BusinessWeek has a great article regarding collection and charge off accounts post-bankruptcy (thanks to Barry Ritholtz at The Big Picture for bringing it to my attention).
In a financial version of Night of the Living Dead, debts forgiven by bankruptcy courts are springing back to life to haunt consumers. Fueling these miniature horror stories is an unlikely market in which seemingly extinguished debts are avidly bought and sold.
The case of Van Rathavongsa illustrates how canceled debts regain vitality. The Raleigh (N.C.) factory worker pulled himself out from beneath a mountain of bills by means of a bankruptcy proceeding that wrapped up in 2002. One of the debts the judge canceled, or “discharged,” was $9,523 Rathavongsa owed to Capital One Financial (COF), the big credit-card company. But Capital One continued to report the factory worker’s discharged debt to credit bureaus as a live balance, according to documents filed in U.S. Bankruptcy Court in Raleigh…To obtain the home loan, Rathavongsa eventually did what many consumers in this situation do. He gave in and paid Capital One $9,523 he no longer legally owed.
The full article can be found here:
Prisoners of Debt
It’s actually quite scary to think about some of the tactics that these institutions are utilizing. If you are in a similar situation and have some questions please feel free to contact me. I am not an attorney but have had a fair amount of experience working with clients to improve their credit. If it’s beyond my area of expertise I will happily refer you to a qualified attorney.
Before you commit to a lender, ask these top 10 questions. If you don’t like the answers you receive, continue shopping for a loan until you find a mortgage broker / lender with whom you feel comfortable.
1. Which Type of Loan is Best?
Reputable lenders will find out more about you before throwing out loan options. You wouldn’t expect a doctor to suggest surgery before she assessed your medical situation, would you? Choose a lender who gathers enough information from you before she suggests a certain type of loan. Don’t be afraid to ask a lender to explain the pros and cons about:
- Fixed Rate Loans
- Adjustable Rate Loans
- Interest Only Loans
- Negative-amoritization loans
2. What is the Interest Rate & Annual Percentage Rate
The annual percentage rate (APR) is derived by a complex calculation that includes the interest rate and all the other related lender fees divided by the loan’s term. However, bear in mind that:
- Many lenders do not compute APR correctly.
- There is no way to accurately compute an APR rate for an adjustable loan.
- It does not account for early payoffs.
If your interest rate is adjustable, ask about its:
- Adjustment frequency
- Maximum annual adjustment
- Highest Rate (Cap)
- Index
- Margin
3. What are the Discount Points and Origination Fees?
Each “point” is equal to 1 percent of the loan amount. Therefore, 2 points on a $100,000 loan cost $2,000.
- Sometimes lenders charge origination fees in addition to points.
- Points “buy down” the interest rate, meaning the more points you pay, the lower the interest rate.
- Points are also tax deductible, even if the seller pays some or all of the points.
4. What Are All the Costs?
All the costs of a loan include not only fees that go into the lender’s pocket but also related third-party vendor fees such as:
- Appraisal
- Credit report
- Lender’s title policy
- Pest inspection report
- Escrow (where applicable)
- Recording Fees
- Taxes
An estimate of these fees constitutes the Good Faith Estimate or GFE, which the lender is required by federal law to give to you.
5. Will the Lender Guarantee the GFE?
According to the Real Estate Settlement and Procedures Act (RESPA), lenders have three days after you’ve applied for a loan to give you the Good Faith Estimate, containing all the costs of your loan. Points to consider:
- Since lenders are not required to guarantee GFEs, this document is worth about the cost of the paper on which it is printed.
- However, there is a lot of pressure on lenders by consumers to guarantee their GFEs.
- If your lender refuses to stand behind its estimate, go elsewhere.
6. Do You Offer Loan Rate Locks?
Interest rates fluctuate and change daily. If you have reason to believe that interest rates are moving up, you might want to lock your loan. Lenders typically charge zero to one point to lock a loan rate and points. Ask your lender:
- Do you charge a fee to lock my interest rate?
- Does the lock-in protect all the loan costs?
- For how long will you lock this rate?
- Will you give me the loan lock in writing?
The alternative is to pay the prevailing rate and points on the day your loan funds.
7. Is There a Prepayment Penalty?
In some states, prepayment penalties are no longer allowed, so ask. Typically, prepayment penalties let the lender collect an additional six months of “unearned interest” if you pay the loan off early through a refinance of sale of the property. Be sure to ask:
- How much is the prepayment penalty?
- What are the terms of the prepay? Some are in effect only during the first 2 to 5 years of the loan.
- Would the prepayment penalty apply if I refinanced through you at a later date?
8. Are You Equipped to Approve Loans In-House?
Underwriters review loans and issue conditions before approving or rejecting a loan.
- Ask if a lender can handle its own underwriting.
- VA and FHA Loans typically take longer to process, but some lenders meet government requirements to automatically approve or disapprove a loan without sending it to the VA or FHA.
9. How Much Time Do You Need to Fund?
Average loan processing time periods fall between 21 and 45 days. To properly write a purchase contract, you will need to include a closing date, and that date should be coordinated with your lender. Find out:
- What is your anticipated turnaround time?
- What obstacles could possibly hold up closing?
- How long after final application approval will the loan Fund?
So many people get turned down for a home loan and they shouldn’t be. If you have been turned down for a purchase or refinance get a second opinion. Don’t take no for an answer. Make sure the person your talking to knows what they are doing. So many people have so little experience actually closing a loan and for that are not aware of all the different programs that are available. Most Loan Officers are paid by the hour and don’t care if they close a loan or not. They punch the clock work on the easy ones and go home, if there is anything outside the box then forget it they call and say sorry they can’t help you after taking your application fee. I won’t say any names but I sat across from a local banker and she said she will take the application fee knowing she can’t help the client. How crappy is that. It should be, if I take your money and can’t help you, I will refund every penny to you. This how I work all of the time, you shouldn’t except anything less. I don’t take an application fee for starters and if I can’t help you why should I charge you? Don’t get discouraged don’t stop looking and find someone who gets paid if a loan closes. I will talk about typical closing fees in later posts.
Tapping equity isn’t the only reason to refinance; sometimes it can make financial sense to refinance a home mortgage just to get a lower rate.Whether it’s smart to refinance solely for a rate benefit depends on how long a home owner plans to stay in the home. Almost every new mortgage costs money, and it’s those fees that smart borrowers want to recoup during the term of home ownership. Otherwise, if you’re not getting any of that money back — through a lower payment and a lower interest rate — you may as well run out into the street during rush hour and throw stacks of money into the air.
But how do you compare rates to know if you’re getting a good deal on a refinance? The best way is to compare Good Faith Estimates and work with a reputable lender who will guarantee its fees to refinance. Not all lenders will stand behind Good Faith Estimates and there are no laws at present that require it, which means the estimate borrowers receive might not mean diddlysquat . . Let me look at what your doing even if I’m not doing your loan to make sure what your doing is in your best interest.