The “B” Word – Bankruptcy
Bankruptcy sounds scary, but when all else fails, filing bankruptcy will allow you to keep your house. Briefly, there are two primary types of bankruptcy, Chapter 7 and Chapter 13. Before we discuss whether you should consider filing for bankruptcy, let’s examine the different types of bankruptcy.
Chapter 7 – Discharge of Debt
Chapter 7 is the most popular option, because it completely discharges all your debt. All of your assets are liquidated and split evenly between your creditors, except for a LONG list of “excluded assets” which include most of the stuff you really want to keep anyway - namely your house, cars, home furnishings, personal effects, etc. You’ll have to work something out with your lender for your house, because unlike Chapter 13, there is no trustee to collect your money and pay them off. But if you don’t have to pay credit card payments or medical bills etc, you may have some money you can redirect to your mortgage payment. Generally speaking, Chapter 7 is probably not going to work for you if you need to stop the foreclosure but do not have the money to pay your mortgage company to bring the loan current.
Be aware that the laws changed in 2005 to make it more difficult to file Chapter 7; there is now a means test, and you will have to prove that you cannot afford to file Chapter 13 and pay back some of your debt. If you succeed in qualifying for Chapter 7, your debts will be discharged in 4-6 months, but the bankruptcy will be on your credit report for ten years.
Chapter 13 - Reorganization
Chapter 13 is commonly called “reorganization”. You have to come up with a plan to reorganize your finances. A trustee takes monthly payments from you over the course of 3-5 years and pays your creditors off. There are three types of debt that fall under your Chapter 13 plan:
1) Secured payments, including back payments, interest, and penalties on your mortgage, car payments, etc.
2) Preferred payments, including unpaid taxes, your bankruptcy attorneys fees (if he’ll let you pay it out)
3) Unsecured payments, including everything else, most notably credit cards and medical bills.
Here is a grossly oversimplified way of how this works. P = I - E
• P = Your payment amount
• I = ALL of your income.
• E = ALL of your expenses for everything - house payment, food, clothes, gas, reasonable entertainment, etc.
You pay the trustee each month, and they in turn pay all your creditors. Secured and preferred creditors get paid 100% of what they are owed. After that, whatever is left over is divided up and paid to your unsecured payments. Thus, your credit cards / medical bills etc. may only get paid 5% of what they are owed. The amount they get can range from 0% - 100%, depending on your budget. The challenge is to make the bankruptcy plan work, and that is why you need an attorney. It is in everyone’s interest to ensure that your Chapter 13 plan to succeed – you, your lenders, your attorney, and the trustee. That is why it is very important to work out a plan and payment amount that you can afford.
Once you’ve completed at least 3 years of payments (and as many as 5 years), and paid off your plan, your bankruptcy is “discharged” and your credit starts to improve! Chapter 13 bankruptcy remains on your credit report for seven years from the date of filing.
Is Bankruptcy Right For You?
Now that you understand bankruptcy, you must decide if it is the right option for you. Are you overwhelmed with lots of debt beyond your house payment, with no change in income on the horizon? Bankruptcy can be a fresh start and a huge relief, if you’re willing to take the hit on your credit report. However, if you are in that much debt and behind on payments, your credit is probably in bad shape already. Your credit will be affected for seven years or more, but if you DON’T file, you may still be in the same financial position seven years from now anyway. Many people get in over their heads and need a fresh start. That is why the bankruptcy laws were created to begin with.
If you are a relative or caretaker of an elderly relative who is in danger of losing their house, bankruptcy may be an excellent choice. The homeowner will likely not need any credit in the twilight years of their life, and bankruptcy will let them keep their home. Just remember, you’ll have to help them with the process, as there is a credit class you have to take over the phone etc.
If finding another place to live is not an option for you, and you need to put a roof over your family’s head, then bankruptcy may be just what you need. On the other hand, if you are single or married without kids, and you can move into an apartment, maybe you’ll choose to get rid of the house and get back on your feet.
