Even so, you can still refinance, bad credit or not. There are options available to you, so you can take advantage of better interest rates. This can be especially important if you purchased your home using an adjustable rate mortgage, and the 3 or 5 year initial period is about to expire. When it does, your mortgage will adjust upward. This can cost you an extra $200 – $600 per month in higher mortgage payments. Many people don’t have the financial wherewithal to absorb such an increase in their mortgage payment. Even if you do, there’s little reason to do so when you can refinance and avoid the payment increase.

One of the first things you should do before you attempt to get your refinance underway is to order a copy of your credit report. You can do that for free once per year from any of the three major credit reporting bureaus. It’s really important that you do this because it will give you an opportunity to correct any mistakes contained in the report. A 2004 study indicated that about 25% of credit reports contained factual errors that reduced the borrower’s credit scores. Don’t let that happen to you, if pushes you into the sub-prime category, it can cost you thousands of dollars. In addition, you may find some accounts that are listed as outstanding but only because you owe a few dollars on them. Those are easily corrected so they’ll read “Paid In Full” on your credit report. That will go a long way towards raising your FICO score, and getting you a better interest rate on your refinance.

After you’ve done all your homework and corrected any inaccuracies on your credit report, you can begin the process of getting your refinance loan. Contact the different companies so your can do a thorough comparison. There is a large variation among different lenders. Get a written estimate of their rate and fee structure. You’ll notice some will quote mortgages with more fees, while others will have lower interest rates. Rarely will you find both. These companies have to pay for the money too, and it’s not free. Be very careful when you scrutinize the different offers.

There are some things you need to look for. One of these is prepayment penalties. This a penalty the lender imposes if you pay the loan off early. They do this because they don’t get all the interest if you pay the loan off early. They were counting on a 15 or 30 year income stream from you in the form of interest. Typically it’s best not to get a mortgage with a prepayment penalty, even if it includes a lower interest rate, which they typically do. If the penalty is large, you’ll be severely hampered if you want to pay off the loan early, such as if you’d like to refinance again, or if you sell your home. Interest only mortgages are regularly sadled with this type of clause.

One of the things that is difficult about any refinance, but bad credit refinancing in particular, is comparing the offers. There are many business out there now that allow different lenders to compete for your refinance business. The great thing is, the lenders know their in a competitive bidding situation, so they go out of their way to give you the best refinance deal possible. Remember you do have options, no matter how bad your credit may be. Just do your homework first. The money you save on your refinancing will be your own.

For even more information about refinancing, even with bad credit, go to the bad credit mortgage refinancing guide.

A successful marriage has always required astute planning, particularly financial. From years as a marriage counselor, it is my experience that the major hurdles are sex and money but not necessarily in that order. . And interestingly enough I required that any participant in the Marriage Symposium I sponsored be married a minimum of five years. This is an arbitrary figure determined by myself I have found that those married over five years have different problems than those married less. After five years the romanticism has flowered and the reality of spending your life with someone sightly different from the one I married has begun to come crashing down.

But these new FICO rules are raising havoc with married couples as well as with partners and live-ins.. For years it has been common practice to include one’s spouse as an authorized signatory on the other spouse’s credit cards.

At first blush, it seemed so romantic – signifying the oneness of our union. Then it became a practical matter. Put the spouse on the gasoline credit card so each could purchase fuel for his/her car at one’s leisure. Then it was extended to department credit cards so clothing and other household purchases can be made by the one who usually shops for those items. After all doesn’t that spouse has more time for that sort of thing. Besides it is so much more convenient to write just one check every month

Now with many department stores doing away with their own individual credit card (Target being the latest), why not put the spouse on the VISA or MASTERCARD, since they are more universally accepted whenever and where ever one shops. In that way the number of cards being carried can be reduced hereby reducing the risk of being lost or stolen. Good sound thinking and practice. After all – we are one union

At this point enter FICO and the rules change.

With the advent of the Credit Society, it became necessary to have a central source to determine the creditworthiness of an individual applying for credit. What is that applicant’s credit history? The 3 big credit reporting agencies entered the scene and fulfilled stop gap measure. But who has the time to examine a lengthy though accurate report when the needs of the customer who is in front of me must be served before he decides to take his business elsewhere. Now if there were some simple mathematical figure that could represent the financial history of a potential customer and consequently the financial risk to a lender, instant decisions could be made which were reliable. The Fair Isaac Co grasped the opportunity and FICO enters the scene.

But as always, someone is bound and determined to beat the system. Part of the American Dream is owning your own home. But how sell a home to someone who has a low credit score. To deprive that someone of the American Dream is un-American.

I’ll build houses but only if you can buy So there arose a new market – those with excellent credit (for a fee, of course) could rent their account to one with a low credit score – make them an authorized signatory. The one with the low score realized the American Dream. The person renting his account received a fee, the housing market boomed, the economy flourished, unemployment was reduced. Everyone was happy. It appeared to be a WIN – WIN situation. Then the bubble burst and foreclosures became common.

