WHAT IT IS

Companies that advertise “Stop Foreclosure Now”, “We can save your home.  Guaranteed”, and other similar promises.  When people are scared or uncertain, and they feel their family’s future is in jeopardy, these ads can look like a lifeline.  And unscrupulous companies are counting on the emotions of troubled homeowners for their profits.

Some homeowners are receiving official-looking notices in their mail that seem to be telling them exactly what they want to hear to be able to stay in their home. 

WHAT HAPPENS
The companies to be aware of usually ask for money up front to ‘modify a delinquent mortgage’ or to ‘provide counseling services’.  They may pressure homeowners to sign over their deed or surrender the title to their home so that they can use a “rent-to-buy-back” plan.  Others tell homeowners who are concerned and not yet delinquent on their mortgage to stop paying the mortgage so it can be late and they have a better chance of qualifying for help.

The Federal Trade Commission and the federal government’s Making Home Affordable websites both have information on what to watch for to protect yourself from these types of scams.

WHAT TO DO

Get educated.  You’ve already started doing that by reading this article. 

Contact your own bank or mortgage servicing company first.  They have a direct interest in helping you stay in your home.  

The Credit Info Center has tips on how to apply for a loan modification including info on writing a hardship letter.

DON’T PAY MONEY UP FRONT without knowing exactly what you’re getting and who you’re getting it from.  Do some research: search for the company on Google to find out who the parent company is. 

Check with the Better Business Bureau to see if they have received any complaints about this company.  And remember to contact your own bank or mortgage company first!  They can tell you which legitimate companies they work with.

Get EVERYTHING in writing!  Take notes on the dates you talk to company representatives, what their name is, what they said.  You have to be proactive because nobody is going to care about your home and your loan as much as you do.

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On July 17, 2009, Alexis Leondis with Bloomberg.com wrote an article about a North Carolina homeowner whose credit score dropped 121 points after going into the three month trial period of a loan modification.  The Home Affordable Modification Program began in March to reduce mortgage payments for homeowners that are already delinquent or in danger of defaulting. The lower-cost, modified loans are subject to a three-month trial period.

The Consumer Data Industry Association, which represents credit bureaus, has guidelines for lenders to follow when they report loan adjustments on consumer credit files.  These guidelines state that homeowners in the trial period should be reported as current and on partial payment plans if they are not delinquent with payments. A new reporting classification will be created in November that specifies the borrower received a loan modified under a federal government plan.

FICO, creator of the FICO scoring formula, says that an account that has been settled or renegotiated for less than the full amount is viewed as a negative because historically consumers on reduced payment plans represent a greater risk. However, the size of the impact may be more for borrowers with higher credit scores. Additionally, FICO may study whether penalizing borrowers for loan workouts is still valid as more changes are completed under the Obama administration’s housing plan.

WHAT TO DO

When considering a loan workout, find out the exact terms of the agreements, including whether there is a permanent or temporary reduction in the monthly payments. 

Barry Zigas, director of housing policy at the Consumer Federation of America, states that consumers should be wary of signing a waiver of rights and recommends always working with nonprofit housing counselors.

Ask the lender if the loan modification will be through the government program or the bank’s own program.

Inquire about how the changes will be reported to the credit bureaus.

Get everything in writing!  If the lender tells you something in person or over the phone, request an email or fax confirming what they said.  Be sure that all dates and deadlines are included in it.

Ask questions.  If something seems out of place or is confusing, take the time to ask about it.  If the person you are working with does not know, ask them to check with a supervisor or someone else who does know the answer.  You are entitled to know the details about everything, especially as it pertains to your home and your financial well-being.

To shed some light on current lending guidelines and the $8000 tax credit, we spoke with Kathryn Welch, Mortgage Advisor with Nova Home Loans.  She has been in the industry since 2002, offering services throughout most of the U.S. 