You should not consider bankruptcy unless you have first considered options like Credit Counseling and Debt Negotiation. These are covered extensively in my Credit Repair Boot Camp that you received as a bonus with this course – read it for more details on these programs. However, since you are in foreclosure, bankruptcy may be your only option to save your house. As soon as you file, the foreclosure process is halted. In other words, it’s the last resort – but it is an option.
Credit Considerations
Many people are concerned about how bankruptcy will affect your credit report. Based on the previous paragraph, you might be thinking that you will not be able to get a loan or credit card for many years. Forget the hype – let’s look at the facts. At the point where your case is discharged, you will have very little debt other than a mortgage payment. Creditors know this, and they also know that while you have a poor history, that you are probably eager to improve your credit. Plus, in this day and age of credit card companies chomping at the bit to loan money, you’ll be shocked at how many credit offers you get. Here is a New York Times Article that documents that very phenomenon.
The choice is a personal one – should I declare bankruptcy or not? Ultimately, YOU (and your significant other, if any) have to make the choice.
Get Some Good Advice
If you’re considering bankruptcy, you should make an appointment for a free initial consultation with your local branch of the Consumer Credit Counseling Service. Take all your bills with you and present your entire financial situation to them, and ask if bankruptcy is a good option for you. Be sure to bring all the documents regarding your foreclosure. It could be that while credit counseling would have been a good option for you a few months ago, now that foreclosure is looming you will need to file bankruptcy to keep the house.
If you do decide to file, you must find a good local attorney that specializes in bankruptcy. When you call, tell them you are considering filing bankruptcy and would like to get a consultation (hopefully a free one). A local attorney can fill you in on the laws in your state and give you information on the costs and paperwork involved. If you don’t feel comfortable with the first attorney you see, call another one – you need to feel comfortable with the person you are working with.
I strongly recommend that you do NOT try to file the papers for bankruptcy yourself. Like any other legal matter, it is complex and should be handled by a reputable, local attorney. You will be required to go to at least one court proceeding, and you’ll be very glad to have your attorney there doing the talking for you.
This is another area to beware of potential scam artists! I would be wary of using anyone who has aggressively solicited you via mail or phone – firms that can do that have big marketing budgets AND client lists – you might get lost in the shuffle. If their goal from the outset is to get you to file bankruptcy, how can you be sure they’ll advise you honestly if there is a better option? Instead, pull out the yellow pages and try to find a smaller practice in your local area. I have heard horror stories from people who used big city practices that may have hundreds of cases going at once. In a situation like this you really want to be able to get somebody on the phone that is familiar with your case.
Don’t Wait!
One final word on Bankruptcy – don’t wait until the last minute. In many states, the new laws require you to complete a credit counseling course 7-8 days BEFORE filing your case with the court. Whereas before you could file your case the morning of the Sheriff’s sale and save your house, now you MUST begin the process more than a week before the sale. Please – check with your attorney on this to avoid an untimely surprise.
Borrow from a Retirement Plan
If you have an IRA or 401(k), you may be considering taking a withdrawal from it to prevent your foreclosure. If you do so, you will lose a big chunk of the withdrawal to taxes and penalties. Not only will you be penalized 10% of the money you withdraw, but you will also have to report the full amount of the withdrawal as taxable income for the year, and pay income taxes on that amount.
A much better option is to take a loan from your retirement plan, rather than a disbursement. As long as you have a job, you can generally get a loan from your employer’s 401(k) plan. If you leave or lose your job, you can no longer keep the loan or borrow from the plan. Therefore, you may be thinking that you are unable to take advantage of a loan if you are unemployed.
However, under new tax laws that went in to effect in 2002, if you are self-employed, you can start your own 401k plan. Any business that has no employees qualifies. The paperwork to set up a Self-Employed 401(k) is easy, and you can transfer any balances from your other IRAs, 401(k)s, or SEPs into your Self-Employed 401(k). Most of these plans allow you to borrow up to 50% of your account balance up to $50,000, at a reasonable interest rate (near prime). You can set up this plan whether your business is part-time or full-time, and most plans cost less than $200/yr to maintain.
