Lindsy Emery asked:




When you’re in financial distress and you own a home, it can be a scary time. Will you lose it all? Will your home get repossessed by the bank? At a time like this, you may sit down to review your options but get bogged down in the choices you have. How is home loan modification different than mortgage refinancing? Which is right for you?

First off, relax. There are lots of qualified financial counselors, information from your bank, and free online resources like this website to help you get informed. Nobody expects you to know everything right away, and it’s not really as complicated as you might think.

Home Loan Modification vs. Mortgage Refinancing, Are They The Same Thing?

While they are not the same thing, modification and refinancing are both methods for reshuffling your mortgage payments and handling them in a new way. Homeowners turn to each of them, but usually in different times and under different circumstances.

Most homeowners are more familiar with loan refinancing. In a refinance, you take out a new mortgage loan (with more favorable terms) and use it to pay off your old one. People generally refinance when they’ve built up some equity in their homes and they want to take advantage of better terms, like a lower interest rate.

When you get a modification, you’re not taking out a new loan. A modification adjusts the terms of your original mortgage in a variety of ways. The most common loan mods include:

1. extending the loan term

2. decreasing the interest rate

3. forgiving principal (in rare cases)

The goal is to end up with a lower monthly payment that you can afford. Your bank sees regular monthly payments coming in again, and you get to keep your house.

Is Refinancing or Modification Right for You?

A number of factors determine whether you should refinance or apply for a modification, and your professional financial counselor is best equipped to help you decide which is right for you.

If you have substantial equity in your home and it hasn’t depreciated more than 10% since you first bought it, you may be a good candidate for refinancing. Lenders usually require an upfront payment of “points,” where each point equals 1% of the loan and the more points, the lower the new interest rate. 20% equity is usually a good number for refinancing.

Unfortunately, many lenders won’t let you refinance if your home isn’t worth at least 90% of your current loan’s vale. Plummeting house prices have caused many people to go underwater on their mortgages, making refinancing unrealistic for many homeowners.

If you’ve had some catastrophic event in your family (such as an unemployment, death, divorce, or medical disaster) that has made it impossible to meet your monthly mortgage payment, you might be a good candidate for loan modification. If your monthly payment (including principal, interest, taxes, and insurance) totals more than 35% to 45% of your gross monthly income, you could also be a good candidate for loan modification. 

Carrie

Carrie Reeder asked:




When applying for a mortgage loan, your credit score plays a huge role. Thus, many people choose to establish a good credit history before applying for a mortgage. Having a low credit score will not necessarily prevent you from getting a mortgage. Likewise, it’s possible to get a mortgage with no credit history. Before applying for a no FICO score home loan, it is important to understand how these loans work, and how to qualify.

Purpose of Credit Scoring

Without credit reports and credit scoring, potential lenders would be unable to assess an applicant’s creditworthiness. Credit reports contain very detailed information about our credit history. For example, the length of credit history, number of credit accounts, outstanding balances, etc. Along with creditor information, reports also contain a three digit number. This is the FICO score. Credit scores range from 300 to 850. Higher scores obviously means better credit.

How Credit Scores Affect Mortgage Loan Approvals

Years ago, obtaining a mortgage loan with poor credit was rare. However, lenders have begun offering flexible programs, which make it possible for more families to qualify for home loans. Among these includes a variety of mortgage loans especially for people with bad credit.

Bad credit generally consists of several late payments, bankruptcies, foreclosures, collections, judgments, etc. All of these factors contribute to very low credit scores. Low credit scores equal higher interest rates, which will increase mortgage payments. Fortunately, there are loan programs in which FICO scores are not a primary factor.

What are No Credit Score Home Loans?

If you have bad credit or no credit history, you may qualify for a no credit score home loan. In many instances, homebuyers earn a sizeable income, in which they can afford to buy a home. However, because of past credit history, many will not qualify for a conventional home loan. Rather than wait until credit improves, these individuals may apply for loans without using credit scores.

Try using one of ABC Loan Guide’s
Recommended Poor Credit Mortgage Loan Companies.