$8000 Tax Credit
On May 29, 2009, the U.S. Department of Housing and Urban Development (HUD) announced that the Federal Housing Administration (FHA) will allow state housing finance agencies to provide second mortgages "monetizing" the tax credit so that borrowers can use the funds toward their down payments and closing costs for the purchase of homes with FHA-insured mortgage loans. 

WHAT IT MEANS: Eligible consumers can immediately apply the tax credit toward their home purchase closing costs, for needed repairs on the property, to help reduce their interest rate, or as an additional down payment.  

WHO: First time home buyers, defined as someone who has not had any ownership interest in a property in the past three years.  Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit. 

WHEN: Home purchases between January 1, 2009 and December 1, 2009. 

HOW: This can only be applied to FHA loans.  Important Info on FHA loans:

• FHA loans require a 3.5% down payment, which can be gifted by family member. The $8000 cannot be included in 3.5% percent down payment.
• There is a mandatory FHA funding fee up front, which is 1.75% of the loan amount.
• The FHA loan will have monthly mortgage insurance equal to .55% of the loan amount.
• FHA interest rates are usually lower than conventional loans.

NOTE: Qualifying consumers obtaining conventional loans can access the $8000 credit on their tax return when filing next year.  Conventional purchase loans that are non-FHA have a minimum down payment requirement of 10%. 

NO REPAYMENT: This is a tax credit; the $8000 does NOT have to be repaid. 

The National Association of Home Builders has great information on the Tax Credit here.  You can also see if your state has additional tax credits available for home buyers at this site.

Credit Score Information

We asked Ms. Welch about the importance of good credit when applying for a home loan.  It comes as no surprise that the requirements have gotten tighter; there are very few loans being made with scores under 600 and if they are, the rates are high. 

The FHA now has credit minimums for loan qualification.  For a purchase loan, a minimum mid-score of 620 is needed.   Conventional loans are typically stricter on credit guidelines than FHA loans; VA loans do not have a minimum credit score requirement at this time. 

NOTE: Lenders use the middle, or mid, score for loan applications.  They look at all three scores from the three credit bureaus and take the middle one.  Not the highest, not an average, just the mid score.  If a consumer only has two scores, the lowest score is used. 

There are some lending programs for people with a bankruptcy discharge in the past 12 months.  Consumers must show that they have rebuilt their credit and must have some open accounts in good standing. 

There are no more stated income loans.   This is especially challenging for the self-employed or people who work on commission.  They now must show an average of two years of tax returns and a current Profit & Loss Statement.  And they must have a minimum of two years being self employed or commissioned. 

What about refinancing a mortgage?

Ms. Welch said that a good candidate to refinance is someone who owes less than half of what their house is worth.  That means the total of all first and second mortgages is less than 50% of the home’s current value. 

Property value is currently the largest obstacle for consumers trying to refinance their existing loan.  Additionally, there are new federal guidelines for property appraisals that are extending the time and cost of determining eligibility for a refinance.  And right now, purchase loans are taking priority over refinance loans. 

Loan modification is a good alternative for homeowners who might be upside down or are close to being upside down in their mortgage as opposed to refinancing.  This article has links to no-cost, confidential info on loan modifications. 

Final Thoughts

Check your credit report before you contact your lender to be sure it is accurate and that you have the best score possible for your application. 

Be proactive.  Stay aware of properties in your area that have been in foreclosure or had a short sale.  These prices will be used in the property comparisons and can give a more accurate figure of property value as opposed to listed prices on homes that are for sale. 

Provide all of the requested documentation up front as quickly as possible.  Giving your lender the paperwork they need at the beginning can save precious time during the loan process. 

Lenders can no longer lock in loans at a 30 day lock; the minimum is now a 45 day lock for a refinance.  Rate wise, this means higher interest rates for consumers. 

All lenders work with the same loans and guidelines.  The difference among lending companies can be the fees they charge their customers to originate and process the loan.  Consumers can, and should, ask for a detailed explanation of all charges connected to their loan.   

