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Here’s a mortgage primer on which loans are no longer the flavor of the month on Wall Street. They’re the Michael Vick’s of the mortgage world, they were once very popular on but now nobody wants to be associated with them. Okay, that’s a little bit too harsh since these loans didn’t kill dogs. Then again, these loans have put families in dire straits so lets keep the Michael Vick analogy.

Loans the Wall Street doesn’t like:

• THE LOANS WITH THE REALLY REALLY REALLY LOW RATE AND LOW MONTHLY PAYMENT

Also called: 1%, NEGATIVE AMORTIZATION, NEG AM, OPTION ARMS, PAY OPTION ARMS or

“A CAN OF WHOOP ASS WAITING TO HAPPEN”

• THE LOANS FOR BORROWERS WITH REALLY REALLY REALLY BAD CREDIT HISTORIES

Also called: SUBPRIME, NON PRIME, POOR CREDIT, 2/28s, 3/27s, or

“I GUESS THIS IS WHAT I GET FOR NOT PAYING MY BILLS”

• THE LOANS FOR BORROWERS WHO HAVE GOOD CREDIT BUT WHOSE OVERALL LOAN APPLICATION DOESN’T MEET FANNIE MAE OR FREDDIE MAC’S STANDARDS

Also called: ALT-A or

“SO I’VE GOT GOOD CREDIT AND A GOOD JOB BUT I’M PENALIZED FOR NOT SAVING ANY MONEY”

• THE LOANS FOR BORROWERS WHO CAN’T REALLY REALLY REALLY SHOW HOW MUCH MONEY THEY’VE MADE OR HOW MUCH THEY HAVE SAVED UP

Also called: STATED INCOME, STATEDSIVA, SISA, NO DOC, or

“DON’T THEY HAVE LOANS FOR PEOPLE WHO DON’T HAVE JOBS?”

• THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY DON’T WANT TO PUT ANY MONEY DOWN

Are called: 80/20, 100% Financing, NO MONEY DOWN, 103%, 107% or

“I WANT A LOAN WHERE I GET TO KEEP MY MONEY IN CASE MY JOB GETS OUTSOURCED TO INDIA”

• THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY DON’T WANT TO PAY AN AMORTIZED PAYMENT

Also called: INTEREST ONLY, IO, or

“IF I LIKE PAYING DOWN PRINCIPAL MY PAYMENT GETS RECAST TO A LOWER PAYMENT EVERY MONTH”

• THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY WANT TO BUY A HOME THEY HAVE NO INTENTION OF LIVING IN

Also called: INVESTMENT PROPERTY LOANS, NON OWNER OCCUPANCY, NOO or

“I’M GOING TO BE THE NEXT DONALD TRUMP”

• THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY MAKE A LOT OF DOUGH

Also called: JUMBO, NON CONFORMING, SUPER JUMBO, MILLION DOLLAR LOANS, ANYTHING OVER $417,000 or

“THAT’S PRETTY LOW FOR A RATE OF RETURN AND PRETTY HIGH FOR A MORTGAGE INTEREST RATE”

It remains to be seen if Wall Street still likes:

• THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY HAVE NO INTENTION OF LIVING IN THEIR HOMES FOR 15 to 30 YEARS

Also called: ADJUSTABLE RATE MORTGAGES, ARMS, 3/1, 5/1, 7/1, 10/1, TEASER RATE LOANS, HYBRID LOANS, BALLOONS or

“THE AVERAGE PERSON MOVES EVERY 5 to 7 YEARS, SO WHY SHOULD I GET A LOAN FOR 30 YEARS?”

Wall Street will always like:

• THE LOANS WITH REALLY REALLY REALLY NO RISK

Also called: FHA, VA, CONFORMING, FANNIE MAE, FREDDIE MAC or

“THE LOANS THAT MAKE UP THE MAJORITY OF THE AMERICAN MORTGAGE LANDSCAPE”

I’ve never been a verbose writer. I took a high level Shakespeare class during my last semester in college and the professor wrote on my final paper - “You understand quickly, you write even quicker.” I asked him what his comments meant and he said, when you write, you get right to the point.

Here’s my view of what happened to the mortgage industry. (If you want a more verbose, simply google Mortgage Collapse.)

