Bankruptcy & Foreclosures

Sure these are days where new mortgage loans are at an all time low in terms of volume but even in periods of industry-wide bottom-out, there are still countless numbers of individuals out there looking to borrow money for a home. And while lending standards are becoming increasingly stringent, there are a few tips to keep in mind should you happen to be one of those individuals mentioned above.

Credit

Before you even begin the process of applying for a mortgage, obtain a copy of your credit report and your FICO credit score.

Your FICO score is the three-digit number that’s responsible for a whopping 75% of a mortgage lender’s decision to issue you a loan. If your credit report shows collections or past due balances, odds are you need to focus on getting these issues resolved before you walk into the lender’s office. Remember that FICO score minimum cut offs are creeping up higher as the market continues to deteriorate. Scores that were acceptable a mere six months ago may now be too low for consideration.

Pre-approval Vs. Pre-qualification

Many borrowers confuse the terms pre-qualified with pre-approved. Pre-qualification is the more casual process of the two, where a lender simply estimates you how much money you can borrow based on how much money you make versus how much debt you may have and how much cash you can come up with for a down payment on the home. Pre-approval, on the other hand, is a much more thorough process which isn’t determined until after you’ve applying for the loan. After submitting proof of income (pay stubs), tax documentation (W2’s) and other information such as an appraisal of the home you intend to purchase, the lender considers the information along with a credit check. If your data happens to meet the lender’s criteria, the lender can agree in writing to make the loan; this is considered being pre-approved.

Know Your Limits

Part of the current mortgage crisis comes from people borrowing the maximum amount of money they are approved for. The best advice is to never borrow more than you can afford on a monthly basis with the hope that your income will increase down the line. Many renters fail to take into consideration the fact that aside from a mortgage payment, bills such as property taxes, homeowners insurance, utility bills, and maintenance and repairs are a reality of being a homeowner. When talking to the lender, keep in mind that the mortgage payment is only a small part of the debt you will be locking yourself into.

Posts of economic turmoil without solutions are fairly useless in offering up any resolve (nor do they offer much hope to domestic consumers). Fortunately, every once in a while, news of our government’s plans to take action trickle down the pipeline. Just this week the Bush administration announced plans to expand a current standing government program that exists to aid struggling borrowers keep their homes.

This program intends to offer assistance to some 100,000 individual homeowners many of whom owe more on their mortgages than their houses are worth by reducing their monthly payments. While simplistic on the surface, this expansion program actually attempts to nip the problem at the source by encouraging mortgage lenders to decrease the value of the loans in effort to transfer the risk of default to the government.

Additionally, the expansion would continue to allow the FHA to insure a new mortgage if a lender voluntarily decreases the mortgage principal to a maximum of either 90% or 97% of the new value (depending on the borrower’s risk profile). Better still, borrowers can qualify for the program even if they had some late payments throughout the previous year, but are otherwise reliably creditworthy and wish to remain in their homes. Existing FHA underwriting standards still apply, and the home must be owner-occupied, meaning investment properties, high-risk borrowers, and owners of vacation homes wouldn’t qualify.

While the proposal has yet to be approved, the FHASecure program is being touted as one of the Bush Administration’s top efforts aimed at preventing foreclosure and comes in direct response to more sweeping and costly Democratic proposals.

High foreclosure rates, talk of recession, it seems like there is nothing but doom and gloom in the news today concerning the economy. But alas there is hope coming in the form of our government and as fate would have it, this happens to be election time.

Majority Democrats want the government to get involved by backing up to $400 billion in troubled loans. The goal is twofold: First to help strapped borrowers and also to thaw a credit market plagued by uncertainty about the value of subprime mortgages that were issued to individuals with spotty credit or low income.

Interestingly, the republicans don’t share the democratic view of economic resolve. In his speech delivered on the 25th of March, Senator John McCain argued against a more expansive role for the government in dealing with the economic crisis. While the candidates themselves argue about the best means for recovery, the current body of leadership has issued its own proposal.

Issuing the most radical proposed overhaul of financial oversight since the Great Depression, the Bush administration has fired up a fierce debate by pitting those eager to revamp an antiquated system (such as plans proposed by the democratic candidates) against an industry that has been typically opposed to excessive regulation.

The plan, set to be released tomorrow is quite well aware of the current situation which has meant billions of dollars of losses for banks and investment firms, the near-collapse of the country’s fifth largest investment bank, made it harder for individuals and businesses to secure loans and has pushed the country to the brink of economic recession.

In addressing these issues, the plan is calling for the greatest alteration in financial regulation since many of the current oversight institutions were created in the 1930s. So what then is the debate about? Many experts in the financial industry are concerned that Congress could use the situation to rush in to legislate & regulate. Opponents to the proposal fear the government may use the current unstable economic conditions to grant themselves regulatory power that may remain long after the economy recovers. Whether or not these accusations prove true will remain a mystery until after the plan is released.