An increase in payday lending, however, proves that this is not the case. It’s also an indication that the check cashing business is here to stay.

The financial services industry is known for having a variety of products.

A segment of the population that has long gone underserved, however, are people with low incomes.

According to the New York Times, more than 28 million Americans are without a bank account, and more than 50 million have no credit score.

Excluded from mainstream credit, low-income people turn to check-cashing outlets.

Although the interest rates on the loans scream of predatory lending, these payday lending establishments are filling a void in the marketplace.

Although they may not be as easily identifiable as the golden arches, they’re everywhere.

More numerous than McDonalds and Starbucks
If you think payday lending outlets are restricted to poor sections of the country, think again.

The various check cashing and payday lending storefronts throughout America outnumber all the McDonalds and Starbucks outlets combined.

Every day, lines of people visit check-cashing outlets with paycheck in hand.

They charge a fee for each cashed paycheck, the average fee for a loan of $255 for two weeks equals $45, which is nearly18 percent.

Those fees can equal 450 percent interest on an annualized basis, which is eerily reminiscent of the predatory lending that took place with subprime mortgages.

Serving the underserved
The outcry from consumer protection groups has fallen largely on deaf ears.

Nationally, payday lenders are allowed to continue making unsecured loans, largely because these businesses aren’t tied to larger financial institutions.

Unlike the subprime mortgage industry, in which loans were tied to mortgage-backed securities, payday loans are unsecured.

The risk falls entirely on the company.

Like it or not, this is the only industry which seems willing to serve low-to-middle income families.

Without a credit score or bank account, traditional banks aren’t likely to touch this clientele, especially considering the fallout from the subprime catastrophe.

Credit unions, originally created to be the bastion of poor people with low incomes, are just beginning to consider the payday lending field.

Kinecta Federal Credit Union, for example, bought the payday lender Nix Check Cashing.

They’re now charging a slightly lower rate for a payday loan, and including a $20 rebate if a loan is paid on time for six months with no bounced check.

Yet the interest rate and the fees remain disproportionate to what people with good credit would pay.

Unfortunately, the laws of risk management dictate that people with poor credit should pay higher rates.

Just what separates a higher rate from predatory lending is something the financial sector or Congress will need to resolve in the future.

Until it does, payday lending will continue to thrive in its current form.

Report This Post

Bankruptcy. For many, it’s an unthinkable fate, one that’s impossible in a land that rewards people for perseverance and hard work.

Yet after a few decades of addiction to credit cards and rising consumer debt, America is finding the number of bankruptcies on the rise.

If the economy continues to worsen, more people will begrudgingly become familiar with the current bankruptcy law, and take part of a sad but growing trend.

Bankruptcy on the rise
For a snapshot of how sharply bankruptcies have risen, take a look at Minnesota.

It’s been reported that nearly 13,800 people filed for Chapter 7 personal bankruptcy in 2008, which is nearly a 50 percent increase over the previous year.

Business bankruptcies exceeded that figure, ticking in at around 66 percent.

To make matters worse, the number grew sharply in December, with personal bankruptcies rising nearly 75 percent higher than the previous year.

It was worse for businesses, which accounted for nearly half of the December overall filings.

Experts believe that this doesn’t bode well for the future. Lenders typically like to wait out the month of December before calling in their overdue loans.

Most try to let their borrowers make it through the holiday season, hoping they’ll be able to recoup enough cash to make good on their loans.

This year, however, no such leniency appears to have been given, and bankruptcies have spiked.

Bankruptcy Law 101
With this trend continuing, it’s wise to gain a general understanding of bankruptcy law. There are two types of personal bankruptcy-Chapter 7 and Chapter 13.

Chapter 7 wipes out an unsecured debt, such as credit card or medical bills. It won’t eliminate any fixed debts, which include child support, mortgages, and student loans.

Chapter 13 bankruptcy is for filers who believe that they can repay their creditors in three to five years.

Chapter 13 also puts a cap on the amount of debt you can carry when you’re filing, a ceiling designed to keep wealthy individuals from taking advantage of the law.

Either type of bankruptcy requires a means test, which will determine your eligibility.