The subprime mortgage world has fallen flat on its face. Loaning money to people who have proven that they can’t pay back a credit card let alone a mortgage was bad business. These loans started off with a 2 year introductory rate and now we’re seeing those two years expiring and now we’re getting into the adjustment phase. The mortgage entities that bought these loans are filing bankruptcy en masse. As as a result, borrowers who need these loans can’t get them anymore. The effects of these loans are moving up the risk ladder with “ALT-A” companies (the risk level between PRIME and SUBPRIME) starting to close their doors as well. It’s a mess right now and it may take years for all this to get straightened out.

Here are two videos worth watching regarding the mortgage mess:

Jim Cramer (rather calm):

Jim Cramer (going ballistic):

Everyone has heard the line, ‘When banks compete, you win!” Well, not really when it comes to a second mortgage or home equity loan. These loans rely on credit score and equity. If you have bad credit, you better have equity. If you have no equity, you better have good credit to get a 115% or 125% loan. If you have bad credit and no equity, sayonara.

So where do you go when banks won’t compete. Enter person to person lending at www.prosper.com. Featured in Inc, Newsweek, Business Week, Entrepreneur, et. al. prosper has grown exponentially.

The premise is simple: People who need money request it, and other people bid for the privilege of lending it to them. Prosper makes sure everything is safe, fair and easy. You can borrow anywhere from $50 to $25,000. Seems like an interesting lending alternative when no else is willing.

Your credit maybe considered bad and causing a low score for a number of reasons. While the are numerous reasons for bad credit some of the more common ones are as follows. You have numerous credit cards that are maxed out or close to the credit limit, you have unpaid judgments or collection accounts, you have 30 day lates showing on your payment history. All of these examples can cause severe drops in your credit score.

One area people overlook that can negatively impact their credit report is failing to honor mobile phone contracts. Cell phone companies give away free phones to customers who sign on with their services for a specified period of time, usually one to two years. Terminating subscription to the phone service before the expiration and failing to reimburse the phone carrier for the cost of the free phone is considered breaking the contract. Cell phone companies would then report to the credit bureaus and cause a blemish on the credit history. Such blemishes are not serious, but they nonetheless lower credit scores.

Credit scores generally range from about 350 to 850.

• 800+ = great credit
• 700-799 = good credit
• 600-699 = average credit
• 500-599 = bad credit
• under 500 = hard to get a loan at all

Your credit can be bad for a variety of reasons: Late payments High Account Balances Bankruptcy Collections Charge offs To minimize negative on your factors you will need to pay down balances, make payments on time, dispute incorrect information, and let the passing of time lessen the impact of past bad credit.

To many inquires at one time can affect your credit score.

If you credit score is low because of a high balance on a credit card transfer some of the balance to another card. Try not to open a new card because to do this can also reduce your score.

One reason why your credit may be bad is because of erroneous information reported on your credit report. This can happen to anyone and is actually quite common. This is one reason why you need to check your credit report out at least once per every 12 months. By checking you credit report for free you can keep an eye on your credit and make sure that you take care of any erroneous information when it happens, not when you are trying to apply for a loan and it comes as a surprise to everyone. Utilize your one free annual credit report each year to take a look over your credit to make sure everything looks well. There are many reasons as to why credit report errors can happen so make sure that if errors do happen to you that you rectify the situation immediately.

Maintaining high balances on your credit cards and other revolving debt negatively impacts your credit score. Paying down credit cards balances below the 70%, 50%, and 30% thresholds is a quick way to boost your credit score.

Paying down your credit card balances to around 30% will help your score. If you can, try to keep the balance at that level at all times. If you need to raise your score quickly, and don’t have the money to pay down your balances, you may request that your creditors increase your credit limit. This will in turn lower your balance in comparison to the limit. Only use this technique if you are responsible with your credit. Once your limit is increased, it may be tempting to go on a shopping spree. Know that if you do this, you will be in a much worse situation than when you started. Not only will you have more debt, but you will increase your ratio of balance to limit.

There are several ways to increase your credit. However the fundamental principle is the bills must be paid on time. This doesn’t mean by the due date. For the sake of your credit a payment must NEVER be more then 30 days late. If you are acquiring 30 day lates on your credit then your credit standing will deteriorate quickly. Judgments also hurt your credit even if you pay them.

It is also important to note that a credit score is a snapshot. Although it shows your payment history, length of credit, etc. having inaccurate (negative) information removed from your credit bureau report will immediately reflect an increase in your score.