FICO changed its rules again and tightened up on renting out one’s account (known in the trade as piggybacking…) Well intended but the innocent also suffer. Remember that spouse who thought it was romantic to put their spouse on their account. Suddenly the spouse put on another’s credit card has no individual credit despite a history of timely payments, etc. And in a time of financial crisis, credit is only granted on one’s individual credit history. No credit history – no credit. What’s a spouse to do????

In my opinion, each spouse should retain sole control of any credit card and adopt the new Marriage Commandment – YOU CAN SHARE MY BED BUT NOT MY CREDIT CARD!!!

Don Sheehy Myakka City, FL http://www.more4trust.com

Don’t do it.

It weakens your position with lenders. Once a lender sees a co-signer on one of your loans—the lender will question your stability and move into “cover their butt” mode. And the way lenders cover their butts, is by forcing you to get a co-signer on your next loan…and the loan after that…and the loan after that.

Bottom line: When you have an existing co-signed loan—the chance of a lender requiring a co-signer on your next loan increases significantly.

There are right ways to recover from bankruptcy (or just rebuild bad credit) properly and quickly. But having a co-signer only delays your recovery and sets you up for complications along the way.

If you are unable to qualify for the credit you need…take it as a sign that it is not meant to be…until you can qualify on your own.

What if you are asked to become a co-signer?

I have a core belief…and it goes something like this, “Lend people money only if you can afford not to get it back and you won’t hold a grudge if you don’t—but never ever lend people your credit.”

If you’re thinking about co-signing for someone…

Don’t do it.

There is too much at stake.

If the borrower defaults on the loan, two things will happen to your credit reports and FICO credit scores:

1. If the loan goes into default, the lender looks to you to make the payment(s)…so have your checkbook ready.

2. Each time the loan becomes 30 days past due, a late payment will appear on your credit report(s) for up to 7 years…and as a result your credit scores will be lower than they could be.

Additionally, when you co-sign…

1. The payment you co-signed for is calculated in your debt-to-income ratio. So going in debt for someone else could actually prevent you from getting the credit you need when you need it. And it could increase the cost of credit since your scores may be lower.

2. When each lender reviews your credit report(s) to consider the loan, they will post a credit inquiry that will lower your credit scores.

3. Your own credit card interest rates could skyrocket due to the added debt. In what is becoming more common practice, credit card issuers are reviewing your credit reports and looking for how much debt you have with other companies.

4. The added debt could lower your insurance credit scores to the point where it could impact your ability to get or keep homeowner’s and auto insurance or cause your premiums to increase.

As you can see, there is very little value in co-signing a loan. But there is a lot of downside risk.

And these days your credit score is about more than just your ability to obtain credit…it’s about your insurance rates and almost everything else in your financial life.

Co-signing for family members…

I can remember stories about my family members asking our Uncle David to co-sign. I should know, I was one of them.

What I noticed is that after one family member asked Uncle David to co-sign…all the other family members deemed it their birthright to do the same. Whether it was for a car, motorcycle, camera equipment, or business loans…Uncle David was (and still is) there to the rescue. (Does your family have an Uncle David?)

To a lot of my family, Uncle David turned into Uncle David Bank and Trust, Inc. The sad fact is many family members took advantage of his kindness. Some only paid him back after they passed away. Many times he was left high and dry, making the payments for the borrower.

It’s a tough balance to be kind to others, even family members, and remain financially responsible. But one thing I know, I never…never… never…loan someone my credit by co-signing. It’s just too risky.

What about co-signing for your children?

If you can easily afford your insurance rates to double, your credit card limits to be reduced, and your interest rates on your revolving credit to increase substantially, then go ahead and do it.

Not me.

I feel it’s better to do other things to help your children establish credit.

When my wife and I have children, our plan is to show our kids how to accomplish their credit goals without a co-signer. Will we help them? Sure we will. But not by co-signing. By the time they need to purchase their first car, their credit scores alone will qualify them.

We plan to teach them about the importance of managing their credit and credit scores so they are able to reach and maintain high credit scores; save for a down payment using money they earn (not borrow); and how to compare and select a lender to work with.

What about having a spouse co-sign on a loan?

Well, that isn’t co-signing. That’s co-borrowing…a different animal altogether. Co-borrowing is common practice among married people on a loan for a car or mortgage. And there is nothing wrong with co-borrowing. The goal, however, would be not to have everything held together. You need to build individual and joint credit so you can weather a storm (i.e., death, serious illness, etc.) on your own if need be.

I only recommend co-borrowing with a responsible spouse. And if you’re not married I would even go so far as to suggest reviewing your partner’s FICO credit scores! (Should we call this a FICO Pre-Nup?) Consider me paranoid. A person’s credit history tends to leave clues. If the clues unearth a trail of bad credit…don’t be naive.

