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Can We Cancel the Check?

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Posted On: 04/16/2008

Q: We have been looking for a new apartment, and every rental manager says they require a credit check. It will cost us $60 or $70 if we apply for a new place. Is there anyway around this cost?

A: You might ask landlords if they will accept a credit report that you obtain for each adult tenant, those age 18 and above. Such reports are available without cost from AnnualCreditReport.com, a site established under the Fair and Accurate Credit Transactions Act. However, you must obtain the report directly because the landlord or another party cannot go online and get it for you. As Frank Dorman with the Federal Trade Commission explains, “only the person for whom the credit report was created can request and obtain a free credit report – they can get three per year, one each from the three major credit-reporting agencies.”

Also, according to Craig Watts with Fair Isaac, developer of the FICO credit scoring system, use of AnnualCreditReport.com will not reduce or impact your credit score.

If you have weak credit, then you should tell that to the landlord up front and explain why. It often happens that poor credit is a by-product of events that were not your fault (the company closed your office or you had massive medical expenses) or events that are not relevant today – two years ago you lost a job and could not find another for four months, but now you’re employed.

Q: I asked my lender and they seem very vague about the possibility of doing a loan modification. They asked that I submit financial information first. Do I need to know anything before I go through the process to better position myself so that I can qualify for a modification? For instance, do I want to show as much income or little income?

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A: The odds are good that you are not in contact with your lender. Instead you are most likely in touch with the “servicer” who represents the actual loan owner. The rights of the servicer to modify a loan are generally determined by something called the “pooling and servicing” agreement, also known as a PAS.

What you see as a “loan modification” the loan owner sees as less income and reduced value. However, the PAS may well authorize a limited number of modifications – but only when they are in the best interests of the loan owner. How could a modification benefit a loan owner? As one example, it might be cheaper to modify a loan than foreclose, given that a typical foreclosure costs lenders about $40,000.

The job of the servicer is to consider each modification individually – thus the need for financial information. You must provide an accurate discussion of your finances and why, specifically, a modification is necessary. Also, the lender will want to know if your property is for sale or will be sold and whether you have equity.

The servicer may then consider a number of options including a rate reduction, principal forgiveness, forbearance, a short sale or foreclosure.

Three points: First, you might do best having an attorney work with the servicer. Second, look into the credit ramifications associated with any loan modification. This can be negotiable. Third, consider selling the property after any prepayment penalty period ends.

Q: Where can I find assumable mortgages?

A: Long ago there used to be three kinds of mortgages, those which were freely assumable, those that could be assumed with permission of the lender and those that could not be assumed at all.

Today, it is virtually impossible to find a freely assumable loan. As examples, FHA loans originated after December 15, 1989 and VA mortgages started after March 1, 1988 are no longer freely assumable.

The reason lenders no longer make freely assumable loans is because they worry that a mortgage may be taken over by someone less qualified than the original borrower – someone who will default. As to qualified assumptions where lender consent is required, that’s OK for lenders because they can qualify the new borrower, modify the loan terms and extract additional fees and changes. Lenders also can say “no” if they’re unhappy with the new borrower’s finances and for other reasons such as a decline in the value of the underlying property.

Given that we have low interest rates at this writing, it might be best to skip thoughts of loan assumptions and move directly to new financing. There’s no sense assuming many of the loans that have been made in the past few years because their terms are toxic. Instead, get new financing with a fixed rate and better terms.

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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