Delete Collection Accounts

Getting a home mortgage loan or refinancing an existing loan calls for a clean credit report. Banks simply will not give a mortgage to someone with collection accounts on their credit report. And, sometimes these collection accounts can be a big shock to the prospective home buyer. Who knew the account was even there?

In California, the statute of limitations for an unpaid collection account is four [4] years. It seems, though, that  creditors have come up with some creative ways to keep collection accounts going. Sometimes, the debt is sold to another credit company, thus re-activating it or sometimes it is simply transferred to another division of the same company with a different name. Both gambits are done with the hope of resurrecting these debts.

This can have a major impact on the consumer’s credit score, sometimes as much as 30 points. This is, of course, of major concern when applying for a home loan. All collections must be paid or the bank will not grant the mortgage. If collection agencies realize that a debtor is trying for a home loan, then they will definitely play hardball and expect to get the entire amount of the debt paid with additional fees added.

So, what to do?

Thanks to a recent court case, the 9th Circuit held that the Federal Debt Collection Practices Act requires substantial activity by the debt collector before a debt can be considered valid. Specifically, for a debt to be valid the collection agency must send a notice to the debtor within 5 days.This is true if it’s the first collection agency, one of many or a subsequent one.

Of course, people often don’t even realize they have collections because collection agencies rarely send out these “validation notices.” Now, the collection agency must inform the debtor of the total amount of the debt and to whom it is owed and this must be in writing within 5 days. Furthermore, the agency must inform the consumers they have 30 days in which to dispute the debt.

When the consumer disputes the debt or any part of it, the agency must supply a copy of the judgment or verification of the debt. Previously, knowing the consumer wanted to buy a house, the agencies would simply insist on payment until either the home buyer gave up the quest for a house or paid the loan.

Now, there is some protection for the home buyer with a collection account. If you discover a collection account on your credit report, it is only valid if you have received notice of it from the collection agency in writing and you may still dispute the account. If the collection agency refuses to back down, yes, you will have to hire an attorney, but a simple letter may do the trick.

Great Short Sale News. You CAN Buy Another House.

Losing sleep over the precipitous drop in the value of your home? Wondering how you can continue to make payments on that $500,000 loan when the home now seems worth at most $300,000? Casting  jealous glances at the newcomers in your area who are getting bargain prices and bargain rates?

Guess what? Now you can short sell your home AND  buy another house at today’s prices and rates.

Over 14 million loans in the U.S. are now either underwater or in some stage of foreclosure. About half the nationwide sales to new buyers are either repossessions or short sales.  It seems to most underwater homeowners that there ought to be some way to connect the two–now there is. You can short sale your home and buy a similar property for half the price.

Lenders are  now coming out with new programs, many insured by FHA, which make it possible for homeowners to short sale their homes and simultaneously buy another property at today’s prices and today’s rates. Many homeowners have allowed their homes to go into foreclosure or waited helplessly for the loan modifications that never came simply because they couldn’t figure out where they were going to live if they left their homes. Some decided to stick out the school year. Others couldn’t bear to leave the neighborhood. Now they don’t have to.

Here are a few of the guidelines that will allow homeowners to short sale their current home and simultaneously purchase another home. First, they must be current on their mortgages. So, owners who have “let the property go” or who were not financially able would not qualify. Finally, here is some reward for those who have steadfastly made their payments in the face of dropping values.

Second, they must be able to qualify for the new mortgage.That means a FICO of at least 640 and income sufficient to pay for the new mortgage.That’s not as hard as it may seem. If a homeowner can pay the $500,000 mortgage at 6% or 7%, no matter with what great difficulty, think how easy it will be to pay the $300,000 with a 5% mortgage for an identical property.

Third, the buyer must have money sufficient to pay the minimum 3.5% FHA down payment and the accompanying  closing costs. The short seller will get no proceeds from the sale of his property. That’s a given. So, where will the money come from for the new property? If  it’s an FHA loan, the minimum down payment is 3.5% and that total amount can be a gift. Also, the short seller is eligible for the federal tax credit which goes up to $6500 for move-up buyers. That may be applied to the down payment or closing costs, but this is not yet determined.

Finally, some programs require that the new loan cannot be more than the previous loan. So, in this case the new loan cannot be more than the $500,000 which the  buyer was paying on the previous home. With the drop in prices today, in most markets, this will be an easy criterion to satisfy.

Impetus to do short sales just got much bigger. If you’ve been dithering about what to do and how to house the family after a short sale, these new loans could certainly aid in the decision-making process and give you peace of mind. Short selling your home and buying another one at today’s much lower values may, in fact, result in a significant improvement in your housing standards…

Forgiven a Debt? You May Owe Tax

NEW YORK - MAY 20:  In this photo illustration...
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No good deed goes unpunished, so the saying goes. That’s certainly true if you manage to get your credit card company or your bank to reduce your balance….The IRS wants its piece of that party…

Until recently, credit cards and mortgage loans were offered like candy to almost anyone. Run up your credit card and no big deal–you could get an equity line of credit [a HELOC], refi your house or with a high FICO score, pass on the debt to a zero interest card. Now, you’ve lost your job or you’ve been forced to go part-time or your spouse has lost a job…Whatever the reason, you need credit now more than ever, but you already have a mountain of debt.

With true hardship, you may be able to talk your credit card company or collection agency into accepting partial payments as full. After all, something is better than nothing, right? Or, you may have determined that if your mortgage company would accept a short payoff and let you keep your home, then you could make it. That’s great, and exactly what you should be doing as a responsible card holder and home owner. Now comes the hard part.

