The changing face of credit

Once the recession happened, however, things drastically changed in the world of credit. Lenders shut their doors quickly and even high-credit scoring borrowers suddenly had to deal with hefty fees, slashed limits and higher percentage rates. It made for a difficult time and many borrowers are still trying to recover. The good news is that lenders are willing to negotiate with customers in an effort to recoup as much as possible from them.

Negotiating with lenders

New studies are showing that some people are having problems with paying down debt and looking to negotiate but don’t know how. The true test is a three-point questionnaire.

• Is the borrower clear about his or her finances and aware of how much they can afford to pay?
• Does the borrower understand the timelines involved with the debt?
• Is the borrower willing to forgo a high credit score to take care of debt now?

For those who answered yes to the above three questions, a debt repayment plan may be closer than they think. First, the borrower who is ready to face debt needs to be in trouble. It may sound odd, but borrowers who still have the ability to pay but don’t aren’t given much leeway in terms of payments. The only true reason for falling back on payments is when a consumer simply doesn’t have the funds. Due to wanting to mitigate losses, lenders normally approach borrowers who are several payments behind and offer some dialogue to fix the issue. They have forbearance and hardship programs ready for borrowers who need help. Though missing a payment may be a sure-fire way to get a lender to notice and offer help, it will do little for the borrower’s credit. In fact, two missed payments can bring a credit score down by as much as 100 points. In addition, going through any forbearance plan or hardship program will also show up negatively on a credit report.

Before formal negotiations

Before a consumer starts to negotiate with lenders, he or she should look into alternatives that are less damaging to credit. Financial institutions offering unsecured loans are still competitive and some offer much better deals than others. Consumers in debt could try to find a lower-rate credit card, a three-year fixed-rate personal loan from a credit union or a three-year fixed-rate loan from a peer-to-peer lending website. It’s critical for borrowers who are in trouble to still think clearly. Experts caution that grabbing any option is never a good idea. Though there may seem to be fewer options, in today’s market there are still levels of service for bad-credit borrowers. Consumers are cautioned to look into a few options prior to choosing one.

When negotiating isn’t an option

There are still a group of people who will try as hard as they can but still be unable to negotiate with their lender. If that is the case, then they need to heed some additional suggestions. They should work on a viable budget as soon as possible. It’s always a good idea to get to where the problem actually started, and that’s true with credit chaos. Consumers should look at their incoming money and outgoing expenses and find out where their issues are. Another tip is to get realistic without the use of credit. Though credit helped in former years, it also gave people a false sense of security. Unsecured loans are not always there to help people and now the general public is finding that out. Now more than ever, having financial wisdom is crucial to personal money management.

If you're considering mortgage loan modification, do your research and see if it's right for you first. (Photo: photos.com)

Some consumers are looking for a mortgage loan modification now that the recession seems to be stabilizing. In the midst of the lending crash, many banks were closing their doors to even the highest-credit-scoring customers. Now that there seems to be some leveling off of the problems, consumers are trying again to procure modifications. Larry Flauter of Flauter Realty in Tampa, stated, “Now is a great time to get back into seeking modifications because prices are still low, so deals are still out there and there are safeguards built into the system.” Banks are once again moving toward underwriting, but this time with moderate interest rates and requirements. Thus, modifications are available to a wider variety of consumers. There are some things to watch out for during the process, however. Here are a few of which you should be aware.

Unlicensed Lenders

One major problem before the recession, and growing once again, is an explosion of unlicensed lenders. Almost everyone who has ever looked for a mortgage product has probably come in contact with a few. Because of the real estate bubble’s burst, many unscrupulous lenders lost their licenses. This was due to creating fraudulent paperwork or failing to disclose fees. Unfortunately, these lenders have returned with a vengeance to the real estate world. Many are now underwriting FHA-insured mortgages. For FHA-approval, they merely change their names and are able to register as a new lender. Dani Babb, founder of The Babb Group, stated, “The government doesn’t have time or manpower to track down these fraudulent lenders, so preventing borrowers from being lured into [these] mortgages will be difficult.”

Second Mortgages

Some consumers are looking for second mortgages to help them with homeownership. Although this may be helpful on the surface, they should be careful. This is a practice that occurs when homeowners need extra upfront cash. They use the extra money to pay off bills, to handle home repairs or buy necessary big-ticket items. Although there is an immediate payback, there are some long-term repercussions. These loans have substantially higher interest rates, sometimes as high as 25 percent. If consumers take a step back and look at the situation, it may be clearer. They are setting themselves up for one loan payment that is carrying the bulk of their loan. Then they’ll have another loan payment that is probably close to the first due to interest. The problem is that most consumers aren’t prepared financially or mentally to make two payments for the next few decades. If anything happens with their employment status or a disaster, they could be setting themselves up for financial ruin. It would be a better idea to put off their mortgage loan modification and save money with a second job or cut-backs. Second mortgages are almost always a bad financial idea.

Quick Claim Deed

If payments are completely unmanageable, some consumers are trying to avoid foreclosure by handing over ownership of properties with quick claim deeds. In this situation, a relative or friend agrees to make the mortgage payments until the owner can sell the home. Prospective sellers need to be careful with these types of transactions. There are some types of loans that will not sustain this type of purchase. The problem is that some government-backed loans don’t allow buyers to purchase homes that haven’t been owned by the same person for 90 days or less. A seller could find their perfect buyer, but in the end they may be unable to take the property due to restrictions on their loan agreement. The buyer not only is unable to make the purchase, but they also lose the loan.

Mortgages – A Pledge Until Death

Mortgages can be difficult to handle and mortgage loan modification plans can be equally as strenuous. Consumers need to be sure they understand the requirements for their loan, the changes they want and the changes they are being offered before they sign. Taking extra precautions will pay off in the long run.