You’ll also need to enlist the help of a bankruptcy attorney, who will charge you a hefty fee.

Most lawyers get somewhere between $1,000 to $3,000 for a filing.

There are also court filing fees, required credit counseling, and a budgeting class.

It can be an expensive process, particularly ironic in light of the fact that you’re broke.

Becoming familiar with bankruptcy laws has become an increasingly commonplace pastime for Americans.

The staggering numbers of filings over the past year are an indictor that we’re in the midst of tough times.

The big question in 2009 and beyond is how long will this trend last.

Report This Post

Credit repair scams often promise that they can get negative information deleted from your credit report for a fee.

The problem is, that’s illegal, no one can get accurate, negative information removed from a credit report.

It’s also illegal for them to charge for their services in advance, under the Credit Repair Organizations Act, which requires that any credit repair services be completed before payment is made.

Information must be inaccurate to be removed
There are companies that will offer to advise you on improving your credit and will assist you in identifying inaccurate information on your credit report and getting it removed, which can improve your score.

But the key here is the information has to be inaccurate to be removed and getting inaccurate information deleted from your report is something that you can do on your own.

One of the tricks scammers sometimes use is that they will contest an accurate piece of negative information, say a missed payment, which is then withdrawn from the report while the credit reporting company investigates.

If the victim then checks their credit report, they may see the item is no longer there and think the scammers have delivered.

But the negative item goes right back on the report once the agency verifies it, and the victim is no better off and a good bit poorer as well.

Some of the tactics promoted by illegitimate credit repair companies can get you into legal trouble as well.

For example, they may suggest you invent a new identity based on an Employer Identification Number in order to generate a new credit report.

But misrepresenting your identity on a loan or credit application is a federal crime, as is obtaining an Employer Identification Number under false pretenses.

Warning signs of a credit repair scam
The Federal Trade Commission offers a fact sheet on credit repair and credit repair scams for consumers.

It offers a number of “red flags” that should signal to consumers that a credit repair scam is likely in the works. Among them:

- They want you to pay in advance. As noted above, it is illegal for credit repair companies to demand payment until services have been completed.

- They urge you not to contact any of the three major credit reporting firms yourself.

- They promise they can eliminate negative information from your credit report, even if the information is correct.

- They advise you to dispute accurate information on your credit report.

Correcting your credit repot yourself
As noted above, you can review your credit report and demand that inaccurate or outdated information be removed by yourself.

You are entitled by law to a free copy of your credit report annually from each of the three credit reporting agencies – Equifax, Experion and Transunion – who collectively sponsor a web site, www.annualcreditreport.com, specifically for the purpose of enabling consumers to request their reports.

When you receive your reports, review them and note any inaccuracies.

To have inaccurate items removed, you need to write to the credit reporting agency issuing the report, note the inaccuracy and ask that it be removed.

If it involves a bill you have paid or a disputed bill, be sure to explain the circumstances and provide any documentation you may have to back up your claim.

Report This Post

From their perspective, to continue paying a $450,000 mortgage on a home that’s now only worth $350,000, for example, is simply to throw good money after bad.

In fact, it’s an approach that’s even being endorsed by some experts. University of Arizona law professor Brent White argues that so-called “strategic defaults” can potentially save homeowners hundreds of thousands of dollars and are morally no different from a business deciding to cut its losses on a venture.

But regardless of whether a foreclosure is voluntary or not, you still need a place to live.

And while being a renter is always a possibility, many will still want to return to home ownership eventually, particularly those who gave up their previous homes as an economic choice, rather than out of necessity.

Five-year wait for Fannie, Freddie mortgages
If you lose your home to foreclosure, voluntary or otherwise, you won’t be able to qualify for a Fannie Mae or Freddie Mac conforming loan for at least five years and perhaps seven.

Same for an FHA loan. Because conforming and FHA mortgages account for the great majority of home loans made in this country, particularly in the middle and lower price ranges, that’s a pretty big obstacle to overcome.

Of course, you can always seek a nonconforming mortgage, but those lenders will have their own guidelines for how soon they’ll lend after a foreclosure.