Stephen Snyder is the founder of the After Bankruptcy Foundation a non-profit organization that provides free bankruptcy recovery information. Stephen is also an expert on credit score information and how cosigning can effect it.

Three years ago Aaron and Gwendolyn moved from sharing an apartment to marriage to having a set of twins to buying their first home. Aaron four years out of college was employed at a local engineering firm specializing in water treatment and sewer/water construction work for several cities and counties in a 60-mile radius. Aaron started at an entry-level engineering position and was working his way up project by project. He was working to passing exams and satisfying requirements to become a Professional Engineer and thus command more money. The pay increases due to a slowing workload were lagging what was projected. Gwendolyn is a Registered Nurse worked a flexible schedule of three twelve-hour shifts per week and since she worked from six in the evening to six in the morning they were able to avoid any outside childcare. This gave her plenty of time with the twins who were experiencing the terrible twos period of pleasantry.

When Aaron and Gwendolyn bought their home due to cash flow considerations they chose an Adjustable Rate Mortgage with a start rate of 1.5%. With a purchase price of $325,000.00 the couple was able to negotiate an 80/15 piggyback combo with a combined loan to value of 95% CLTV. The first mortgage of $325,000 x 80% = $260,000.00. The second mortgage of 15% amounted to $325,000 x 15% = $48,750.00. The payment on the first was based on 1.5% so the payment for the first year was $897.31/month. The payment was scheduled to go up 7.5% per year for the first five years UNLESS the negative amortization exceeded 115% of the original balance, which would trigger amortizing the whole mortgage balance at the fully indexed rate. It is now winding up the end of the third year going into the fourth. The first year minimum payment was $897.31/month. The second year increased 7.5% to $946.61/month. The third year increased to $1,036.96/month. At the beginning of the month a noted rate increase was received. In reviewing, the prior month’s payment was $1,036.96/month. In the meantime, because the second mortgage was going behind a negative amortization first mortgage the best second mortgage available was one that is tied to the prime rate. Currently the prime is at 8.25%. Due to the risk level an additional 1.50% margin is added to the prime rate giving a current rate of 8.25% plus 1.50% = 9.75% rate on the second mortgage. The payment is now $415/month on the second mortgage but will float with prime. All during this period the taxes have risen to $3,900/year for a monthly escrow of $325/month. The hazard insurance has been holding with slight increases to $2,900/year = $241.66/month. The prior month’s payment was $1,036.96/month plus $415/month on the second mortgage plus $325/month in taxes and $241.66/month in hazard insurance for a total housing payment of $2,018.62/month. This was stretching the budget but Aaron and Gwendolyn were just making it together with all the expenses of the twins and settling in to a new home.

Now with the most recent notice it brought home the downside of a negative adjustable rate mortgage showing its teeth from the ARM disclosure. There was a mountain of paperwork to sign at the closing outlining what was to transpire in the course of time with regard to this particular negotiated mortgage deal. The mortgage broker chose to present a 3.75% margin on top of the one-month LIBOR index, which is now at 5.32%. So the current fully indexed rate is at 5.32% plus 3.75% margin for a rate of 9.07%. With the broker structuring the deal at a 3.75% margin it gave a bigger Yield Spread Premium payment from the lender to the broker at closing. Margins could have been set closer to 2.00% or 2.25% to slow down the steep increases. If the lower margins had been selected, then the fully indexed rate would have been 2.0% + 5.32% = 7.32% or 7.57%. This is a big difference. The end result was to set the borrowers up to explode payment wise in three years in a rising market. With a 115% LTV loan to value limitation the mortgage could float up to approximately $260,000 x 115% = $299,000 before full amortization would take place by recasting the payment to pay out in the remainder term.

Note: ARM rider terms can very from case to case. Many differences are based on the index selected. Acronyms such as COSI, MOSI, MTA, 1-month LIBOR, 6-month LIBOR, 1-Year Treasury, 3-Year Treasury, 5-Year Treasury, etc. populate the market place. Some are more stable while others spike up and down over time. The consumer needs to carefully select something that will work for them. Look at the history of the index and understand it. If the ARM loan is not fully understood in detail, pass and get something else. The stakes are just too high.

This month’s notice put Aaron and Gwendolyn in shock. The mortgage amount on the first was now at $299,000 and the mortgage was being recast to fully amortize at the fully indexed rate of (5.32% index + 3.75% margin) 9.07% adjusting monthly per index movement. The new payment based on $299,000 principal and 9.07% rate with a remainder term of 323 payments leads to a payment of $2,477.59/month. This was a $2,477.59 – $1,036.96 = $1,440.63/month increase in payment. This was indeed a budget destroyer.

