Home Loan Articles

It sounds like it’s too good to be true: If your home mortgage is upside down you can sell your home for market value, not owe the remainder of the mortgage balance AND get paid $1,500 to move!

That’s pretty much what the Obama administration’s new plan is for kick starting the economy and helping homeowners who are stuck in houses that are worth less than their mortgage amount. The process of selling something for less than you paid for it it called a “short sale” and mortgage banks and lending institutions have not been allowing homeowners to short sell their homes when at all possible. The New York Times broke this story but now other news outlets are reporting it as well.

Starting on April 5th, this home selling plan will allow homeowners to sell their home for its current market value, not pay back the rest of the mortgage amount and they will get $1,500 in relocation money to help move to or rent a more affordable home or apartment. The lender who agrees to work with the homeowner during this will be given $1,000 to forgive the mortgage balance and another $1,000 for a new loan. To make sure that everyone is on an even playing field the lender is also prohibited from suing the homeowner at a later date for not paying back the rest of the original mortgage amount owed. This way homeowners also don’t have to worry about credit scores and credit rating being too negatively affected.

Up to this point many people have been having a difficult time trying to get a bank to modify a mortgage because it just didn’t make sense for the banks to essentially “lose” money that they already had coming in. This program would force banks and mortgage lenders to work with the homeowner as long as the home was able to sell for current market value.

The whole plan still relies, however, on you being able to sell your home to someone else. Your home’s value for this program can only be determined by a qualified real estate agent and not by the bank or mortgage holder itself. This means that you’ll still have to sell your home in a bad economy, but at least you can lower the price to what the market is willing to bear.

Let’s look at a practical example of how you could sell your house short and get paid for it.

Suppose that in 2005 you bought a home for $250,000 and you financed the entire mortgage. Let’s say you’ve paid $10,000 of that off, but you still owe $240,000. However, due to the declining home values a real estate agent tells you your home could only sell for $200,000.

Without this progam you would have two options: sell your home for $200,000 and still owe the bank $40,000 or you could try to sell your home for $240,000 but you probably wouldn’t get any takers.

Now you have a third choice: After April 5th his new plan will allow you to sell your home for $200,000 and it will force the bank to forgive the $40,000 you owe. You’ll be free and clear of a mortgage and you’ll even get $1,500 from the federal government to help move and find a new place to live.

While this seems to work on paper, it still remains to be seen if mortage lenders will cooperate with this plan or if real estate agents will be able to judge market values with a fair and unbiased eye. One problem that’s been pointed out is that real estate agents still have an incentive to overvalue homes because they are paid a percentage of that home sale amount. It also remains to be seen if the weakened job market will continue to prevent people from buying new homes, even if prices are much lower.

Once you know how credit scores and credit reports work, you’re going to want to probably go about finding ways to improve your own credit score so that you can qualify for a larger mortgage with better loan terms. The credit scoring companies keep their exact formula for credit scoring a secret, but there are some ways that most consumers can clean up their credit report and actually improve their credit score over time.

The Bestselling Book – Your Credit Score

Here are a few ways to begin improving your credit score:

Pay your bills on time: This is about your personal credit history. The lenders are looking to see if you have been late with payments or worse, if your account was sent to a collection agency or if you declared bankruptcy. This determines your risk level. If you’re having trouble and receiving collection letters and harassing phone calls from a debt collection company then contact your creditors and explain the situation. Try to work out an arrangement with them so that they don’t report you as a bad credit risk. Show them that you are acting in good faith. You can use some of the same tactics with your creditors that you might use when you’re working with a bank to modify your home loan.

If you need help budgeting consider a credit counseling agency. Many of these are nonprofit and risk free. Find someone reputable to work with you in-person and as always be sure there are no hidden fees. Consider recommends from trusted sources like your bank.

Reduce and eliminate your outstanding debt: Some credit reports look at what credit is available to you and how much you owe. If you have a large credit limit and you owe very little on it, bravo for you. You look good. There is a caveat, though: if you have too much credit and none of it is used then you may actually be penalized because you have the potential to max out all your credit in a month and be a serious risk for paying it back.

Having lots of outstanding debt is also not very good. If you owe money close to your limit or if you’ve gone above your limit, you lose points and your credit score is hurt. For most people, it’s credit cards that get them into the most trouble. When you’re using credit cards, you’ll want to use some common sense tactics like these:

• Keep your credit card balances low
• Make consistent payments and no late payments.
• Don’t open up new credit accounts.