They’ll also be likely to demand a hefty down payment and charge a relatively high interest rate.

This is one reason why a short sale or deed-in-lieu of foreclosure may be better strategies than simply allowing your home to go into foreclosure.

With a short sale, you can qualify for a Fannie Mae/Freddie Mac-backed mortgage in as little as two years, and three years on a deed-in-lieu.

And while both have the same impact on your credit rating as a foreclosure, your credit can begin to recover in as little as two years after any of them.

That’s according to the Fair Isaac Corporation, which developed the FICO credit scoring system used by the three major credit rating agencies.

Credit impacts decline after two years
That’s not to say you’ll get a great interest rate after two years, but you can at least get a decent one.

Of course, the full effect of a foreclosure, short sale or deed-in-lieu will remain on your credit for seven years, but the impact does begin to tail off significantly after the first two.

As for the effect on your credit score of a foreclosure or short sale, many mortgage advisers say you can expect a drop of 200-300 points, with the biggest drop for those whose credit was previously unblemished.

However, much of that decline is due to the accumulation of missed or late payments that precede a foreclosure or late score.

Examples provided by Fair Isaac Corp. put the impact of a foreclosure or short sale by themselves at about 100-150 points.

In sum, if you’re faced with the possibility of losing your own, either involuntarily or as a deliberate economic choice, you’re probably better off pursuing a short sale or deed-in-lieu instead of simply allowing the property to fall into foreclosure.

The effect on your credit score may be the same, but if you want to get back into home ownership within a relatively short time, either a short sale or deed-in-lieu will provide the quicker route back, provided your lender is agreeable to them.

Report This Post

A cosigner is someone who puts their name on the mortgage to guarantee the debt will be paid if the primary borrower defaults.

Though more commonly used for lesser debts such as buying a car, cosigners can also be used to qualify for a mortgage.

You didn’t hear much about them during the years of the housing bubble, since credit was easy to get and few people needed one, but their use has become more common as lenders tightened their credit guidelines.

In most cases, a cosigner won’t necessarily enable you to qualify for a mortgage, but may be able to help you get a better mortgage than you could have obtained on your own.

That is, a loan with a lower interest rate, smaller down payment or higher loan amount than you could have qualified for by yourself.

Helpful for those just starting out
Cosigners are frequently used by young people who are just beginning to establish their credit.

Others include someone who is just recovering from a major financial setback, such as a stretch of unemployment, a divorce where the spouse ruined the couple’s credit or a retiree on a limited income, to name just a few examples.

A cosigner may not help if you have a terrible credit rating where a lender won’t consider you in the first place, say a credit score in the 500s or below.

When evaluating a mortgage application by two people, most lenders base the decision on the lowest credit score of the two, so a cosigner’s score won’t help you there.

However, if you’re a young person with no credit record and therefore no credit score, the lender may base their decision strictly on the cosigner’s credit score.

Having a cosigner on a mortgage is not something to be taken lightly. In the event of a default, the cosigner is responsible for the entire debt.

This may not be a problem if the property can be sold for an amount that satisfies the debt, but that’s not at all certain in the current housing market.

Parents, close relatives are good choices
When looking for a cosigner, people typically look to relatives, often their parents, who are often willing to help young people establish themselves.

In some cases, children may cosign for elderly parents who have retired.

The key thing is, your cosigner should be someone you know and trust, and vice versa, you’re tying your financial fates together in a big way and neither of you want to be let down by the other.

People sometimes look to friends or wealthy relatives as cosigners, but this can present problems.

If you default on the loan, it can ruin the relationship; and it it’s the relationship itself that deteriorates, you’re still tied together by the loan.

And hitting up well-to-do relatives you don’t have an extremely close relationship with can chill whatever good will you had with them to begin with.

What the cosigner should keep in mind
If you’re the cosigner, you need to approach this very carefully. Remember, you’ll be responsible for the debt if the primary borrower defaults. Are they trustworthy? Reliable?

Why do they need a cosigner in the first place? Are they a young person who hasn’t established credit, or did they already ruin their credit through carelessness? Are you confident they’ll be able to keep up with their mortgage payments?