If a credit card company has forgiven some of your debt and accepted say $20,000 of a $50,000 debt as payment in full, then you are going to owe tax on the forgiven amount, here $30,000, to the IRS. If you have gotten your second mortgage holder to reduce your balance from $35,000 to $10,000 which you then pay off in cash, then you are going to have to pay tax on the forgiven $15,000.

That forgiven debt will be added to your yearly income and will, most likely, be taxed at your highest rate or it may propel you into a higher tax bracket. So, plan carefully when you make these deals with credit card companies, collection agencies and mortgage holders. By now, it’s almost June so most of us can pretty well predict what our yearly income will be. If you’ve lost your job and had almost no income, the tax bite will be less. On the other hand, with no job, you’ll have less to spare when tax time rolls around.
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How to escape paying the tax?
There is one exception to this taxable debt forgiveness, the Mortgage Debt Relief bill,which was voted by Congress in 2007. Because of this legislation, if you sell your home in a short sale either last year or this year, you will owe no tax, although the bank may have accepted hundreds of thousands less than what you owed. This makes it far more palatable to sell a home in a short sale, this aiding millions of home owners who would otherwise have a foreclosure on their records for the next 7 to 10 years. Note, though, if you negotiate a short payoff of one or more mortgages and remain as owner of the house, you will owe tax.

Obama’s Plan: Help for Small Investors

Sign for Barney's Loans, corner of Second Ave ...
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Yes you read that right. Obama’s plan will also help you refinance if you have rental properties. Last week Fannie Mae and Freddie Mac announced they would refinance rental and second homes as part of the Obama administration’s housing relief effort.  That is a relief! It seems that finally these lending giants have realized that helping small investors will also help renters and if nothing else provide homes for the foreclosed upon.

Here’s the skinny. First, the loans must be owned by Fannie or Freddie. If you don’t know, call your servicer to find out or go to Fannie and Freddie websites. If your loan is with another entity or a private lender, you will not be eligible.

Just as with owner-occupied properties, the loan to value ratio cannot exceed 105% and that is up to $729,750 loan amount.  Let’s say you bought a duplex or a fourplex a few years back for $500,000 with a first mortgage of $400,000 at 7.5% and that loan has now been acquired by Fannie Mae. You may well be able to refinance into todays 5% and 6% rates, thereby greatly increasing your cash flow. Even if the value of your property has dropped in the intervening few years, as long as the current market value is at least $420,000, you can do it.

Of course, you do have to be a good prospect for a refi. Your payment history on the loan should be close to perfect–no 30 day lates in the past 12 months. Even if you’ve had other financial woes which may have tanked your credit score, it’s still possible because Fannie and Freddie have agreed to waive their usual minimum score requirement and you won’t have to pay for new mortgage insurance [pmi].

You will have to show income to qualify–often investment income from the building is enough–and there will be the usual closing costs which will increase your loan balance.

All in all, though, this is a great deal!

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9 Tips For Getting Mortgage Approval

These days with turmoil in the financial markets, it’s getting more and more difficult to get mortgage
approval. Lenders, who in the last four years were giving loans to anyone with a pulse, are becoming so risk-averse that they are endangering the very market upon which they depend. One factor which is becoming more and more important today: a good quality credit report.

What Makes Up a Credit Report outlined the various elements constituting a credit report: what’s in it and what’s not.  Here are a few tips to help you keep your credit report pristine so you will have the best chance to get a loan.

1. Keep track of your credit score.

The higher your score the better. Make sure the credit report has no errors by checking the three major credit reporting agencies periodically. Errors take time to remove, so, if you’re looking for a house, you want to get started quickly.

2. Pay Your Bills On Time.

Duh! This is extremely important. If by mischance you are a few days late on a credit card or a mortgage, call the company and ask to have the fee removed. As a courtesy to good payers, most companies will remove the fee. That will assure that a late will not be reported to the credit agency. Be aware, though, you can do this once. After that, you must pay.

3. Avoid Collections.

Ever had a dispute with a credit card company? If you don’t make the payment during the dispute, the bill becomes a collection on your account and pulls down your score. Of course, regular collections from a court judgment over an unpaid bill can destroy your credit report. The key? How old is it? Many collections fall off after a specific number of years.

4. Limit Your Liabilities.

If you know you want to buy a house, don’t buy a new car or add three new credit cards as they will lower your score. And, please, NEVER co-sign for anybody including your beloved children and relatives. You won’t know if they don’t pay their bills on time, but for every late payment or repoed car your credit score gets the ding as well.

5. Limit Your Credit Inquiries.

Just before investing in property or while searching for a mortgage, don’t allow 75  prospective lenders to run your credit. Let one lender run the credit.  Find out your FICO score and as you shop give it to other lenders who can then provide you with a scenario. Too many inquiries pulls down your score.

6. Do Not Open New Accounts Just Before Applying for a Mortgage.

This also applies to the escrow period. Do NOT buy a new car or tons of furniture while in escrow. Just before closing, the lender may run your credit again and these new debts could torpedo your loan. Wait until you close on your house.

7. Do Not Close Unused Accounts Until After the Closing.

Your credit score is calculated partly by how much of your available credit you are actually using. Opening new accounts to increase your ration won’t help either.

8. Be Honest.

Don’t try to hide past financial difficulties whether it’s a bankruptcy or a short sale or whatever. Your loan officer wants to do your loan. Explain what happened–divorce, child in the hospital, loss of job–that explanation can help your case.

9. Provide Information That Has Recently Changed.

Maybe you have paid off a bill and the payoff hasn’t yet shown up on your credit report. Maybe you sold a car. Make sure the lender knows which items on the credit report are no longer there. Most lenders use a service called Rapid Rescore which allows them to recalculate the FICO score in time to use it on your loan.