Ask The Underwriter at 2rHouse.org

The Feds raised rates again yesterday. Now the base Fed rate is 4.0%, highest in several years. The signal given at the meeting was that rates would continue upward until inflation was knocked back. It’s time to batten down the hatches, fasten your seat belts and get ready for the ride.

In case you haven’t picked up on how this works: when the ecomomy slows down, the Feds drop the rates to encourage you, the consumer, to spend more by borrowing. You borrow with the low rate plastic in your pocket and you pay with the low home equity rates on your debt consolidation loan.

You don’t worry about doing this because 1. A warming economy means less unemployment and more money for those with jobs. 2. Everybody does it and it doesn’t really seem like anything more serious than “the way things work”.

I got off the topic a bit – my point was that until we absorb the increasing cost of fuel and everything that has to be moved across the country using fuel, plus everything else we use petroleum products for – we have to live with ever-increasing interest rates. This is how middle America eventually goes under, just to begin again in a few years.

Is there advice buried in here somewhere? I’m afraid that too many of you are going to ignore the signs of impending debt overload and upward spiraling payment shock. After all, its close to the holidays and who wants to think about money right now? Not me. But my housing expense isn’t going up until the next tax bill or insurance premium.

I’ll try to be very clear as I wrap up here. I recently added a sponsor who put what they do right in the name of the company. The wrap-up to this post will be their one-line commercial for what I’ve been trying to tell you for over a month now: Get the bills paid down or off and get the house payment as under control as you can so you can survive the ride of the next year or so.

The old rules about when to refinance are about as helpful as Old Wive’s Tales, which means that if the old rule fits the circumstance, then use it. If not, ignore the advice.

When I started in the business the rule of thumb was to refinance when rates dropped 2%. That reasoning was based on the cost of refinancing, which usually included all new documents, plus an origination fee and discount points that could add 3 or 4 percent to the transaction.

In the last few years we have seen a new habit develop, which was good and bad for the financial health of the average American family. Refinancing was almost painless and almost always resulted in a significant payment savings. Paperwork has been reduced by the lenders to the point where refinancing was almost as painless as a six month dental check-up and just as valuable.

Many families were able to free up some substantial cash that was previously going to the interest only and use that money for improvements, debt reduction, investment, or education purposes. That contributed to the family’s financial health and to the US economy both. Spending and consumer purchases in general increased because cash flow increased.

What’s bad about that? Not that much really, unless you have never lived through a cycle like the one we are approaching. You need to understand that as rates rise and the economy slows down, it will be harder and harder to qualify for refinancing. If you are left holding one of those teaser rate adjustable mortgages, your lifestyle is going to be severely cramped as that rate goes up and up over the next couple of years.

If your income situation changes at all, be prepared for qualifying issues that you may not have faced before. When foreclosures increase (and they are) lenders get very careful about throwing their money around. If you find yourself downsized or suddenly self-employed, you may no longer qualify.

So what’s the bottom line here? Take a look at your mortgage situation TODAY. If you have an adjustable rate, it is time to consider one last refinance while fixed rates are still very affordable. If your mortgage is OK, but your debt load is causing concern, then a home equity loan might be just the thing to consolidate and get you on track for cleaning up your over-spending habits.

There is no reason to think the sky is falling on Chicken Little here. When you take control of your finances and know where you stand, the ups and downs of economic conditions don’t have to force your hand. This time of year is extremely popular for refinancing and home equity loans anyway, since many people settle down at the desk when summer is over and take a look at the financial picture before year end. My advice is to do that TODAY.

Every day the forecast of doom and gloom in the housing industry gets louder. We are being forewarned that industry losses from hurricanes combined with a housing bubble about to burst will only be overshadowed by the homeowners with risky mortgages who no longer have the resources to make the new higher payments or refinance to get out of them.

Whether the forecasters and Chicken Little’s of the media are right on or whether the black cloud will lighten a little before it passes over is immaterial. The perception of rapidly increasing risk will slow down the flow of easy money until it’s a bare trickle.

Recent headlines and follow-up stories about upcoming mortgage industry losses tell me that tougher underwriting guidelines are just around the corner or maybe in a memo being distributed as we speak. In the mortgage industry, losses due to foreclosure always mean audits and then guideline review to determine how risk is being assessed.

We’ve had a pretty free ride for a number of years now. If you didn’t refinance your home loan as part of your annual financial check-up, there was something strange going on. Interest rates as low as 1% were water cooler talk everywhere. It’s pretty easy for an underwriter to say yes when the worst case scenario is that the bank will have to refinance the loan again soon to get the borrower current should something happen. With values rising quickly, the equity position would be even less risky than it is now.

What’s the point of all this mumbo-jumbo? Just a warning that if your financial house is not in order at the moment, please do what you can to minimize the blow while you can. When mortgage companies suddenly start reporting these major losses to the stockholders, you can bet the farm that the underwriters twelve layers down are being told to be more careful than ever.

The confusing part will come when Loan Officers get hungry because the gravy train goes dry. They will continue to write every application they can grab and might even make promises they can’t keep. You need to get out from under your short term adjustable rates now, while fixed rates are still in the ballpark. Guidelines are about to tighten up and you might be stuck with a loan that adjusts more often than your homeowners insurance.