If you’re thinking, “But I’m not self-employed!” … relax. It’s easy to start a home-based business, and in fact, there are significant tax advantages to doing so. Remember you don’t have to actually make money to have a “home-based business” – at least not every year. You can start a business selling on eBay, doing affiliate marketing on the Internet, washing dogs, whatever! Do you have a hobby that you really enjoy? Whether it is collecting stamps or carpentry, painting or paintball, find a way to make it into a business! Talk to an accountant to get the details. (Remember, you can pay them out of the money you borrow, too.)
A word of warning – if you fail to make the loan payments, you’ll trigger the same penalties and consequences as if you had just taken the disbursement. My advice is borrow enough to give yourself a little cushion so you can make sure to make those payments – remember 100% of them (including the interest!) go back to your plan.
Obtain a Private Loan
Generally speaking, most people need an amount equal to 3-4 payments plus attorney’s fees to stop their foreclosure. If you are unable to obtain this amount through traditional lenders, try looking elsewhere for the loan. This is called obtaining a “private loan” or “private money”. The approval process is much easier, but the terms may not be.
Friends & Family
Many people have friends or relatives who are willing and able to act as the lender in this case. If your friend or relative feels more comfortable, you can give them a second mortgage or deed of trust to secure the debt. Every state and situation is different, but generally the second mortgage or deed of trust gives the lender (your friend or relative in this case) a lien against your property. The property cannot be subsequently sold unless the debt is paid off.
Work out whatever terms you can that are mutually agreeable, but I would suggest paying off this debt as soon as possible. For example, do you have a tax refund coming soon? Or can you take a second job to earn some extra money to pay it off? Your friend or relative is going out on a limb for you - pay them off as quickly as possible. Many a relationship has been spoiled over money, so take each step with thought and care, as you are most assuredly walking on thin ice here.
Once you have come to an agreement with your lender, you need to find someone to help you with the paperwork. You can get an attorney or title company to draw up the necessary legal documents for everyone to sign. Another excellent choice is to use a service such as Circle Lending, which specializes in setting up financial arrangements between family and friends. They will be much cheaper than have an attorney do the work for you.
Local Private Investors
If friends or family are not an option for you, you may be able to find a private individual to loan you money. Be aware that you will probably need to have sufficient equity and a good loan-to-value ratio for a private investor to loan you the money. Look in the “Money to Loan” section of newspapers in your area, or place an ad saying: “Wanted: private investor to fund short-term second mortgage. Excellent terms. (your phone number).” Figure out how much you can realistically afford for a monthly payment and plan on giving at least 12-15% interest, then use an online loan calculator (go to MyFico, click on Calculators, then How much will my (fixed) mortgage payments be?) to determine how many years of a loan you need. You will likely get many calls – just solicit offers and take the best one you get. They will ask you for a lien against the house to secure their debt. I strongly recommend you pay a lawyer for a couple hours of their time to represent you and review the paperwork on the transaction. If you sign papers that you don’t understand, you might find yourself back in foreclosure – this time with your new lender!
Other Sources
I have recently become aware of a new source for private money — the oddly named website Foreclosure Fish. They match borrowers and private lenders and also have many additional resources on their site. The site is new but the company behind it, Adama Properties LLC, is not.
You can also check the Resource Page for other sources of private money.
Work It Out With Your Lender
Many people allow their houses to be sold to a stranger on the courthouse steps without ever talking to their lender about the problem. Your lender does not want this foreclosure any more than you do (see below), but they will NOT automatically put you into a program to stop the foreclosure – you must call and ask! If you have not called your lender, now is the time.
The earlier you call, the better. If you have already called them without success, finish this chapter and call them again; sometimes you can get another person who will be more sympathetic or flexible. If you’re only one or two payments behind, and this is your first delinquency, they will almost certainly put you on a payment plan to get you caught up. I’ll say this again - do not procrastinate in calling your lender! If you wait until they have started the official foreclosure process and documents have been filed with attorneys, things get more expensive and more complicated. But no matter WHEN you are in the process, it never hurts to call, and try to work something out.