Normally, their mortgage payment was paid on the 1st of the month within a few days, but not this time. Aaron and Gwendolyn thought about selling or just walking away. With a new first mortgage payment of $2,477.59/month + $415/month on the second + $325/month in taxes + $241.66/month for hazard insurance for a new payment of $3,459.25/month. This was just an overwhelming number to them. It was great while it lasted paying the absolute minimum and staying in the $2,000/month range, but the chickens had come home to roost.

Gwendolyn called out to Aaron, “Honey! The bank is on the phone …since we were two days late on our payment…they want to make a deal.” Aaron thought it strange with just two days off from his normal payment date the bank would be calling and pounding on him for the money. The account executive flagged the file as one experiencing a major increase in the payment. She was proposing to role the first and the second mortgage into a new loan based on a fixed rate on a 40-year term with a rate of 6.25% fixed. The bank was willing to cut closing costs in half and add them to the mortgage and waive the six-month’s interest rate penalty on the first mortgage and roll the escrows over on the new loan. Looking at the numbers the first mortgage of $299,000 was added to the payoff on the second mortgage of some $47,772.88 for a total payoff of $346,772.88 plus accrued interest and closing costs of $4,000 for a new loan amount of $350,775.00. Fortunately for Aaron and Gwendolyn their property had appreciated from $325,000 to $375,000. Using an AVM (Automated Valuation Model) the bank was satisfied with the value found online and was waiving the appraisal. This was a 95% LTV loan and the bank was going to portfolio the loan and waived the PMI insurance by eating it. The new payment based on the $350,775.00 loan was $1,991.49/month for principal and interest. With taxes and insurance the fixed rate payment was now $1,991.49 + $325/month in taxes + $241.66/month in insurance for a new proposed housing expense of $2,558.15/month. This was ($3,459.25 -$2,558.15 =) a savings of $901.10/month with a fixed rate mortgage with only increases for taxes and insurance to deal with over time.

Aaron and Gwendolyn thought about the scenario for about five seconds and took the deal. It was either accepting this deal or move. Their credit would be destroyed in the process if they chose to do something else. If they tried to sell with selling costs there would be nothing left. This credit challenge would have been difficult to overcome. It was going to be rough for a few months but as soon as Aaron got his Professional Engineer (P.E.) designation he would be making a lot more money and his stature in the engineering community would skyrocket with his civil engineering background and other positive options would be available.

With what is happening in the market place, lenders are taking hits on short sales for as much as 10% to 20% of what is owed just to get it off the books. If the lender can work out a situation and the terms are made flexible and loans are rewritten all designed to keep the owner in the home and keep the property out of foreclosure. If a property goes into foreclosure there is a good chance a lender will take a major hit so all kinds of inducements and incentives are put into play to keep the loan in a performing status. Lenders are now doing “workouts” before the situation gets dire for the borrowers. A foreclosure on a borrower’s credit is a very adverse event to overcome. In some cases some lenders will not look at applications for a year or two after establishing a new housing history. There is a great benefit to borrowers to work it out.

In this case, Aaron and Gwendolyn were able to save their homestead and reduced their mortgage to a manageable level. They agreed among themselves, to make extra payments just as soon as Aaron got his P.E. ticket and put the amortization down in the twenty-year range just to justify the big run up in negative amortization. Many other couples are not being offered options as the loan has been sold into the secondary market and the service departments may not be able to offer generous options. In that case the homeowner needs to immediately seek help to change things up before it gets totally out of hand. It will end up in the tank with credit ripped to shreds if efforts are not made to engage the lender early in the cycle. Once “Notice Of Default” is filed it will be tough. The adverse credit event will likewise show up on the borrower’s credit and further complicate things by plummeting FICO scores.

To review: IF an ARM product is the answer, then the lowest possible margin needs to be negotiated coupled with a stable index. An option ARM has the power to allow a borrower to pay above the minimum payment and insure it does not go negative. Some lenders offer a bi-weekly plan, which accelerates the payments by making an extra payment per year and reducing the negative amortization. In any case, a consumer needs to shop and enter into an ARM mortgage with full knowledge of what the terms and conditions of the deal.

Otherwise, “Honey…The Bank Is On The Phone…Since We Were Two Days Late On Our Payment…They Want To Make A Deal…” OR “If we don’t have a payment by Friday, a Notice Of Default will be filed and Foreclosure proceedings will follow.” Homeowners need to be proactive if there is an impending problem with payments they may just get a sympathetic ear.

Dale Rogers www.brokencredit.com www.sellerhelpsbuyer.com All rights reserved. Article may be reprinted as long as the content remains intact, unchanged, and all links remain active.

Dale Rogers is a thirty-year mortgage veteran and frequent contributor to the Broken Credit Blog. The BCB is a free website created to assist the general public with information about credit repair and responsible mortgage lending.

http://www.BrokenCredit.com