Collections Account on Credit Report: Option #1

November 8th, 2010

If you have a collections account on credit report, the first thing you should do is read our article about addressing credit collections head on and attempting to negotiate for a letter of deletion.

The truth of the matter, though, is that sometimes you will be unable to negotiate for a letter of deletion. If this is the case, you have four options:

Collections Account on Credit Report: Option #1

You could immediately pay the collections account. The pros of this are pretty straightforward:

As long as you take all the necessary steps and learn how to fix credit, your credit score will be only minimally affected after just two years.
If the collections account appeared on your credit report in the past few months, your credit score is suffering regardless, so this option will not significantly lengthen the amount of time your score suffers from the slip-up.
You won’t be sued for failing to pay the debt.
Your agreement with the creditor will be satisfied in full, so those harassing phone calls will stop!

Now let’s take a look at the cons:

Your credit score will probably take a hit. Remember that paying a bill in collections often causes a person’s score to drop.
The item will remain on your credit report for seven years. You will have no leverage to negotiate for a letter of deletion.

If the collections account on credit report is relatively new, and you don’t plan on making a large purchase in the next two years, this might be your best option. Be sure to pay the debt instead of making payments. Remember that each time you make a payment on a collections account, your score will take a hit.

If you choose this option, try to negotiate a smaller payment. A lot of creditors will settle for cents on the dollar, especially if you have a bad credit score and they think you might enter bankruptcy. After all, they would rather receive something than nothing!

Here’s another tip you might want to consider: In some cases, you might be better served by asking the creditor not to report the payment to the credit bureaus. I know this seems counter-intuitive, so be sure to read Chapter 6 of 7 Steps to a 720 Credit Score before taking action. If the collections account on credit report is old and you have not made payments for the past two years, the payment might hurt your score. Asking the creditor not to report the payment could preserve your existing score.

How Does Foreclosure Work?

November 4th, 2010

Question: How does foreclosure work?

Answer: If you are behind on your mortgage payments, you might be facing a foreclosure in the near future and wondering: How does foreclosure work? In this unfortunate event, it’s important that you understand the foreclosure process and know what your options—both to avoid foreclosure and minimize its impact.

The Truth in Lending Agreement and other regulatory bodies guide the way a foreclosure unfolds. That said, foreclosure is impacted by the laws and regulations of each state, so procedures may vary from state to state.

So how does foreclosure work? The foreclosure process begins when you are behind on your payments, including both the principal or any interest that has accrued. A homeowner receives a grace period of 15 days from the due date (usually the first of the month) to make a payment. Any late payment past the 15-day grace period will incur a 5 percent late fee. A payment that is 30 days past due will also result in a delinquency notice that will appear in your credit report.

If a mortgage is marked as delinquent for 90 days or more, lenders have the option to file a Notice of Default, or a document that allows them to formally start the foreclosure process. Once this notice is filed with the state, you have a pre-determined (depending on the state) number of days, though typically 30, to pay the requested amount of money to keep the mortgage up to date.

Soon after, your lender can obtain a legal judgment that will leave you with no right to the property and an immediate to vacate as soon as possible. Some banks have “cash for keys” programs that give homeowners a payment as an incentive to leave the property in a good condition. After a foreclosure, many disgruntled homeowners will strip a house of appliances, sinks, and even copper wiring, property that now belongs to the bank. This behavior is considered vandalism or theft and may cause former homeowners legal trouble.

After the bank confiscates the house, the home will be placed on the market in what is known as a trustee sale. This is announced by a Notice of Sale, which is posted on the property. Buyers are able to bid on the home, provided they meet the amount owed to the bank. If none of the bids meet this criterion, the house will be considered an REO, or real estate owned property. An agency will then try to sell the foreclosed home until the full amount owed to the bank is obtained.

Now that you know the general answer to your question—How does foreclosure work?—be sure to learn how to repair credit after bankruptcy or foreclosure.

Tags: foreclosure

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What Is a Short Sale?

November 4th, 2010

Question: What is a short sale, and is it a good alternative to foreclosure?

Answer: Let’s not mince words. The foreclosure process is a brutally taxing process that will leave you stressed and your credit in tatters. (Read the post, “How Does Foreclosure Work?) Though it is sometimes the best option to resolve your financial situation, take a moment to make sure you have considered all of your options before foreclosure becomes a reality. Asking the question—What is a short sale, and is it a good alternative to foreclosure?—is a smart place to start. Indeed, short sale might be something to add to our “foreclosure fix” list.

What is a short sale?

Also known as a compromise sale, short sale is the process of selling your distressed property at a lower market value than the balance of your loan. In other words, you will sell the home for less than what you owe on the loan.

The most important consideration for a short sale is finding a qualified real estate agent with experience in today’s market. You should try to find someone who is acutely aware of market fluctuations and who is best able to serve you, whether you are in a buyer’s market or a seller’s market. Many real estate agents are better suited to one market condition or the other.

With the credit crunch affecting many people’s ability to purchase a home, you may find that your home is valued below your mortgage. In this case, you should find an agent who works with short sales. After you receive an offer, your agent can help you work with the bank to determine the terms of the short sale.

When people ask the question “What is a short sale?” they also want to know: “Will it hurt my credit?” Your credit will still be hurt by a short sale, but it will be in much better shape after a short sale compared with a foreclosure. For one, there won’t be a trail of the delinquency notices and late fees associated with a foreclosure.