As a cosigner, you also need to be alert for trouble signs once the mortgage has been made.

Things like past-due notices are mailed to the primary borrower’s residence, not to you, so you need to keep an eye out for warning signs.

You may even want to set up an agreement where the borrower will provide you with regular updates on the status of the loan.

As a cosigner, you also need to be aware of the impact on your credit.

The full amount of the loan counts against your available credit, so you might find it difficult if you wish to buy a new home yourself or borrow money for investment purposes while you’re on the cosigned note.

Also, a foreclosure or other action against the cosigned property will affect your credit as well, which can also make borrowing difficult even if the property is disposed of.

Refinance desirable after a few years
Generally, a cosigner will stay on the mortgage for a few years until the primary borrower can establish good credit.

At that point, you can request to be taken off the note by asking the lender to requalify the loan with just the primary borrower.

Failing that, it may be necessary to simply refinance the mortgage under the principal borrower’s name, which will typically cost several thousand dollars.

For this reason, you don’t want to cosign a mortgage unless you’re confident the housing market in the area in question is stable, declining home prices, such as were seen from 2006-10, can make it impossible to refinance until housing prices recover.

At the same time, cosigning a mortgage can be a real boon to someone who’s responsible with their finances but, for one reason or another, can’t borrow as much as they need or at the best available rates.

Particularly for parents who intend to offer financial assistance anyway, it offers a way to provide significant help without tying up any actual money.

But in the end, the whole thing is based on trust, both parties need to be confident the other will hold up their end of the bargain for it to work.

Report This Post

That doesn’t mean it’s impossible to get a home loan with poor credit, but the minimum standards are higher.

You’ll likely find it a lot more costly to get a mortgage or refinance with less-than-perfect credit.

So what’s the bottom line? Your best bet for qualifying for a home loan. Either a purchase or mortgage refinance, with bad credit is either the FHA.

They will accept loans with FICO credit scores as low as 580, although individual lenders may require a minimum or at least 620.

The FHA and VA don’t actually write mortgages, they insure mortgages that meet their standards that are issued by qualified lenders.

So it’s up to the lenders themselves to decide what credit scores they’ll accept, and at what terms.

Consider brokers, small lenders
Some smaller lenders may be willing to accept a lower credit score than the major banks will particularly community banks or credit unions.

If you have poor credit, it’s more important than ever to shop around and compare different lenders.

You’ll likely not only find a difference in their willingness to lend, but also significant variety in the terms they’re willing to offer.

A mortgage broker can also be a smart choice when you have bad credit, as they’re in the business of sifting through multiple lenders to find one that meets your needs, although you will pay a premium for this service.

One thing you won’t be able to escape is that getting a mortgage with poor credit is going to be costly.

According to the Fair Isaac Co., which invented the FICO scoring system, a borrower with a score in the 620-639 range can currently expect to pay an interest rate about 1.6 percentage points higher on a 30-year loan than someone with near-perfect credit of 760 or above – about 6.3 percent instead of 4.7 percent for the “ideal” borrower.

That works out to about an additional $10 a month for each $10.000 of your mortgage.

Improving your credit
So what can you do if you’ve got bad credit?

The first thing you should consider is making sure your credit reports are accurate and that you’re not being penalized for bad information.

You’re entitled to receive a free copy of your credit report from each of the three major credit reporting agencies each year.

You can also order your actual credit scores, but will have to pay a fee for that.

Don’t bother with so-called “credit repair” services which promise to boost your credit score in return for a fee.

There’s nothing they can do for you legally to improve your score other than check your report for errors, the same as you can do, and some of these services have been known to suggest measures that can get you in trouble with the law.

Waiting for better scores
The best strategy for dealing with a bad credit score may be to try to improve your credit rating and apply for a mortgage at a later date.

Generally, the impact of most negative items on your credit report begins to diminish after about two years, so if you can maintain a good payment record on your other debts over that time, your credit should show significant improvement over a year or two.

A foreclosure stays on your credit for seven years and a bankruptcy for 10, but even here, the major negative impacts begin to diminish after a few years, and you may be able to qualify for a mortgage again within three years of such an event.