Also please notice, I said, “the earlier you call” – meaning that it is best to not leave the negotiating in someone else’s hands. Your lender wants to know that you are responsible and interested enough to personally call and be the one to negotiate. In the previous chapter we discussed “loss mitigation consultants” that will offer to “negotiate on your behalf” for a fee. These are nearly always a waste of money. Your mortgage company wants to hear from you, not a consultant, and they will be far more motivated to work with an interested homeowner than a for-hire consultant. After you finish this chapter you will have the all the knowledge you need to work out a deal with your lender.
The Big Secret Revealed
Before we go any further, you need to understand a few things about your mortgage company and the person you are calling.
1) First, and foremost…the “dirty little secret” we were talking about earlier. Here it is: Your lender does NOT want to foreclose on you, and they do NOT want to own your house. They are in the business of making loans, not owning and selling houses. And furthermore, they are in business to MAKE money, not LOSE money, and if they foreclose on your house, they are going to LOSE money - probably a LOT of money. The house will sell at a discount price, and they’ll have attorney fees, Realtor fees, court fees, not to mention they haven’t gotten a payment on their loan for several months. They will try ANYTHING to avoid doing all this, but you do have to ask nicely.
2) The person on the other end of the phone is not your enemy. They’re doing their job. It’s a crappy job and they probably hate it. You need to be respectful, humble, and gracious at ALL times. Call them “sir” or “ma’am”, and say “please” and “thank you”. Most of the people they deal with are rude, evasive, and lying. Distinguish yourself from “those” people and the person on the other end of the phone might go to bat for you. Relate to them as another person. Ask about the weather. Ask if they’ve finished their Christmas shopping or have plans for the upcoming holiday. Mention your kids (and ask about their kids). Don’t sound fake when you do this - be sincere, and if they don’t respond, then drop it and just go back to being extremely courteous. But the more you can get them to like you and relate to you, the better off you are.
Okay, take a deep breath….now let’s get prepared to call your lender!
VA (Veteran’s Administration) Loans
If you have a VA loan, you may be in luck! Their Loan Service Representatives can provide financial counseling and help to get you back on your feet. Additionally, the VA has many programs that are not available to non-VA mortgage holders. For example, in some cases they will “refund” a loan, where they basically give you some time to get back on your feet. I don’t have any personal experience with the VA but I have heard many success stories. Call 1-800-827-1000 and ask for the phone number of the Loan Service Representative in your area.
FHA (Federal Housing Association) Loans
If you have a FHA loan, you may be eligible for a one-time payment from the FHA Insurance Fund. The FHA helps homebuyers get a loan with easy terms, and then insures the loan to make it more attractive to mortgage lenders. If you are in default, you need to see if you qualify for help from this program! To qualify, you must be able to prove that you can begin making full payments, and your loan must be between 4-12 months behind. (NOTE: in most states, foreclosure proceedings begin when you miss your third payment, so you need to act quickly!) If approved for this program, the FHA will make you an interest free loan to allow you to get caught up on your mortgage. Like any other lender, they will place a lien against your property and the loan will have to be paid off whenever you sell your home. This is a very attractive program – if you have a FHA loan be sure to ask your lender about it immediately.
Prepare for the call
Get a pad and pen handy to take prepare for your call, and to take notes during the call. You must document every detail of every conversation you have with anyone at your lender. Write down the date and time each call begins and ends, who you talked too, and what was discussed. Once you determine who your loss mitigation contact is, try to communicate only with them if possible, to reduce the possibility of miscommunication.
Before you call, take a few minutes to prepare. On the first page, draw a line down the middle and write “Income” at the top of the left column and “Expenses” at the top of the right column. Now, write down all your income sources and the corresponding amounts in the left column. In the right column, do the same with your expenses in the right column. It may help to review your bank or credit card statements to help you remember what you spend money on. Don’t forget all your loan payments, car payments, gas, groceries, insurance, credit card payments – EVERYTHING. The reason you are doing this is because the mortgage company representative is likely going to ask you all of this information to determine whether you can afford a forbearance or repayment plan. Carefully analyze these numbers, and make sure that there is room in your budget. You really want to be prepared for these questions with accurate numbers. Make sure you are giving your lender numbers that will make them believe you can make your payments on whatever plan they are working out for you. If they don’t believe you can make the payments, they might not approve the plan. Don’t rush through this process.