Maintain open communication with your lender.  If you have an unexpected challenge, let them know so that they can continue working on your behalf with accurate and complete information.   

Lastly, be patient and realize the lending guidelines are changing.  When government programs are announced and then rescinded two days later, it makes it challenging for even the most experienced lenders to get the accurate details they need for their customers.   

Thank you to Kathryn Welch, who answered our questions for this article.  She can be reached at 520.808.4340 or kathrynw@novahomeloans.com. 

NOTE: This article is intended for informational purposes only.  Consumers should contact their accountant, mortgage advisor, and/or attorney to determine individual qualification and for specific guidelines to their situation.

WHAT IS A LOAN MODIFICATION?
According to HUD (Housing and Urban Development) a Loan Modification is a permanent change in one or more of the terms of a mortgagor's loan, allows the loan to be reinstated, and results in a payment the mortgagor can afford.

It is NOT a new loan; it consists of changes to the existing loan to keep the consumer in their home and to prevent the lender from having a foreclosed property.

Fair Isaacs Corporation, creator of the FICO score, says that if the account is reported as the same loan with changes, there are three areas where scores may be minimally affected.  These are the credit Inquiry when the company obtains your credit report, changes to the loan balance, and changes to the loan terms.

If it is reported as a new loan, there will be the same three items to consider as listed above, as well as the impact of the new "open date" indicating a new credit obligation.  This type of reporting will likely result in more of a credit score decrease.

AFFECTS ON CREDIT RATING
The actual modifications to the existing loan usually have no impact on credit scores.  If the interest rate is changed, it doesn't affect scores as interest rates are not reported to the credit bureaus and are not part of the scoring formula.  If the loan is extended from a 15 year to a 30 year to make the monthly payments more affordable, that is unlikely to have any impact on the scores.

If there were late payments of 30 days or more leading up to the loan modification, those late payments are already hurting credit scores and they will not go away just because the loan is changed.  If there were past due amounts on the loan that are now included in the new loan balance after the loan mod, the score should be helped a bit because the loan is now current and not past due.  The new, higher loan balance may have a slightly detrimental impact on scores as it affects the overall amounts owed.

If the principle on the mortgage is reduced in the loan modification process, there is a chance that the lender will report the difference, the amount they "forgave" or reduced the principle by, as settlement accepted or written/charged off.  Both of these are negative statuses for credit report accounts. 

WHAT TO DO 
Try to stay current on your loan.  Even though many companies are advising people that they have to be delinquent to get a loan modification, try to keep making your payments on time.  Then be diligent and consistent with contacting your loan servicing company regularly to request an appointment with someone in their loan modification department.  Tell them you are trying very hard to avoid getting behind, that you are experiencing financial difficulties, and you want their assistance in modifying your loan before it is too late.

NOTE: It does NOT count against your score when you contact your mortgage lender, or any other creditor for that matter.  Just talking to them does not have any impact on your credit scores.

Start to gather and organize all your financial paperwork.  You will be required to show proof of employment, income, assets, expenses, medical items that are contributing to your current hardship.  Be ready when you do get the appointment so that you don't have to spend two or three weeks getting your documentation together.

You may want to contact your local realtor to obtain a Comprehensive Market Analysis which is a widely accepted report showing the approximate current value of your house.  This can be helpful when talking to your lender and asking them to reduce your loan balance to the home's value.

If possible, negotiate for your credit rating in the loan mod process by requesting that they report your account as CURRENT.  This is the optimal status and will have a positive impact on your credit.  They are under no obligation to do so, however, it certainly can't hurt to ask.

Check out this website as a starting place to see if you may qualify for a loan modification.  It is free to use and you are under no obligation when you get the results.  And of course, contact your actual mortgage lender that is servicing your loan to find out what programs they already have in place that may fit your needs.

   We are seeing an increase in the number of people with questions about foreclosures, short sales, and loan modifications.  This is a complex issue, and a very personal one for those facing the possibility of losing their home. 