If you do decide to pay off some of your credit cards, be sure to leave the cards open. The credit bureaus look favorably upon accounts that have been open for a substantial period of time, especially if they are showing a zero balance.

Remember that a credit score amounts to a prediction of how likely it will be that you go 60 days late or more on your mortgage in the next two years. One thing that will really lower this score is if you carry high balances on revolving debt and then start making a few of the payments late. This is the pattern of a consumer who is close to getting in trouble with debt.

Things that may go into a collection or judgment that will hurt you credit are; unpaid medical payments, unpaid utility payments, and unpaid cell phones or cable payments.

An explanation of when to get qualified for a mortgage:

Should I get qualified for a mortgage before looking for a new house or find a house I like and then get qualified? You should absolutely get pre-qualified for a home loan before house hunting. By getting qualified first this will allow you to know how much house you can afford and how much of a mortgage you can qualify for. Also, most realtor’s will want to see a pre-approval before they start showing you houses, and the listing realtor will definitely want to see a pre-approval before accepting a bid on a house.

There is usually no commitment on your part to get -qualified. In most cases, you don’t even need to provide personal income documents. Of course, the more documents you furnish to your mortgage broker, the better and more accurate your pre-qualification will be. If you provide your mortgage broker with income and assets documentations, he/she can get you pre-approved from a bank, which is basically a loan approval, pending the information of the home and the appraisal.

Definitely begin the process as early as possible with your mortgage broker. This will give you a nice clear picture of what you can afford and what the process will be once you find your dream home. The sooner you begin with your mortgage broker, the sooner you can move through the loan process once you find your home!

Giving yourself time needed to save up for a down payment, improving your scores, and moving balances on accounts is imperative to a successful home loan transaction.

It’s actually not a bad idea to start looking into being qualified as much as three months before you plan on purchasing a home. That way, if there are any credit issues that you were not aware of, there is a good chance you will have time to address them before the purchase.

If you have an Adjustable Rate Mortgage(ARM) Loan, and the fixed period is will be expiring soon. You should look into becoming qualified for a new mortgage loan at about three months prior to the fixed period’s expiration.

It is a great idea to get pre-approved before you start to look for a new home so you know how much you have to finance. With today’s many 100% purchase programs a down payment is becoming a thing of the past for many people. But with no down payment the amount you can afford to finance will go down.

Editors Note: Due to the mortgage and credit crunch, negative amortization mortgages are more difficult to get. If you’re in need of a Denver loan contact us to discuss your mortgage options.

An explanation of Negative Amortization:

Negative Amortization means that the loan balance can actually increase.

If you make the minimum payment the difference between the minimum payment and a principal and interest payment will be added back onto the balance of the mortgage.

If the interest only payment is greater than the minimum payment in any given month, you have the option to pay either amount. If you choose to pay only the minimum payment, any additional interest which is due is deferred at that time.

When the loan is “re-cast”, usually after 5 years, any deferred interest is then added to the principal balance resulting in Negative Amortization. The deferred interest can be paid at any time prior to the re-casting of the loan and becomes tax deductible once it has been paid.

Negative amortization can be a very bad thing if it continues to happen every single month. You will not build equity in your home, but you will actually lose equity in your home. Negative amortization type loans can be a good option for borrowers who have very unstable incomes where the ability to make an ultra low payment is available. This way when they are having a low income month they can simply make the lowest payment possible and when they have better income producing months they can make a much higher payment. Negative amortization loans are not for everyone.

The maximum amount of negative amortization that can occur is limited. Depending in which state your property is located, the limit is between 110% and 125% of the original principal balance.

Option ARMs (also known as pay option or pick-a-payment ARMs) function differently than other types of loan products. In general, the minimum payment will only change once a year. The interest only payment is calculated monthly.

Editors Note: Due to the mortgage and credit crunch, alternative credit loans are no longer be available. If you’re in need of a first or second mortgage in Denver, CO contact us to discuss your mortgage options.

Alternative credit is an option available for borrowers with little or no credit history. Alternative credit usually is in the form of a letter from the company that holds an account that does not normally report to credit bureaus.

One program that was designed for limited credit depth is Fannie Mae’s “My Community” program that will allow up to 100% financing. You should discuss this program with your broker to see if it is right for you.