You may be asked questions like “what is the reason you’ve fallen behind in your payments?” Think about your answers. Don’t write down a script to read to them, you want to sound natural when you are talking, but know what you’re going to say. Tell them the truth - I lost my job, my spouse is in the hospital, my dad passed away, WHATEVER. Tell them you want to make your payments but are just having a temporary problem. Explain that things will be getting better soon and tell them why. (My spouse is back at work, our tax refund is coming in, whatever.) Think through all of this before you get them on the phone so you’ll know what you are going to say.
Make the Call
Call the customer service number on your mortgage statement and ask to speak with loss mitigation. At some companies the first person who answers may be able to help you, but most lenders have a dedicated loss mitigation department to work with borrowers who are behind on their payments to help them avoid foreclosure. If you don’t ask for this department right away, you might end up going through your entire story twice – a waste of time for you and them!
When you get through to the loss mitigation representative, be sure ask for their complete contact information, including name, mailing address, direct phone number or extension (to hopefully keep you out of the queue if you have to call back), fax number, and email address. You might not get all of this but you should ask for it. Not only does it show you are engaged and interested in solving your problem, but you should follow up with a fax or written letter summarizing every call.
Be sure to use their name when you are talking with them – you want to show respect and get them to relate to you on a personal level. In this example, we’re going to pretend his name is John. After you have verified all your personal information, say these magic words: “John, I’m in a temporary, bad situation and I NEED YOUR HELP. I’m behind on my payments, and I want to get caught up.” Now, in a few sentences explain your situation (lost job, medical bills, etc.) and then end with “…What can you do to help me?” Make sure you explain why the situation is temporary and things are better or are going to get better soon. If your situation is permanent, your lender may not be as eager to help you – be persuasive, sell your case and make them want to help you. Now shut up and listen! See what their offer is, if they make one. If they don’t, be prepared to ask.
The first option they are likely to suggest is a forbearance agreement. Your mortgage company is likely to consider agreeing to a forbearance agreement if they have reason to believe that your situation is temporary, and that you will have the money to make up your missed payments at a specific time in the near future. Be prepared to tell them the source of your funds – a bonus, loan, tax refund, etc.
You may be allowed to make no payment or a partial payment with the understanding that you will pay the balance of the past due amount by a specific date. If they don’t offer, ask:
• ”John, my cousin told me that he was behind on his payments, and his mortgage company let him pay interest only for a few months and tack those payments onto the end of the loan. Is that possible?”
Another common option is a repayment plan, where the mortgage company allows you to make a partial payment on your past due amount along with your normal monthly payment for several months until you are current. To oversimplify it, let’s just say your mortgage payment is $1000 and you’re two payments behind ($2000). They might let you repay the $2000 over the course of six or more months by adding 1/6 of the amount, or $333.33 to your normal $1000 payment. For the next six months, you would pay $1333.33. After that, your payment would go back down to your normal payment of $1000.00. Ask:
• ”John, my friend at work said his mortgage company let him just pay a little more every month for a few months until he had caught up, can we do that?”
Yet another possibility is a loan modification. In this scenario you and your mortgage company agree in writing to permanently modify the original terms of your note to make the payments more affordable. Some common loan modifications are adding the missed payments to the existing balance, adding months or years to the length of the note, and transforming an adjustable-rate mortgage into a fixed-rate mortgage.
This is important: Be realistic about what you can afford, and don’t agree to a plan that you are not going to be able to keep. If you work out a plan that is not within your real budget you’re going to be back in foreclosure before long. If for some reason you can’t follow through on your agreement, stay in communication with them, but don’t expect them to be as sympathetic the second time. If a pattern develops where you agree to payments and then don’t make them, your lender will quickly abandon any work-out agreements and proceed to foreclosure. Say what you’ll do, then do what you say.
