and a new target for a litany of mail. Good old fashioned shoe leather will beat out direct mail on this one. Why? Because nothing beats a face to face call on a prospect and especially on this subject. Also, direct mail cannot ask and receive referrals like you can in person. Pretty simple.

Count on NOD’s rising too. There will still be an REO market of sorts, as a result of poor documentation of liens, uncooperative subordinate lien holders, high income sellers that don’t fit guidelines and poor yield spreads that will cause the lender to elect foreclosure over a short sale.

Option ARM mortgages still pose a risk

Inside the fallout from risky housing boom loans in Sacramento, one particularly notorious brand of mortgage, the Option ARM, still looms as big potential trouble.

Analysts have debated its implications half to death. Will it or won’t it spark a new wave of area mortgage defaults in 2010 and 2011?

The experience of Mark Mosley of Vacaville offers hope that another crisis may be averted. Last fall, Wells Fargo rewrote his dangerous Option ARM into a fixed-rate loan and cut what he owed by $59,000. He’ll make it now.

This week, Wells Fargo executive Brad Blackwell told the state Senate Banking Finance and Insurance Committee the bank has modified thousands of Option ARMs assumed with its October 2008 purchase of Wachovia. He said Wells Fargo has cut average monthly payments by 25 percent and forgiven $2.6 billion in Option ARM debt. Mosley is one example.

At Sacramento’s NeighborWorks Homeownership Center, a nonprofit loan counseling agency, executive Mike Himes said he’s seen several clients get these deals from Wells Fargo. The counselor also has seen Bank of America, Wilshire and OneWest (formerly IndyMac) trim Option ARM loans, a phenomenon known as principal reduction.

Blackwell said just a few hundred of the bank’s Option ARMs will put borrowers into foreclosure situations in 2010 and 2011. Most have 10-year horizons well beyond that, he said.

Still, plenty of borrowers out there remain in trouble. Like Jullean Ewers of Rocklin, for instance. She is edging toward the moment when her loan “explodes,” and her monthly payment nearly triples. Her servicer, Aurora, has told her that as long as she’s making the minimum payment she doesn’t qualify for a modification. If she gets no help, she may not make it.

Ewers’ story is common in that she didn’t know exactly what she was getting into at a time when her mother had a stroke and her brother had heart bypass surgery.

“I feel embarrassed that I got into an Option ARM,” she says. Yet she has always made her payment, almost always the minimum.

These minimum payments are the problem with Option ARMs, which Business Week magazine once declared “might be the riskiest and most complicated home loan product ever created.”

Most people, like Ewers, make the minimum of four available payment choices: the one that doesn’t even pay all the interest and makes the loan grow bigger as it’s being paid off. When the loan amount reaches 10 to 15 percent above what was originally borrowed, it “recasts.” Monthly payments can triple, and foreclosure is often not far behind.

Sacramento’s economy partially rests on whether lenders create more examples like Mosley and fewer like Ewers. Almost one in five 2005 home loans in Sacramento, Placer, El Dorado and Yolo counties were Option ARMs. In 2006, they were one in four, according to First American CoreLogic.

Consumer advocates say 60 percent of the nation’s Option ARMs are in California, an “affordability product” that’s also a ticking time bomb if not altered.

Subprime is now yesterday’s news. The jury is out on whether Option ARMs might be tomorrow’s.

California tax relief for forgiven mortgage debt delayed by politics

Sacramento-area residents are almost certain to get state tax relief for 2009 forgiven mortgage debt – eventually.

First, allow for politics.

On Monday, Gov. Arnold Schwarzenegger signaled his intent to veto a wide-ranging bill that – among other provisions – bans the state from taxing debt forgiven in short sales and loan modifications.

But the governor’s spokesman said Schwarzenegger is “absolutely, 100 percent” committed to ensuring that Californians who escaped one harrowing financial encounter with lenders don’t have another with the state this year. A majority of lawmakers have repeatedly said the same.

“We’re looking to get this done with another bill,” said Schwarzenegger spokesman Aaron McLear on Monday. McLear said the governor is looking at AB 1779 by Assemblyman Roger Niello, R-Fair Oaks, and SB X6 14 by Sen. Ronald Calderon, D-Montebello. Both would prevent the state from labeling forgiven mortgage debt as extra new income and taxing it.

The federal government has banned such taxes through 2012. California lawmakers and the governor banned them in 2007 and 2008, but haven’t reached agreement yet for 2009. Niello’s proposal extends protections through 2010; Calderon’s through 2013.