Examples of accounts that may qualify as alternative credit are cell phone accounts, cable TV accounts, car insurance and even cancelled rent checks all can be used as alternative credit. However they all need to be paid on time in the last 12-24 months.

Homeowners and prospective buyers with limited credit histories or artificially reduced Fair Isaac (FICO) credit scores may now obtain alternative credit reports and scores based on the timely payments they make to landlords, utilities, telecoms and cable companies and other recurring accounts which may not be included in their national credit bureau file, even child support ampersand payday loans.

Another example of a borrower who may need to use Alternative credit would be someone who did a bankruptcy and never re-established any credit accounts. Sometimes after a bankruptcy people feel it is better to pay cash for everything and not get any more credit accounts. This is not true as it is important to re-establish your credit after the BK.

Banks make a distinction between loan applicants with no credit history and those with bad credit history. Non-prime lenders are usually the only source of mortgage financing for loan borrowers with bad credit profiles, whereas home buyers with little or no consumer credit history can often get home loans with Alternative Credit features from banks. Mortgage brokers are a good source for Alternative Credit mortgage programs.

You may also here mortgage professionals refer to alternative credit such as cell phones and cable TV as Alt trade lines. This is an excellent way for someone with very little established good credit to prove their credit worthiness to a lender. It’s all about building a case for yourself to the lender. Knowing how to package your information to the lender is a better portion of the mortgage broker’s job.

These Alternative Credit programs are very useful for Foreign Nationals, who traditionally will not have established credit since they have just come to the United States.

Helpful tips if you can’t make your mortgage payment:

You have a few options if you can not make your monthly mortgage payment. One option is to contact your lender and see if they will be willing to work something out with you in regards to skipping the payment or adding the payment back onto the end of the loan. Some lenders are very generous and will work with you on trying to find a solution and others are not as easy to work with. Consult your mortgage consultant to discuss your options with him/her too.

You should also examine why you cannot make your current payment, will a temporary fix actually solve or just delay the problem? You want to be sure that if you choose to refinance and get a lower rate will you still be able to make your payments even at a reduced level. If you do decide you just cannot continue to make payments at your current level you may want to consider selling your property and moving into something more within your means.

Most lenders don’t want to be associated with putting a family out on the street, so it is always a good idea to contact your lender to make up your payment in a matter acceptable to both parties.

The majority of lenders are not in the business of real estate acquisition, they are in the business of lending money. Putting a home into the foreclosure process is very costly to a lender, therefore they really have no desire to add your home to the list. Most lenders will work with you if your current financial situation is temporary. For example, a temporary job layoff, injury or illness that requires several months for recovery. Contacting your lender before things spiral out of control is most important.

One advantage to refinancing is you get a 30 day reprieve of making a mortgage payment.

If this is not an option you can contact us and if you are not already late we may be able to place you in a program that is better for your current situation than you are currently in.

If refinancing does not cure your current situation, then selling is not a bad option. It is better than having a foreclosure or a bankruptcy on your credit report. People make the mistake of buying to much of a home all the time. Sell now and protect your credit score, and maybe your situation will change in the future, and you will then be able to purchase a different home.

Credit scores have become very important to consumers for a variety of different things. Your credit score determines whether you will be, approved, declined, required to place a large down payment, or have to obtain good or very unfavorable terms for not only mortgages, home loans and cars, but for a variety of other things as well. Your credit and credit scores can now play a major role in determining what premiums you pay for homeowners and auto insurance, whether or not a utility company (phone service, gas service, electric, etc…) will require you to place a deposit down to get service turned on (and how much of a deposit), your rate and determine whether you will be approved or declined on personal loans and credit cards, whether or not you are able to rent an apartment or home, amongst many other things. Many employers now look at a potential employee’s credit report before hiring them. Therefore, you can see how credit and credit scores can play an important role in your life and with bad credit it can force you to pay higher interest rates, higher payments and higher premiums on numerous different items. There are many factors that help contribute to determine a persons credit score that you will learn about here.

The number of open accounts you have influences your credit score. Less than 3 or more than 5 can decrease your score.

The companies that determine your score do not fully disclose all the inner workings of what goes into your score. Granted they tell you what percentage of types accredit help or hurt you but they don’t get into the nuts and bolts of it all. There are however some basic rules of thumb. One rule of thumb is to have your balance be lower then half the highest available balance. So if your highest available balance on a visa card is say 10k. Make sure your actual balance is below 5k. There is also a seasoning factor. Someone who has maintained good credit standings for a long period of time will generally have a higher score then someone who just established their credit.

