I owe more than my house is worth and I have bad credit. What should I do?

Posts Tagged ‘Mortgage’

I owe more than my house is worth and I have bad credit. What should I do?

|

Q: I am a Single Woman Sharing a Mortgage with my Mother. I Purchased the House From her in 2004 to Prevent Her from Filing Bankruptcy and Losing her Home. We’ve Refinanced Twice and Now the Loan is Twice the Amount of What the House is Worth. My Credit is Not Great. I’m in Debt Minus the Loan on the House of About $15,000. The Bulk of That is a $10,000 Loan I Applied for an got (Surprisingly) While I was Unemployed. Isn’t That Called Predatory Lending. I Would Love to Leave Here and Find My Own Place But I Need to Get My Credit in Order. Some of My Debts are 5 Years Old. I Don’t Want to Pay These If I Really Shouldn’t. What’s the Best Thing to do? Also, Re: the $10,000 Loan, I Know I Should Not Have Applied for the Money But I was Desperate As Our Mortgage Was 3 Months In Arrears and In Danger of Being Foreclosed On. Is There a Way That I Could Get This Debt Removed as it was a Predatory Situation?

A: It sounds like you and your mother can not only not afford your home, but the house itself is also severely underwater. I understand your desire to improve your credit and get your own place, but honestly, you must fix problems A, B, and C before you can move on to issues D and E. In this case, problems A, B and C are: getting realistic about your financial past and present, learning how to create and live with a budget, and dealing with your home dilemma. Until you first do those things, you won’t be able to pay off your debts (issue D) or improve your credit (issue E). Without tackling first things first, you’ll also put yourself at risk of losing another home simply because you’ve neglected to learn certain financial lessons.

So let’s start with the first thing: a reality check. You seem to have attempted to throw your mother a lifeline, only to wind up nearly drowning yourself. Your email said you bought the home from her back in 2004 to help her avert bankruptcy and foreclosure. Despite your best intentions, you also stated that you and her wound up 3 months behind on the mortgage and in danger of being foreclosed upon anyway. That’s what led you to seek out the $10,000 loan you’re not saddled with. What happened to during the time of your unemployment? Your message indicated that you were twice laid off and that you “made some not so smart money decisions?” Whatever those decisions were, you have to truly acknowledge them, and make sure that you don’t repeat them.

It sounds to me as if you had your mother have been stuck in a cycle of making repetitive bad decisions. I hope you don’t think I’m being too harsh on you. Because I’m telling you these things honestly out of care and concern for your situation. I can sense your struggle and I know it’s very hard to be in such a tough predicament. I’m just giving you a bit of “tough love,” however, because I’ve seen cases like this time and time again. The only way people get out of these dilemmas is by actively breaking the cycle and ending the behavior that landed them in hot water.

Now let’s move on to the second issue: having a proper budget. Unfortunately, most of us grow up never having learned to create a realistic budget. This is likely true of your mother, and it’s probably true for you as well. Read this article I’ve written on budgeting and this post too, to get some ideas on how to budget to better manage your finances. Additionally, read this post about budgeting and financial planning when you go thorugh a layoff or have reduced income.

So what about the house? The fact that you’ve both faced foreclosure at least twice, and have even refinanced twice since 2004, yet you have still wound up deep in debt and deeply underwater tells me that you can not truly afford this home. I assume you refinanced in recent years to take advantage of relatively low interest rates. But I also suspect that you took cash out of your home as well. I could be wrong. But that’s certainly what many people did during the heydey of the housing market. How was that money used? Did you pay off debt, set aside any savings, or do something else with it? I recognize, of course, that part of the reason your house is likely under water is because home prices have fallen greatly in many parts of the country. But the fact that you owe twice as much as your home is worth signals that something else was going on.

If I were you, I would investigage the prospects of a short sale or a deed in lieu of foreclosure. I don’t know where you live, but it’s highly doubtful that your home will “come back” in value anytime soon. Unfortunately, short sales and deeds in lieu of foreclosure do have negative ramifications for your credit. But these are short-term hits from which you can recover, if you’re prepared to move on and do the right thing financially in the future.

You asked about the loan you got while you were unemployed. I don’t know of any way to legally get this loand eliminated or removed from your credit reports. Just because someone loaned you money at a time when you weren’t working doesn’t make the loan a “predatory loan.” Unfortunately, scores of lenders all across the country did this — both reputable lenders and not-so-reputable ones. Honestly, I don’t know which camp your lender falls into.