Many mortgage lenders offer these sorts of loans. However, homebuyers must meet certain criteria. For example, most lenders will only finance 70% or 80% on a no credit score loan, thus the homebuyer must have a down payment of approximately 20% – 30%. Secondly, most lenders require full documentation on these loans. Thus, homebuyers needing a no doc or stated income loan may not qualify.

Angela

Pamella Neely asked:




If you own a home and have a debt load you can no longer handle, one place to go to solve the problem is to the equity in your home. This can mean either getting an entirely new mortgage (sometimes called a debt consolidation mortgage) or applying for a Home Equity Loan or Home Equity Line of Credit. The best option for you will depend on how much equity you have in your house already, and how long you’ve had the mortgage. We’ll review all three options in this article.

Debt Consolidation Mortgages

Getting a new mortgage to consolidate your debt is a good deal for people who having been paying their mortgages very long. This is because of the way mortgage amortization schedules work – you pay most of the interest on your loan upfront.

So if you have a 30 year mortgage and needed to get a debt consolidation mortgage, it would be much better to get the mortgage in the first ten years of your mortgage’s repayment, rather than in the last 10 years. In the last ten years, you’d have already paid all that nasty interest, and would now be paying your mortgage’s principle

down. To get a new mortgage then would almost be just tossing away all that interest you paid for, for nothing.

But getting a debt consolidation mortgage in, say, the third year of your 30 year mortgage, you’d be starting your mortgage payments over again fairly early. In other words, people with little equity in their homes would probably benefit more from a debt consolidation mortgage than a home equity loan or line of credit.

Keep in mind that getting a new mortgage will require a new closing, and mortgage closing can cost hundreds, even a couple of thousands of dollars. In this aspect, debt consolidation mortgages aren’t as good a deal as home equity lines of credit, which can be gotten with no closing costs.

Getting the Equity Out: Home Equity Loans and Lines of Credit

Don’t think that someone who’s in the last ten years of paying off a 30 year mortgage is in worse shape that the person on only year three, though. Quite the opposite. Home equity loans and lines of credit are among the best options for a debt consolidation loan.

If you meet the following criteria, all that interest you’ve been paying suddenly becomes a major tax deduction:

- you itemize your tax deductions

- you are deducting interest for your first or second homes only

- the loan is for no more than $100,000

- the interest you want to deduct on any amount of the home equity loan can not be more than the difference between the market value of your home and your mortgage.

For example, say your mortgage is for $200,000 and the market value of your home is $250,000. You can not deduct more than the interest on $50,000 worth of your home equity loan. Of course, owing more on your home than its worth is a very, very bad situation in the first place.

The biggest drawback with home equity loans and lines of credit is that your house is the collateral, so if you don’t change your spending and earning habits and turn your debting into saving, you could find yourself unable to pay the home equity loan, and then in a position where you could lose your house.

Home Equity Loan

These debt consolidation options usually have a fairly low interest rate, but the rate can be variable. You take out a lump sum to consolidate your debts, then pay the home equity loan back with a fixed monthly payment. Be sure you understand the terms of the loan – those variable rates can turn a good loan into a bad loan.

Home Equity Line of Credit (aka HELOC)

This kind of loan is a bit more like a credit card. You get approved for a given amount, and then you can draw as much as you want from it, whenever you want, by writing a check. The amount the lender gives you depends on your home’s value (both Home Equity Loans and Lines of Credit usually involve getting an appraisal of your house) and how much you ow on your mortgage. Typically, they’ll give you 70-80% of the difference between the two.

Do NOT work with lenders that encourage you to borrow more than the value of your house. In today’s uncertain real estate market (and larger economy), if you take a loan like that out, and the real estate values in your neighborhood drop, the lender may be able to call your loan. That means you either pay up, or they take your house. This same principle applies to the recently very popular interest-only mortgages.

Avoid these risky loans at all costs. The idea of getting a debt consolidation loan is to get you out of financial trouble, not into more.

Emily