The governor’s veto threat stems from a dispute with the Democratic-controlled Legislature over SB X8 32, a bill passed by both houses in recent days. McLear said Schwarzenegger will likely veto it over a business tax issue unrelated to the forgiven mortgage debt issue.

The governor opposes a clause that penalizes the state’s largest businesses for seeking some tax refunds. Businesses, backed by such groups as the California Chamber of Commerce, say they sometimes overpay taxes to avoid penalties for underpaying. But some businesses routinely fish for refunds whether or not they’re fairly owed one, said Democrats, pointing to similar prevention measures by the federal government.

“This anti-fraud provision was adopted by the Bush administration in 2007,” Alicia Trost, spokeswoman for Senate President Pro Tem Darrell Steinberg, D-Sacramento, said in a statement Monday.

The forgiven mortgage debt and business refund provisions are among dozens in a bill that aligns many of the state’s tax codes with those of the federal government.

Years after homeowners default, collectors may still come after them

Homeowners defaulting on mortgages today may be surprised to learn years from now that they still owe thousands of dollars – and a collection agency is coming after them to get it.

That’s because lenders have been quietly selling second mortgages and home equity lines left unpaid after foreclosures and short sales. The buyers: collection agencies, which in California have up to four years to make a claim.

If they win court judgments, these collectors could have years to pursue borrowers with repayment plans, and even garnish their wages, said Scott CoBen, a Sacramento bankruptcy attorney.

“The only relief a consumer will have is entering into a debt negotiating plan or filing for bankruptcy,” said Sylvia Alayon, a vice president with the New York-based Consumer Mortgage Audit Center. The firm provides mortgage analysis to lenders, advocacy groups and attorneys.

The phenomenon suggests an ominous, looming echo of today’s real estate meltdown. As debt collectors surely seek at least partial repayment of millions of dollars in unpaid Sacramento home loans, some say renewed financial stresses on tens of thousands of local consumers could dampen economic recovery.

“I think there will be a lot of unhappy people when it hits,” said CoBen. “We saw this in the ’90s. This is not really new. Just when you think you’re back on your feet, you’re making money and the economy’s good, they hit you with this.”

Alayon said most people are so stressed out and exhausted by trying to save their homes today that they are unaware they could face another hit later. And many who are losing homes don’t get the advice necessary to prevent future fallout, say nonprofit loan counselors.

“You’ve got tens of thousands of people in California who have this hanging over their heads who don’t even know it,” said Scott Thompson, principal at for-profit Carmichael-based Mortgage Resolution Services. He fears a new wave of bankruptcies might flatten people just starting to recover from losing their homes.

“So many of these are people with 750 or 800 credit scores who made a bad decision,” said Thompson. “Or they’re people who suffered income cuts. These are people, in terms of the economy, whom we need to participate.”

But an entire industry is gearing up to buy their debt at deep discounts and collect what they can, Alayon said.

“It’s a big business and investors are coming out of the woodwork. It’s a very lucrative business,” she said. Real estate insiders and financial players know it as “scratch and dent.”

Total amount of debt unknown

One of the biggest players in the business, Texas-based Real Time Resolutions, did not respond to an inquiry on the subject from The Bee. Neither did Bank of America, which holds many defaulted Sacramento-area loans made by its Countrywide affiliate during the real estate boom.

Regionally, no one knows for sure how much unpaid debt is on the line. CoBen said people who used their borrowings for a traditional loan on a house in which they lived generally have little to worry about.

But statistics suggest that tens of thousands of borrowers locally may be vulnerable in years ahead. Generally, they are people who defaulted not only on their first mortgage but also on a home equity loan or second mortgage.

In California, banks can’t collect from borrowers for primary, so-called “first-lien,” loans that go unpaid. When a house is foreclosed or sold through a short sale, the lender of the first loan gets the house back or the proceeds from another buyer.

But banks also made thousands of “second-lien” loans, including those used to finance 20 percent down payments across Sacramento during the housing boom.

The Sacramento metro area – Sacramento, Yolo, Placer and El Dorado counties – now ranks second nationally for delinquencies on these loans, according to Oakland-based Foresight Analytics, a real estate consulting firm. The firm said 7.9 percent of the $2.9 billion in area “seconds” now on bank balance sheets are delinquent. Only Las Vegas has a higher rate.