If you come to an agreement with the loss mitigation representative they may fax or mail a copy of the agreement for your signature. Be certain the written agreement is the same as what you discussed on the phone, then sign it immediately and submit it back. If you are faxing, make sure to get a fax confirmation sheet. If you are mailing it, send it certified mail, return receipt requested. After a few days, call your representative back and make sure they acknowledge receipt of your signed agreement. If they don’t send something in writing, then you should send them a confirmation letter. Fax or mail (certified mail, return receipt requested) it to the address your loss mitigation representative gives you so you have record of the agreement. This doesn’t have to be anything fancy, just “Dear John, This letter confirms the conversation we had on xx/yy/zz regarding my loan 1234567. We agreed I will make payments as follows….”
Postponing the Sale
In some states, the foreclosure process happens so fast it is hard to come up with and finalize a solution before the Sheriff’s Sale. In some cases, your lender may agree to delay the Sheriff’s sale to give you time to come up with your payments or sell the house, but realize that this costs them additional legal fees and you will have to provide written proof in most cases.
In judicial foreclosure states, you may succeed in getting the court to order a delay of your sale, even if your lender will not agree. You will have to write a letter of adjournment to the court where you spell out exactly why you are requesting the delay, and be prepared to provide documentation. State laws vary, and the format can even vary from court to court, depending on how that particular judge prefers it. You should contact your court or a local attorney to determine the exact format.
For example, if you have money coming from a retirement plan or tax refund, you might have to give them copies of the documents showing that you have this money coming, and when. Or if you are selling your home and have a contract in place, but the buyer needs more time to close the sale, the lender will probably be willing to work with you. Remember, they don’t want your house – they want their money!
If you just can’t do it…
If you just don’t feel comfortable calling and negotiating with your lender, or if you have tried and were unsuccessful, don’t give up hope. The U.S. Department of Housing and Urban Development (HUD) has a network of counselors who may be able to help, and even negotiate for you. You can call them at (800) 569-4287 or check on the web at http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm for an agency near you.
If you prefer to enlist the help of a private organization, there are many available that will help for a fee, but again I stress, you must be very careful not to fall prey to a scam artist here. Ask for references and call those references yourself; make sure this organization is legitimate and has helped other people. Call the Better Business Bureau in their area and see if they have a record – good or bad. You may check the resources page at http://www.stop-foreclosure-manual.com/resources.html for links to organizations that are known to be legitimate.
Fire Your Lender! (Refinance!)
If you are unable to get the lender to work with you on any sort of payment arrangement or forbearance agreement, you should immediately see if you can refinance the property. A refinance loan is a new loan that pays off your old loan completely. The old lender goes away and you start with a clean slate with your new lender. Since your relationship with the old lender has soured, this may be a very attractive option!
Once again, keep your eye on the calendar. There may not be time to refinance if you are already approaching the sheriff’s sale. For example in my state of Texas, from the time the foreclosure is posted to the sale date is only three weeks. It may be difficult to close a loan in three weeks – but worth a try. In fact, if your loan is approved you may be able to get your current lender to delay the sale to give you time to close, but you will likely have to provide sufficient documentation that you are working with another lender.
In any case, it is important that you continue to work on other solutions simultaneously. If the refinance doesn’t go through, you want to have a back-up plan in place. Don’t put all your eggs in one basket. More than one homeowner has seen a refinance fall through at the last minute and had their house auctioned at the sheriff’s sale before they could come up with another solution.
If you can refinance your home, your problems with your lender go away because THEY get paid off and go away. You’ll then have a new loan with a new lender. You’ll probably get to skip a month’s payment as a bonus. (I understand many folks in the mortgage business refinance their house every November so long as interest rates aren’t rising, then they use their December house payment money to pay for Christmas presents and a vacation. Not bad!) Heck, depending on the interest rate on your original loan, this may be a great deal for you anyway - your payment could even go down.