I don’t want to sound like Chicken Little here, but I have been there, done that. This goes in cycles and the one we are driving into is pretty predictable. I’ll be very happy if it doesn’t turn out to be as confining as it looks like it might be. But I still think we’re in for a rough patch and ordinary, everyday people don’t always have the resources to ride out a big storm.

The questions about judgements on credit reports continue. There seems to be confusion about the difference between a judgement and a lien and also about how to clear it up. I’m going to try to cover several questions at once here, which might help a little.

• A judgement against you is the result of you losing a case in court. Usually, a creditor goes to court to get a judgement against you for the amount of the debt you owe. This is because a judgement can be recorded and enforced. The creditor’s other options would be to write off the debt or send it to collection and lose most of it to fees.
• That judgement, if recorded, becomes a matter of public record. If you have property or buy property, a title search will turn up items of public record.
• If the creditor who won the judgement decides to enforce payment, the next step is to file for Discovery of your assets. The judge can order that your assets be sold to pay the judgement.
• Judgements create a cloud in a real estate transaction because if you buy this house and then you’re ordered to liquidate it to pay this judgement, the mortgage lender may not be in a position to realize full payment of the mortgage. Generally a situation like this adds a heavy layer of risk to the entire deal
• If you have a judgement against you, the mortgage underwriter has to review the whole situation to see if this judgement represents the way you normally handle your credit obligations. Are you bad news? Or was this a fluke that you have under control now?
• If the creditor who has the judgement is receiving payments from you and they are happy and convinced that those payments will continue, they might agree to subordinate their lien position so that the mortgage lender can be in first position in the chain of title. If there is enough value in the house for everybody, you might be able to leave the judgement as is and continue making payments rather than paying it off.
• Judgements can happen for all kinds of reasons. I have seen them for back child support, dental bills, credit card default, car repossession, and everything else you can think of. The underwriter looking at your file has probably seen it all, too. Explain what happened and how you are handling it. Tell the truth and provide the proof.
• Having a judgement against you will lower your FICO score considerably. If you can avoid it by paying your bills on time, do it. If something happens that you couldn’t control, then get it under control and fix it or make arrangements as soon as possible.

The most common question people ask before, during and maybe even after a loan application interview is “How bad is my credit?”

It’s not that hard of a question, but since every credit profile is different, the answers may not mean that much to you. I personally think the most important thing for you is to know where you stand today and then work to improve. There’s no speedy trip to Heaven as a prize, just better interest rates and better terms when you need to make financial decisions. Many insurance companies use your FICO score to decide whether or not you are a good risk, even for auto insurance. You need to get a handle on your own profile fast.

Your FICO score has become the number one way to determine how “creditworthy” you are. This number varies from lender to lender and you should never just take information like this and run with it unless you talk to various lenders about your own personal situation. I can only tell you what I know from my own experience. Do not let anyone play on your emotion or your insecurities. Know your profile and then ask specific questions about their programs before you agree to seriously begin the application.

You will probably be considered “A quality credit” if you have a FICO score of 620 or above. You should have a credit report with no lates or very few lates and NO mortgage lates. Lenders hate mortgage lates. If your score is >700, you probably qualify for the best rates and terms, unless that score is based on a credit report with very little information. Your credit report needs to reflect a history of at least 4 accounts, one currently open, to show the lender how you take care of credit obligations.

If you have a mortgage late or two, but only 30 days late, not sixty, then you’re probably a “B credit” borrower. No recent or unpaid collections or chargeoffs are on your report and your score hovers around 600. If it weren’t for the mortgage lates, you would be a model citizen. Never forget that lenders hate to see mortgage lates. If you’re not worried about your housing expense, how can they expect you to care about anything else.

When you hit the “C level credit” category, you’ll start to see drastic increases in the rates you’re offered. This is risky territory for the lender, since they can see that you are often late on your mortgage, sometimes even 60 days late. The credit report shows that you let things go to collection and sometimes accounts have even been charged off as bad debt. There is a good chance that you’ll be slow to pay this loan, too.

If you’ve had a recent bankruptcy or foreclosure, then you’re looking at “D credit” loan programs to help you re-establish yourself as a worthy borrower. A Subprime lender can help you get a loan to prove you know how to take care of your obligations, but that is the only program you’re going to quality for. These loans are usually structured with a higher rate and a short repayment term. The rate is less than a credit card, but much higher than A and B borrowers pay.

The idea is that you’ll make perfect payments for 6-12 months and then refinance into a better rate and term. This is no time to mess up again. You can quickly re-establish yourself after a “life event” by paying on time and being able to prove it.

If you don’t know where you fall, then get a copy of your credit report and see what’s on there. There might be something there that’s lowering your score and isn’t even correct information. Dispute and correct whatever you can legitimately before you need a loan. Be sure you order the package that includes report and FICO, since most plans are one or the other. My advice is get it from MY FICO, but the choice is yours. The one free annual report you can get does not include your FICO score, so the only real advantage is that you have the report details to see what needs to be corrected. I try to keep a link in the right hand column to MY FICO.