Whether you pay all your bills on time is probably one of the more important aspects that determines your credit scores. Most companies that extend credits to you report to the major credit repositories on a regular basis. Any late payments history will have a negative effect on the credit scores. The more recent the reported “lates”, the higher the impact on scores. Lender banks consider mortgage payment “lates” much more severe than credit card late payments, and punish homeowners with mortgage “lates” accordingly with higher interest rates and/or lower loan amounts.

Your credit report will list any collection or charged-off accounts that you may have. Having these kind of accounts reporting will definitely have an adverse affect on your credit score. A word of caution though. Paying off collection accounts, especially older ones may cause your credit score to go down, at least in the very short term. If you are applying for a mortgage please consult with a mortgage professional such as myself before paying old collection accounts.

The number of recent inquires has an affect on your score as well. Although it does not carry as much leverage as many other factors in determining your credit score you should still avoid having your credit checked unless necessary.

If you have had a bankruptcy, you can expect it to stay on your credit report for up to 7 full years. Although it will still show, there are ways to still increase your credit score after a bankruptcy.

Capacity = Willingness and ability to pay back the loan Credit = Payment history and current balances; willingness to repay Character = Job stability and or time in property Collateral = Property or what the lending institution will be left with if the borrower fails to pay.

Another one of the C’s that is often over looked is Cash to Close. Liquid assets readily available to pay the down payment, closing costs, and prepaid items of a mortgage transaction.

Credit is one of the most important things a borrower must be aware of when buying a new home. The credit report is a representation of how you pay your bills. If you have great credit. A Bank is willing to finance up to 106% . Which would allow a person to purchase a house with no money down.

Character – from the standpoint of underwriting, lenders are usually looking for a minimum or two years work history at the same company. If you have changed companies in the past two years, but are in the same line of work, as long as your income has stayed the same or increased lenders will accept that. The longer you have been employed with the same company and in the same line of work the better off you are and the more lenient the lender may be on other factors.

Knowing what lenders are looking for and planning to provide them what they need in order to fund your loan is the best way to make sure you can get the best loan for you.

From an underwriting perspective, if a loan package is significantly strong in one of the “C” areas, deficiencies in another “C” can be given less weight. Example, if a borrower is putting down a large down payment the Collateral would be stronger so a weaker credit score might be tolerated.

Credit - Although there are a few programs that are not credit score driven, by far you will be able to secure a better rate if your credit rating is good. Payment history plays a big part in your credit score and this shows the lender your track record of payments to your creditors. It’s more probable that you will pay your loan on time if you pay your other bills on time. If you have high balances on your other debt such as credit cards and automobiles this can affect your Debt-to-income (DTI) ratio and put you at more risk in the eyes of the lender. The reason good credit scores are important is because you have the ability with good scores vs. bad scores to qualify for no income verification or no documentation loans.

Collateral-From the standpoint of loan underwriting, the higher the stake a homeowner has in the property, the less likely he would default on the mortgage. Statistics have shown that if homeowners have 20% or more in equity in their homes, lenders are less likely to suffer a loss as a result of default. For home buyers who have less than 20% to put down as down payment, many banks are willing to grant them loans as long as these home buyers have other compensating factors, such as a better than average credit profile, or a low debt to income ratio. As a safety measure, most banks require home buyers putting down less than 20% to carry Private Mortgage Insurance, which insures the banks against loss due to homeowner default.

Capacity - Capacity goes hand and hand with credit. When a lender reviews your credit there are 2 major factors they are looking at aside from credit scores. One is your DTI or Debt-to-income ratio and the other is your credit history. Both of these will determine your capacity to repay the loan or your risk to the lender.

Capacity also refers to the amount of debts you can realistically pay given your income. Creditors look at how long you’ve been on your job, your income level and the likelihood that it will increase over time. They also look to see that you’re in a stable job or at least a stable job industry. It’s important when you fill out a credit application to make your job sound stable, high-level and even” professional.” Are you a secretary or are you an executive secretary or the office manager? Finally, creditors examine your existing credit relationships, such as credit cards, bank loans and mortgages. They want to know your credit limits (you may be denied additional credit if you already have a lot of open credit lines), your current credit balances, how long you’ve had each account and your payment history—whether you pay late or on time.

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