Nevetheless, again, I want you to be willing to take responsibililty for your own actions, and not put the blame elsewhere. You stated to me that you knew you shouldn’t have applied for the loan in the first place but that you were “desperate.” Plus, the reason you applied for the loan was because you were in arrears on your mortgage. That’s certainly not the fault of the lender that gave you the $10,000 loan. So it’s not fair to now accuse them of “predatory” lending. Predatory loans are characterized by unreasonably high interest rates, abusive pre-payment penalties, or excessive loan fees including enormous commissions for lenders or mortgage brokers.

Don’t worry about paying off 5-year-old debts at this point. You’ve got enough on your plate to try to pay your current bills. And trust me: In the long run, you will be far better off if you take my advice and deal first with these issues before you attempt to pay off old debts or improve your credit rating in order to try to get another place to live.

Predatory Lending: Racial Profiling at its Worst (theroot.com)
Deducting Mortgage Interest FAQs (turbotax.intuit.com)

The Real Reasons You Can’t Get a Mortgage

|

Author: The Money Coach

If you missed my segment on ABC News NOW, I discussed the real reasons that you are unable to qualify for a mortgage.

1. You Can’t Properly Document Income

Explanation: You can have an 800 FICO score and $1 million in the bank, but if your tax records don’t show enough income, most banks will deny your loan.

2. You Lack “Compensating Factors”

Explanation: A compensating factor is a positive trait in your application to offset any negative factors. For instance, having a very big down payment – say 30% – would be a compensating factor to offset the fact that your credit scores are just so-so.

3. You Picked the Wrong Property Type

Explanation: Banks don’t want to touch certain kinds of properties: such as condos, or new construction on multiple units, where not a lot of the inventory has sold.

4. You Were Sandbagged by a Know-Nothing Appraiser

Explanation: Rules governing mortgage appraisals changed in 2009. Now appraisers are randomly selected. Critics say many of them come from out of town and don’t know local home prices/values. If an appraisal comes in too low, a mortgage application could be dead.

5. You Had an Inexperienced Loan Officer or Mortgage Broker

Explanation: Mortgage pros say having an experienced person who can “work the system” for you helps. A lot.
Without a trained pro, borderline applications aren’t likely to pass muster.

6. You Picked the Wrong Bank

Explanation: Many people seeking a mortgage go just to one bank – or to their current bank. Big mistake. Sometimes you need to try multiple banks or give your banker clarity (in the form of an “explanation letter”) about anything that’s “iffy” in your application.

7. You Got Bushwhacked By New Rules

Explanation: Most banks tie their underwriting guidelines to rules set by Fannie Mae and Freddie Mac. But federal rules change all the time. Some unsuspecting people, who thought they qualified a month ago, could end up getting rejected if a rule change by Fannie or Freddie winds up impacting borrower’s loans.

Related book: Your First Home

How Can I Protect Myself and My Credit if My Ex Husband Does Not Pay the Mortgage?

|

Author: The Money Coach

MORENO VALLEY, CA - AUGUST 25: An advertiseme...

Maintaining a good credit rating while going through divorce can be very tricky. On the one hand, even if the two parties who are separating can agree on how assets and liabilities (like that mortgage) are supposed to be split, that does not mean that your creditors are bound to those terms. In fact, whatever deal you work out with your soon-to-be ex-spouse has no bearing whatsoever on your legal responsibility to repay debts for which you and he were both co-signers. In a nutshell, this means that if the two of you co-signed for credit cards, your house, a car note, or anything else, then your creditors can still legally come after either one of you for repayment.

Let Your Ex Refinance the House ASAP

If what you’ve stated is correct, and the bank is willing to take you off the loan once your divorce is finalized, then you are in a far better position than most people. Frankly, lenders don’t just automatically remove people from loans simply due to divorce. In your situation, it could be the case that your husband has already shown the bank his finances (or gotten pre-qualified for a new mortgage), and the bank knows that he could qualify for a home loan on his own. If so, he can simply refinance your existing mortgage upon your divorce and put the house in his own name. Either way, it is clear that the longer it takes to get that divorce decree, the more potential exposure you have in terms of protecting your credit rating. Conversely, the sooner you can get that divorce decree, the less risk you face that your credit could be ruined by his potential failure to pay.

