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Should I Stop Paying My Mortgage?

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Posted On: 01/07/2009

Q: I want to negotiate with my lender to get better terms on my mortgage, but my lender says they will not change the loan unless I’m in default. Should I stop making payments?

A: No. The lender has made no commitment to change the loan, and any change may be insufficient to provide real help.

Imagine if you default on your loan. Your credit rating will be shot and no other lender will want to refinance the property. You’ll make a bad situation worse. Consider these ideas:

First, what’s happened to the value of your property? If the value is less than your mortgage balance you’ll probably be unable to refinance unless you bring cash to closing. If you have a value issue then defaulting on your loan does nothing to help your situation.

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Second, a growing number of lenders are modifying loans – but only loans that are toxic, in default or likely to soon be in default. If you’re making payments you’re unlikely to get help when so many people have bigger problems. A possible solution: Look into refinancing with an FHA mortgage.

Third, look at your current loan with care. By any chance does it have a prepayment penalty? If yes, you’ll want to hold off refinancing or selling until the penalty period is over.

Fourth, think about whether your current loan – and your current home – make financial sense. It may well be that the best choice is to sell the property and then rent or buy something with a lower cost basis. This may not be a great option, but then for many recent homeowners it’s a better than foreclosure or bankruptcy, terrible events which haunt people for years.

Fifth, hang on and stay in place.

There are sources that can provide help. For instance, contact your state attorney general’s office; they often have programs for residents, as well as direct contacts with lenders. Go to www.loansafe.org; it has excellent links and consumer information. Speak with community housing organizations in your area; they can often provide information and assistance. Lastly, contact your governor, representative and senators; they may be able to suggest a government program that can help in your situation.

Q: This sure seems like a good time to buy a house. I have a good job and make good money, but I also have a weak credit score. What can I do?

A: Credit scores are always changing. They go up and down as your use of credit changes, so you need to improve your spending and savings habits.

The first step is to go to AnnualCreditReport.com and download your credit report (not your score) from one of the three major credit-reporting agencies. There is no cost to use this site and no obligation to buy anything.

Take a careful look at your credit report. Are there items that are out of date (generally more than seven years old, 10 years for bankruptcies) or factually incorrect? If yes, contact the credit-reporting agency by certified mail with a return receipt requested. Explain the issue and provide copies of receipts and other forms of proof to support your claims.

Additionally, there are a number of strategies that can help improve credit scores over time.

• Pay down credit card debts. You want to show less debt and more credit, so do not cancel credit cards once they are paid off.

• Pay all bills on time and in full. No exceptions. No excuses.

• Do not open new credit accounts. The problem here is “seasoning.” If you open new accounts then the average age of your accounts will drop. More seasoning produces higher credit scores.

• Save money. The more cash you have the easier it is to pay bills and avoid late fees.

• Watch your credit cards. For instance, many credit-card companies are reducing credit lines, and this can impact credit scores. Example: You have a credit card with a $5,000 line of credit and a $1,500 balance. You are using 30 percent of your available credit. If the credit line is dropped to $2,500 and you still have a $1,500 balance you are now using 60 percent of your credit line. A higher percentage of credit line usage will reduce your credit score.

One of the best steps you can take to improve credit is to meet with a mortgage lender and have a loan officer review your combined credit report, the report lenders use when considering a mortgage application. The lender can check your current credit score, show where improvements can be made and detail the mortgage programs for which you now qualify.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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