Bankruptcy & Foreclosures

We’re only human right? And as humans it is in our nature to celebrate low interest rates. Lower rates make loans cheaper and therefore the material goodness we all seek (cars, houses, boats, and motor homes) more attainable. After last week’s rate slash, the Federal Reserve has been hinting toward the fact that this may mark the end of the rate cuts in an effort to stimulate the economy. So does this mean goodbye to those material goods mentioned above? Perhaps, but there is no need for panic just yet. Believe it or not, low interest rates sometimes make big trouble as they tend to increase demand and with increases in demand without corresponding increases in supply we experience a little phenomenon known as inflation. In other words, yes, there are a few more dollars left in your pocket after you’ve paid all of your bills, but those dollars are worth a lot less than they would be had your interest rate been a bit higher.

It is true that US consumers could actually benefit by a slight rise in interest rates. It sounds blasphemous but it’s true. For starters, some goods and services would immediately get less expensive on account of a stronger dollar. Less inflation means lower prices of goods imported from other countries. Think about it, since the same amount of dollars will purchase more goods from overseas; expect immediate dives in the cost of clothing, appliances, and many other everyday products.

Additionally, higher rates could put an end to the quickly sliding value of the dollar. In case you’ve been living under a rock, let me be the first to tell you that the value of the dollar has been slipping against foreign currencies such as the euro. And why? Because low interest rates here in the US make it less appealing for foreign investors. After all, we all love high interest rates when it comes to money we make, rather than spend.

Along those lines of reasoning, the Fed’s move to slash interest rates has decreased the amount of money individuals make on their CDs, money market, and savings accounts. An increase in interest works both ways (outgoing and incoming).

Finally, and most pertinent to many, an increase in interest rates could potentially stabilize the cost of oil. As of yet, the trading of oil is still based on the exchange of the dollar (despite pleas from investors to transfer to the euro) so a sinking value of the dollar means that other countries can buy more oil for the same amount of currency. The ability to buy more oil around the globe means increases in demand and lower worldwide supply. Hence, the trouble we’re currently experiencing.

The bottom line is that we all cringe at the thought of interest rate hikes but keep in mind that this doesn’t automatically mean more money flying out of our wallets.

When the economy reaches levels where the light at the end of the housing crisis tunnel begins to fade, what choice to mortgage holders have but to turn to their government for help? As it turns out, Congress is ready, willing, and able to help more than a million homeowners staring down the barrel of potential foreclosure. The only problem is that their latest proposal is being met with skepticism in that it could worsen the current situation rather than improve upon it.

The plan calls for up to a whopping $300 billion in loan guarantees from the Federal Housing Administration to refinance loans that homeowners can’t afford under the stipulation that the original lender reduces the principal on the loan to 85% of the home’s current market value.

These measures aim to counteract the recent trend of home-price declines and it does have some redeeming qualities namely in the fact that lenders would get back more of their money than they would by foreclosing. Additionally in preventing 1.5 million foreclosures, this tactic would halt (or at least slow) home-price declines since it would keep these 1.5 million properties from flooding an already saturated market.

So what’s the problem you ask? Some critics claim that this plan would essentially transfer the risk to homeowners (mortgage holders) and lending institutions that were in fact cautious during the housing boom. Even more concrete is the reality that FHA would be left holding a massive portfolio of loans backed by houses and property worth less than the balances on the mortgages. You may say so what to these risks but think about it for a moment: Rather than banks and individuals facing foreclosure risk, the government itself (meaning each of us, the taxpayers) would be responsible for some 300 billion dollars in bad paper; This coming at a time when FHA’s losses are already at record highs.

The bottom line is that there is no easy solution to the crisis Americans currently face and regardless of how the numbers are shuffled; the burden of mortgages worth more than the property behind them isn’t going to simply go away. The Dodd-Frank bill is one of many yet to be approved proposals attempting to lessen the economical impact to the individuals in trouble with their mortgage but the fact remains that displacing the debt doesn’t make it go away.

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.