Waiting means you won’t be able to take advantage of the ultra-low rates currently available, but you may find that by waiting for your score to improve, the rates you’ll be able to get with good credit in two-three years may be better than what you can qualify for today, even in the current low-rate environment.

If you need a mortgage now
One is to get a co-signer, usually a close relative, to help you qualify.

Bear in mind that in the event you default, the co-signer will be liable for the full value of the mortgage, so you only want to use this approach with someone you have a solid and trustworthy relationship with, and only if you are certain you will be able to meet your obligations.

Another possibility for couples, when only one partner has poor credit, is to seek a mortgage or refinance solely in the name of the partner with good credit.

This means you won’t be able to list both persons’ income and assets on the mortgage application – just those of the partner who’s actually applying for the loan, which can seriously limit how much you can borrow.

Don’t assume that you have to borrow right now just because interest rates and home prices are very low right now.

Whatever approach you take, borrowing now or working to improve your credit, should depend on careful assessment of what makes the most sense for you over the long term.

Report This Post

Land contracts were a popular way of buying a home back in the 1970s and 1980s, but fell out of favor in recent years as creative financing made it easy for almost anyone to qualify for a mortgage.

However, they’ve been making something of a comeback lately as lenders have tightened credit requirements, sending some potential buyers in search of alternative financing.

A land contract is a fairly simple concept. The seller is financing the purchase instead of a mortgage lender.

Instead of taking out a mortgage, the buyer agrees to make regular payments directly to the seller, who still retains title to the property.

Once the debt is paid off, the seller transfers title to the buyer, who then owns the property free and clear.

Poor credit not an obstacle
The main advantage of a land contract is that it’s fairly easy to qualify for. As long as the seller is willing to go that route, there’s little need for extensive credit checks. If the buyer defaults, the seller simply retains the property without the need of going through foreclosure.

Also, because there’s no lender involved, the transaction is simply between the buyer and seller, without the involvement of a third party.

This eliminates the need for appraisals or other hurdles a lender may insist on for a traditional mortgage.

A land contract is often viewed as a way to “pay down the purchase price” before obtaining a regular mortgage to purchase the property outright.

The terms of the contract will call for 5-10 years of regular payments, concluding with a balloon payment for the balance of the mortgage.

The buyers will typically plan on taking out a mortgage to make the balloon payment, since they will have had several years to improve their credit and earnings to qualify, and the loan needed for the balloon payment will be smaller than what would have been needed to buy the home up front.

Fewer protections for the buyer
On the downside, a land contract doesn’t have many of the protections that come with a mortgage.

Because the seller retains the title until the land contract is fully paid off, the buyer could end up defaulting and forfeiting their interest to the property if they miss just one payment, in which case the buyer is entitled to keep the payments made to date as rent.

Going through a lender to obtain a regular mortgage can involve some hurdles, but it also provides some protections as well. Before granting a mortgage, a lender is going to insist on making sure that everything is in order legally – that the title is clear, there are no outstanding liens on the property, that it appraises for the purchase and that the deed is registered at the time of sale.

Also, when you buy a home with a regular mortgage, you own the property at that point and have certain rights as a result.

If you fall behind on your payments, you can’t be evicted from the property without the lender going through the entire foreclosure process.

When the seller still holds a mortgage
One of the biggest negatives that can occur with a land contract is when a buyer purchases a property on which the seller is still making mortgage payments.

In some cases, the seller’s mortgage may specify that the lender can demand immediate payment in full if he or she no longer occupies the home; in which case the buyer could be compelled to come up with the full balance immediately if they wish to remain in the home.

Another possibility is that the seller might default on the mortgage and the lender forecloses; meaning the buyer loses the property unless he or she is able to work out an arrangement with the lender.

The laws on land contracts vary from state to state, so prospective buyers need to investigate whatever rules apply in their area.

As with any major financial transaction, it’s a good idea to get professional assistance before engaging in a land contract, preferably a real estate attorney who can review agreements beforehand and alert you to potential pitfalls to avoid and steps you should take.

Report This Post