There are credit consequences to a foreclosure; however, this article is about the growing number of scams and unscrupulous companies trying to make some money by taking advantage of the fear and confusion about foreclosure.

Last week National Public Radio talked about this topic and gave updates on the government crackdown of phony foreclosure rescue schemes.  They warned that many of these scams request money up front which is often an indicator that something is not legitimate and is actually illegal in several states.

TYPES OF SCAMS

Phony Counseling

The consumer is told that the company, for a fee, can negotiate a deal with the lender to save the house.  The consumer is usually told not to contact the lender, their lawyer or a credit counselor. Sometimes, they require the homeowner to make mortgage payments directly to them during the lender negotiations. 

Bait and Switch 

The homeowner thinks they are signing documents for a new loan to make the existing mortgage current.  In reality, the signed documents surrender title of the house to the scam artist. 

Rent-to-Buy Scheme

The homeowner is told to give up the title as part of the deal to remain in the home as a renter and buy it back in a few years.  People are often told that surrendering the title permits a borrower with a better credit rating to get a loan to prevent foreclosure of the home.  This can be a double disaster as the scam artist takes most of the home’s equity and when the new borrower defaults on the loan, the original homeowner-turned-renter is evicted.

Bankruptcy Foreclosure

The scam artist promises lender negotiation or a loan refinance for an upfront fee.  They take the homeowner's money and file a bankruptcy case in the homeowner's name, often without telling them.  Even though a bankruptcy (BK) filing can temporarily stop the foreclosure process, this can be disastrous to the owner financially, they can still lose the home and their credit will be severely impacted with the BK filing.

WATCH FOR THESE MESSAGES

"Stop Foreclosure Now!"
"We Can Save Your Home. Guaranteed.  Free Consultation."
"We have special relationships within many banks that can speed up case approvals.”           

OTHER RED FLAGS TO AVOID

- A business that guarantees to stop the foreclosure process no matter what.
– Instructions for NO contact with your lender, lawyer or housing counselor.
– A business that only accepts payment by cashier's check or wire transfer.
– Instructions to make all mortgage payments directly to them instead of your mortgage company.
– Anyone that offers to fill out your paperwork for you. 

Some companies are even telling people "I promise you, you're not going to lose your house" and "Don't call your lender, they are just going to lie to you".    They know people are worried and unsure about what to do, and they have a knack for saying enough of the right things to get what they want. 

Many homeowners end up spending countless hours on the phone trying to get back to the person who told them these things, looking for the paperwork or documents they were promised, wondering what the next step is because they are still getting notices from their lender.  Meanwhile, the foreclosure clock is ticking and precious time goes by with no results to help them keep their home.

WHAT TO DO
 

The Federal Trade Commission provides more details about these scams, what to look for and avoid, along with where to get more information.  If you are considering using one of these companies, contact the Better Business Bureau before paying for any services.  Request a written agreement that you can read before signing to see exactly what they are going to do, what the time frame is to accomplish it in, and what their refund policy looks like.

Check with your lender first.  They are the direct line to stopping or slowing the foreclosure process.  Keep in mind that the lending industry in still changing and will be for some time.  There are new programs announced and publicized in the media, but the guidelines and processes for those programs are not always completely in place in each lending company right away. 

Protect yourself by writing EVERYTHING down: who you talked to, their employee number, the date and time, what they are doing, what you are supposed to do.  Ask for written confirmation to have an additional  record of what you were told.  You can also write down your understanding of the conversation and agreements and send it to them as a written record.

If you believe you have been the victim of a foreclosure or loan scam, report it to the Better Business Bureau, the Federal Trade Commission and your State Attorney General's office.  You may also want to contact your federal congressional representatives to make them aware of the situation.

This link lists several other consumer resources regarding mortgages and foreclosure prevention.

Please send us your mortgage related questions or post them in Comments as we are planning to interview mortgage lenders for a future article.  Thank you.