Dear Debt Adviser,
Currently we owe $211,000 on our home and it is worth about $167,000 to $175,000. We have an interest-only loan and want to get out from under that before a higher interest rate and inflation hit. We have a credit score in the high 600s. Any thoughts?
You are certainly not alone in owing more on your mortgage loan than your home is worth. Unfortunately, many others are in the same situation or worse. In addition, you are not alone with an unconventional loan product on your home. Interest-only mortgages, balloon mortgages, option-ARM mortgages, you name it, many folks have them. The good news for you and others in similar situations is that help is available and accessible for a large number of the people who want and need to refinance or modify their mortgage loans.
President Barack Obama's Making Home Affordable program provides homeowners with assistance in two different ways. One is for homeowners whose homes have lost value and/or need to refinance. The second is for homeowners who are facing financial hardship and need a loan modification. FICO, the credit-scoring people, have established a simple Web site at Mortgagereliefonline.com to help you determine if you are eligible for the program. Once on the site, you fill out a really short and simple form and submit it for instantaneous feedback. If you are eligible, you are given instructions and asked for your contact information.
Should you not be eligible for assistance through the Making Home Affordable program, don't lose hope. With a credit score in the high 600s (680 or more), you may qualify for a more traditional 15- or 30-year, fixed-rate mortgage or a rewrite with your present lender or a new loan with a new lender. I recommend that you check your credit reports before you contact anyone or go shopping elsewhere for a loan to assure that there are no surprises on your reports.
Studies have found that about 25 percent of credit reports contain some errors or out-of-date information. You can get a copy of each of your reports for free every 12 months at AnnualCreditReport.com. You will want to have seen what any potential lender will see when they review your credit report after you apply for a loan.
Review reports from all three major bureaus -- Equifax, Experian and TransUnion -- because you will not usually know which bureau a lender uses when checking a potential borrower's credit. Immediately dispute any inaccurate or out-of-date information and pay any unpaid charge offs or past-due payments so that your credit reports contain the most positive and correct information. Do this several months before you apply for refinancing to allow time for the bureaus to research and correct and/or update your reports.
If you decide to shop for a loan, do so within 30 days and there will not be an impact on your credit score from too many inquiries. The current FICO score ignores the last 30 days of mortgage loan inquiries prior to scoring, and it groups other inquiries into 45-day batches that only count as one inquiry.
Before you sign on the dotted line for your new mortgage, be sure you understand all the terms of the new loan and all fees associated with the loan, including loan payoff provisions, closing costs and points. I strongly advise you to use an attorney to review the documents before you sign. There may be an additional expense for using an attorney of your own, but in large financial transactions, the cost of not using one can be incredibly huge. Remember, the lender is using an attorney, and so should you. A personal tip: When they issue the title insurance on the loan, I always pay a little extra to have the insurance people issue a title policy naming me as an insured. The lender is typically covered up to the amount of the mortgage. You want to be covered for the value of the entire property in case of a title problem that is not picked up in a search.
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