How to Protect Yourself

When a home is involved in a divorce proceeding, and both individuals are on the mortgage, the single best way to protect the credit rating of both parties is to sell the home. This way, the bank gets paid off and your joint obligation is satisfied. Of course, the two of you will have to decide how to split the proceeds from the sale of the house – another potentially thorny issue. But it’s far less dicey than sweating it out month after month, and keeping your fingers crossed hoping your ex will pay the mortgage as agreed.

I realize, of course, that for a host of reasons, some people may not want to sell a home, even if they are divorcing. Maybe the house still has sentimental value, to one or both parties. Perhaps kids are involved and you want to keep the house to provide stability to the children. Or maybe you’re reluctant to sell simply because it’s a rotten housing market in your local neighborhood. Whatever the case, selling may not be practical or feasible. If it isn’t, consider another option.

Tighten Up That Property Settlement Agreement

As stated, your divorce agreement – even after it’s signed off by a judge – doesn’t have the legal right to change the terms of your original mortgage agreement. Those terms and repayment stipulations were locked in when you both signed for the home loan. What you can do, however, is include in your divorce agreement (sometimes called a Property Settlement Agreement, or PSA) a strongly-worded paragraph that addresses several aspects concerning the house. First, your PSA should note that your ex-husband is assuming full ownership of and liability for the home. Next, the PSA should state a certain effective date that he is solely responsible for the house – including the mortgage, property taxes, maintenance on it, etc. Additionally, include a clause indicating that until the divorce is finalized, the mortgage company is to also give you a copy of the monthly statements. That way you can keep an eye on things and bring up the issue early on if he doesn’t pay.

Consequences of Non-Payment

Lastly, the PSA should note financial penalties and consequences that are imposed in the event that he doesn’t pay. For example, for every missed payment – or every payment that’s 30 days late – he might be forced to make a certain cash payment to you. Moreover, you could insert a phrase stating that his failure to pay the mortgage effectively amounts to a judgment in your favor against him. If it turns out that you ever have to pay the mortgage company to preserve your credit rating, you can take your ex to small claims court, or use that judgment against him to garnish his wages and seek other legal remedies. A good attorney will be able to help you word this appropriately in your Property Settlement Agreement, and advise you about your state laws.

Why Your Separation Date Is Critical

One final bit of advice: You stated that you will be moving out of the home in the future. Be sure to consult an attorney in your area for insights into two areas that may be impacted by your planned move. First, if you have kids, and you want to keep custody (or even have joint custody), find out whether or not moving would in any way jeopardize your ability to retain custody. Additionally, understand how your state looks at your “Separation Date.” Is it the date divorced papers were filed, the date you moved out of the house, or simply the date that you formally told your spouse that you wanted a divorce? Different states count your separation date in different ways. But this date is a vital legal benchmark. This date is crucial because it can determine a host of financial aspects, such as your credit, alimony, pension benefits, the date at which the market value of the home is assessed, and so on. In general, most states won’t hold you responsible for debts your ex-spouse incurred after your separation date. But debts amassed before then are often considered owed by both parties.

Divorcing spouses quitting Facebook in favour of privacy (nationalpost.com)
NYT: Why divorce? Some instead permanently separate (msnbc.msn.com)
I can’t refinance my house without my husband’s signature. What should I do? (askthemoneycoach.com)

Help for people during the housing crisis

|

Author: The Money Coach

Even if your family isn’t having mortgage trouble, you probably know one that is: One in five homes on the market is a foreclosure, a record 200,000 foreclosures are occurring each month, and existing U.S. home sales have hit a 10-year low. Money coach Lynnette Khalfani-Cox helps three families solve their home-ownership dilemmas.

“We’re stuck with a home we can’t sell.”
— Michelle and Tom Magnetti

Michelle is a 28-year-old recruiter for the Department of Defense; Tom is a 31-year-old new-home-sales consultant; they have a daughter, Giuliana, 11 months.

Read Lynnette’s advice on Redbook.com

7 reasons banks reject mortgage applications, and how to get approved (walletpop.com)
How can I remove items from my credit report? (askthemoneycoach.com)

Ask The Money Coach

Posts Tagged ‘Mortgage’