Loan-to-Value
A key factor in your ability to get a loan, especially if your credit is damaged, is the Loan-To-Value (LTV) ratio. If you have a low enough LTV, not only will you be able to get a loan easier, but you may be able to “cash out some equity.” Equity is the difference between the value of the house and the amount you owe on it. Here are two examples of how equity in your house could increase.
1) You bought your house for $100,000. It is worth $100,000 today, but in the course of making payments over the past several years, you have paid off $10,000 of the principal, so you only owe $90,000 and have $10,000 equity in your house. $90,000 / $100,000 = .9, so you have a 90% LTV.
2) You bought your house for $100,000. The value of your home has increased to $120,000 today, and in the course of making payments over the past several years, you have paid off $10,000 of the principal, so you only owe $90,000 and have $30,000 equity in your house. $90,000 / $120,000 = .75, so you have a 75% LTV.
Thus, if real estate values in your area are increasing, you may have built up some equity in your home without even knowing it. Ask your new lender “How much equity can I cash out?” They might say none, but if they let you, why not get a little extra cash so you can have money to make the first few house payments or other expenses for a few months? Be responsible here - don’t cash out $20k in equity and take the family to Europe for the summer. But if you have the ability to cash out some equity, do so. Once you’re back on your feet, if you want to take the extra money out and pay it towards principal on the loan, you can do so.
Debt-to-Income
Another important ratio that your lender will be interested in is your Debt-To-Income (DTI) ratio. This is the ratio of how much you have to pay for your expenses and bills to how much income you bring in each month. The historical figure that mortgage lenders have required for a loan to be approved is a 36% DTI. If you have much higher than that, you may have to look to private lenders for a loan.
I have two further suggestions regarding refinancing your home:
1. Get SOMEONE who understands mortgage loans (your banker, cousin, friend, dad, etc) to review the terms of your new loan before you sign on the dotted line. You need to UNDERSTAND what you are signing and the ramifications to your payment, interest rate, payoff amount, loan term, etc. Your NEW lender is not the best person for this, because your contact is probably earning a commission on closing your loan, and they may not give you 100% unbiased information. Look before you leap!
2. If you cash out some equity, go to the bank and open a separate savings account. Deposit in the savings account, NOT your checking account! It will disappear out of your checking account in no time! Withdraw that money ONLY if you really need it for your house payment, food, etc. Don’t spend it all and find yourself back in this mess again!
Get the Facts Early
When working with a company to get a refinance loan, be sure to ask early on in the process for a realistic, good-faith estimate of their fees and what the interest rate will be. In the sub-prime market (if that is where you are at, and you probably are if your credit is damaged) it is normal to see high interest rates, but what you don’t want are surprises at the closing table. Some lenders charge exorbitant loan initiation fees or closing costs to try to mask the true cost of the loan. Be sure to let them know you want to know how much all of that is going to cost up front, and that you do not want any surprises at the closing table. You should also get the name, phone number, and email address of your closing agent from the lender. The closing agent will work for a local attorney or title company. Contact the closing agent and ask them to fax or email you a copy of the preliminary closing statement just as soon as it is ready. Ask them to send a new copy any time there are changes throughout the process. The closing statement is called the “HUD” in the business, because everyone uses the HUD-1 Settlement Statement provided by the U.S. Department of Housing and Urban Development. That form breaks out exactly where every penny goes in a real estate closing.
Lenders
For a list of lenders, please see the resources page at: http://www.stop-foreclosure-manual.com/resources.html.
If you have decent credit but have just fallen on hard times recently, go to an online service like eLoan and make them compete for your business. If your credit is not-so-hot (what lenders call “sub-prime”), try Countrywide Home Loans. You can fill out the application on their site from the privacy of your home and not have to talk to any human until later. Remember, too many credit apps in a short period of time will hurt your credit, so just pick one or two and see what they can do for you.
Another option is to try a company called Abacus Credit & Loan. Abacus maintains a database of sub-prime lenders, including many who will loan you just the amount for your back 3-4 payments. According to their web site, they have been in business since 1998, they specialize in helping people with terrible credit – in fact they guarantee they’ll get you a loan.