Correct inaccurate information: The easiest way to clean up your credit is to correct inaccurate information on your credit report. If you have a bad credit report because of a mistake, it’s your responsibility to correct it. This is the easiest way to improve your credit score. Remember, it’s your responsibility to take care of this. Even if a company made a mistake it’s up to you to fix it.

Consumer reporting companies are bound by law to fix their mistakes within a short period of time and give you a free credit report. More than that, if you request it they must send a copy of the cleaned and corrected report to anyone that received the incorrect report in the last six months. That good and clean report will be sent out to any company that denied your loan or penalized you for your bad credit report. Correcting your credit report is the single most important and easiest step to follow in repairing your credit history and raising your credit score.

Your credit score and income levels are the two most important factors that a bank considers when it looks over your home loan or mortgage applications. Banks want to lend money to potential home buyers who have are able to pay back the loan and have a good history of paying back other loans, so do your best to improve your credit score and fix any credit reporting errors when you can.

Whether you’re starting out in the professional world or you’re looking for a fresh start, it’s important to know about credit reports and credit scores and how much they affect everyday life for most people. Your credit score can affect the kind of house you can buy, the apartment you can rent, the job you get, the school you can attend and just about every other aspect of living in a modern world.

Is there a difference between a credit score and a credit report?
When experts talk about a credit “score” they are usually referring to the total calculated number that is gotten from a full credit report. A full credit report could be many pages long and will list lots of things like debt paid, open loans, open credit cards and so forth. A credit score is a single number that summarizes all those good things and bad things listed on your credit report. Your credit score is a system devised to give information to lenders about your credit history. Are you a risk to them if they lend you money?

FICO Credit Scores
With a credit score a higher number is almost always better than a lower number. Different credit agencies use different ranges, but the most widely used score, the FICO, scores credit on a range from 300 to 850, with a majority of people having a credit score between 650 and 799. Here are the general credit score ratings and meanings:

700 – 800 Excellent Credit Rating
680 – 699 Great Credit Rating
620 – 679 Average/Good Credit Rating
580 – 619 Below Average Credit Rating
500 – 579 Not Good Credit Rating
Below 500 Very Bad Credit Rating

Why do you need a good credit score?
Your credit score on a full credit report is used by loan and mortgage companies to determine if they should do business with you – this is why the accuracy of your report is important. You should know what it on these reports, check if the information is accurate and if it is not, follow the steps necessary to correct the information. Home and apartment rental companies also use this to determine if you are able to pay the monthly payments they require. Potential employers are now also using credit scores, though there has been some controversy over this.

How to see your credit report and credit score?
Get a copy of your credit report. You have a right to know what’s in your report and you can ask the company; but you have to ask for it. Under the FACT Act (Free File Disclosure Rule of the Fair and Accurate Credit Transactions Act), each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — is required to provide you with a free copy of your credit report once every 12 months, if you ask for it.

Go to a trusted source for this information – here’s the trusted source and it’s free: www.annualcreditreport.com. You can also contact them at 1-877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

Make sure the information is correct.

According to the Federal Reserve you can access a free credit report from any of the three national credit reporting companies every 12 months. In some states, they’re free all the time. Some consumer companies are allowed to charge a very small and reasonable fee to give you a copy of your report. Your rights as a consumer and to gain information about your credit rating are protected by the Fair Credit Reporting Act (FCRA).

Remember, reviewing your credit report helps you determine what steps to take toward fixing your credit so that you can get a loan. Consider it a personal history lesson, study it and take the steps necessary to clean up your bad credit history.

Information you should access and review to protect your rights and to improve your credit history should include the booklet that the Federal Trade Commission (FTC), the nation’s consumer protection agency, has written to help you improve your credit report. If you do not have access to a computer go to your nearest public library and ask for help.

Companies may have a range of factors that they use to determine their credit score for you. Different credit scoring models are used by various companies, and all the companies keep their own scoring system a secret. But there are common factors in all of them. If you have a bad credit history start taking these basic steps to improve your credit rating. With a good credit score you will find that it’s easier to work with loan companies, you will get better rates on your outstanding loans and it may even help you get a better job!