Things Mortgage Companies Don't Want You to Know
They are not interested in working out your mortgage arrears with you. Mortgage companies through their “Loss Mitigation Departments” will have you fill out all kinds of financial statements and require you to provide extensive financial documentations, all under the guise of a loan workout. At the end of the process, which will take months, the best deal they will make is for you to pay at least half of your arrears up front with the balance of arrears paid over 6 months in conjunction with your regular payment.
By filing a Chapter 13 bankruptcy petition early in the foreclosure process you can save on many of the fees and costs that a mortgage company will charge. Your prospect of successfully completing your Chapter 13 case is greatly increased because the arrears that you will need to pay back will be much lower.
Rebuilding Your Credit after Bankruptcy
Obviously, the idea is to file once and get it right so that you never have to file again. Here are some tips on reestablishing your credit rating so that you can make bankruptcy filing truly a financial turning point and a fresh start:
- Apply for gas credit cards and store cards at businesses where you would normally just pay cash. Pay charges back in full each month or at least pay in a timely manner. Do not carry large balances on the cards. Apply for a secured card where you deposit cash and charge against it. Pay any advances back over a two month period so that they will reflect as positive marks on your credit report. If you are unable to obtain a loan on your own merits, find a relative or friend to cosign for you and pay the loan in a timely manner.
- Find a mortgage broker or car dealer who holds himself out as “bankruptcy friendly”. Attempt to purchase a used car so that you do not get hit with depreciation that occurs during the first two years of a new car purchase. Stay away from payday loans that are at high interest rates and are a “bad credit” trap. Write a letter to each credit reporting agency explaining the circumstances that lead to your filing. You are entitled to include a statement in your credit report explaining why you had to file bankruptcy. If circumstances beyond your control were the cause, this can only help.
- Write to each credit reporting agency for copies of your credit report. Make sure that all of your pre-petition debts are properly notated as being discharged or paid through your bankruptcy. Make sure that none of your pre-petition debts are still being listed as delinquent, ie. 90 days late, 120 days late etc. If these debts are still being notated incorrectly, you are entitled to write the credit reporting agency and contest each such debt. Open a savings or checking account. Try to deposit 5% of your weekly paycheck into the savings account. Lenders may look at this to determine if you can handle money responsibly.
- Live within your means. Remember to not unnecessarily increase your debt to income ratio by taking on credit to purchase luxury items that you DO NOT NEED. Your payments on consumer debt should equal no more than 20% of your disposable income after deducting costs for housing and vehicles.
- Pay your rent and utility bills in a timely manner for at least a year.
- Apply for a secured credit card, where you deposit money and borrow against it. Do not purchase consumables (food, gas, and other things that you use up within a few days) with the credit card. The idea is that you want to be able to pay off the purchases before the item is used up.
- Make sure you don’t apply for too much credit at once. Numerous inquiries to the credit reporting agencies will negatively impact your credit scores.
- Since student loans are generally non-dischargeable in a bankruptcy, make sure you make your payment in a timely manner, and if possible, pay extra each month to begin to pay down the principal.
Dangers Presented by Home Equity and Consolidation Loans
The major drawback of all second mortgages, home improvement loans, and home equity loans is that the creditor requires the borrower to put their house up as collateral for the loan.
Once you as the borrower give a creditor a lien on your real property, then you have given the creditor the ability to foreclose on your property if you are unable to make the monthly payment. This is true even if you are current with your first mortgage.
Home equity loans are often sold by brokers to and ultimately used as a “solution” by people who don’t have enough income to repay their unsecured debts. This all too often results in long-term payments that are beyond their means. This sad fact is all the more tragic when you consider that each state has laws that protect a certain amount of home equity from creditors. Additionally, the federal bankruptcy laws allow you to discharge your unsecured debts and keep the protected equity in your home. Unfortunately, when people opt to pay off all of their unsecured debt through a home equity loan, rather than filing a bankruptcy, they turn dischargeable debt into secured debt. Thus, if they end up having to file a bankruptcy later, they get stuck with a lot of debt that would have been discharged if they hadn’t taken out the home equity loan.
While home equity loans may be attractive because they usually offer low interest rates and lower monthly payments, the total amount of payments often adds up to much more than the amount of the original debt that was consolidated. The total amount of interest that you pay over such a long period of time, usually 15 to 30 years, can be huge. Home equity loans can quickly turn disastrous for many people, given the frequently changing economy and unstable job market. Banks offer these low rates because they know that they can foreclose on the property if you fail to pay back the loan. Furthermore, when interest rates are low, borrowers are especially vulnerable to getting in trouble with home equity loans. Most home equity loans are variable rate loans, and the interest rate charged by the bank increases as the Federal Reserve Board increases the prime rate. As interest rates increase, a once affordable home equity loan payment may dramatically increase, making the home equity loan payment unaffordable.
Borrowers often need to be wary of hidden lender costs that quickly run up the cost of the loan. Borrowers are usually responsible for paying for title insurance, a new appraisal, origination fees, commitment fees, and possibly brokers’ fees. Other disadvantages of home equity loans include “balloon payments” and “teaser rates.” A “balloon payment” requires the borrower to pay off the entire loan within a certain number of years. This usually results in having to take out an additional loan and accordingly incurring more fees and costs. Borrowers without great credit might not be able to obtain a loan large enough to pay off the existing home equity loan and thus, will quickly find themselves facing foreclosure. A “teaser rate” is a low introductory interest rate that can increase during the term of the loan, sometimes by several percent, drastically increasing the total cost of the loan. Some home equity loans can be “flipped” into a new loan with a higher interest rate and add other additional costs.
Many people who take out home equity loans ultimately discover that they end up owing more money on their houses than they are worth. Obviously, this is extremely risky, and although the real estate market traditionally appreciates over time, it is dangerous to rely on real estate appreciation to ultimately meet the total amount owed on your home. Many people find themselves in situations where even selling their home would not generate enough money to pay off the home equity loan, after having to pay off the first mortgage and account for closing costs.
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