In a short sale, lenders consent to permit you to accept an offer for an amount that is less than the total you owe on your loan. You will still be charged with making up the deficiency, or the difference between what you can get in the sale and your loan, but because of the sale, this amount is reduced. Not all lenders allow short sales, but the current market has increased the willingness of many banks to negotiate in this regard.

Keep in mind a few things about short sales. Like foreclosures, a short sale can be long and exhausting process. Most lenders will only sign off on a short sale if you have been sent a notice of default. In the case that you declare bankruptcy, it’s highly unlikely that a lender will agree to a short sale. Remember, though, that lenders have never experienced a market like the current one, so many hard-and-fast rules of the past are more flexible now.

If you are wondering—What is a short sale?—you might already know that you are going to lose your home. Though this is, of course, sad, a short sale might be a better alternative to foreclosure because it causes fewer credit woes and increases the likelihood that you will own another home soon.

Tags: foreclosure, real estate

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Is There a Foreclosure Fix?

November 4th, 2010

Question: I need a foreclosure fix! How can I get my house back once the foreclosure process has started?

Answer: If you have defaulted on your home loan, you may still have an opportunity for a foreclosure fix by finding an opportunity to keep your home and stave off the foreclosure process.

As soon as you receive your first late notice—or preferably before you receive it—consider contacting your lender to work out an alternative payment plan or loan modification. If the foreclosure process has started, though, and you want to hold on to your property, you may have a few options.

The foreclosure process usually begins when you are three to six months behind in your payments. After such a period of delinquency, you will receive a Notice of Default, which formally puts your home into the foreclosure process. However, between the time that you receive a notice and when your home is sold, you may find a way to prevent or nullify the sale.

The first foreclosure fix depends on where you live. Some states offer a redemption period, a foreclosure provision that allows you to recover your home. Foreclosure laws in some states give home owners five days to buy back their house by paying the amount owed on the loan and any related late fees or other penalties. Some lenders might allow you to resume the loan if you can make a single payment that will bring yours back into good standing with your payment schedule.

If your state does not offer a redemption period, it might offer you a similar opportunity if your home is not purchased in the distressed property auction known as a sheriff’s sale. Again, you might have five days to make restitution to the lender or else risk losing your property.

If you cannot afford to pay the amount in full to get your home back, then you can look at other options to begin to halt the process as a temporary foreclosure fix. With foreclosures still a common occurrence through the nation, many lenders might be willing to work with you to prevent a foreclosure, since a foreclosure usually means a loss in their ledgers. Some lenders may offer refinancing or enrolling in a loan modification program. Others might be wiling to allow a short sale. (Read the post, “What Is a Short Sale?”

When it comes down to it, there is no quick fix for the foreclosure program. Your best bet at a foreclosure fix is to learn how to create a budget and trim expenses, then begin the loan modification process.

Tags: foreclosure

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Can a Loan Modification Save Your Home?

November 4th, 2010

In the wake of the turmoil caused by the global crash of the housing bubble, the government has been advocating loan modification programs, which are designed to encourage banks and other lenders to offer more favorable terms to borrowers with existing loans.

The housing bubble saw many homeowners take advantage of unprecedented loan opportunities. Lenders bent over backwards to hand out a smorgasbord of seemingly lucrative options like adjustable rate mortgages to homeowners. However, as we all know, the roof fell in rather quickly, and homeowners were left in desperate straits with sky-high payments due and on the verge of foreclosure. Many distressed homeowners started looking into bankruptcy facts, wondering whether bankruptcy was the best option.

Loan modification programs are based on the premise that the already-struggling banks may benefit by seeing these borrowers pay back some money rather than face a complete loss. Helping these homeowners avoid bankruptcy and foreclosure means the banks will get something rather than nothing.

Loan modification programs are a bankruptcy and foreclosure fix for many besieged property owners.

Most loan modification programs are based on reducing interest rates or payments for a period of time or even giving borrowers a complete break on interest payments for a few years. In other cases, a bank may renegotiate the terms of your loan; for example, you may be able to switch from an adjustable rate mortgage to a fixed rate mortgage based on your circumstances. Theoretically, loan modification programs can help delinquent homeowners achieve a semblance of stability and pay off the remainder of their loans.

The first step in the loan modification process begins with you picking up the phone and contacting your bank’s hardship department. You will need to divulge your income and explain the circumstances that are preventing you from making regular payments on your loan. Your lender can tell you whether you qualify. Most loan modification programs exist for people who have already defaulted on at least one payment. If you are making timely payments, the banks might be reticent to modify your loan, figuring you can continue to stay current on your loan and they can recoup 100 percent of the loan.

All modifications you might make to your loan will be conducted through your lender and not via the government. And because the loan modification program is only encouraged by the government, not all lenders have chosen to participate. As I mentioned, some loan modifications may be available only if you have been tardy on your payments, though I have heard of a few available for people who have never been late. Keep in mind that some loan modificationprograms may be subject to fees based on the type of alteration requested, so get all the information before you make a decision.

No matter how dismal your financial situation, you might be able to find a way to retain your house and prevent a dreaded foreclosure through a loan modification. This might be a wonderful option for you, but its availability will depend on your lender and its willingness to work with you. Call your bank’s hardship department to see if you are eligible for a loan modificationprogram and if so, what type of program might best benefit you. An important thing to keep in mind when you talk to your bank is that the economic situation is changing faster than we can predict. What might have been valid yesterday may no longer be available tomorrow. If you are turned down for a loan modification, try again in a month or two.

Tags: loan modification, real estate

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