A friend of mine went through a nasty divorce last year. The very weekend that the ugly argument occurred that ended the marriage, both he and the ex-wife moved out of their home.  The home is sitting empty today with a for-sale sign, grass that doesn’t get cut, and angry neighbors.  What’s worse is what is happening to their credit score.

He called me yesterday and wanted to see another home – an $80,000 fixer-upper that would ordinarily be a steal. There’s zero chance he will get a loan for the house. When you walk away, you pretty much guarantee no chance of buying (unless you win a lottery or inherit money) for several years.

Reuters Finance featured a story on just this issue,

The penalties largely revolve around your credit record, which admittedly gets blown up in the near-term. For a few years you can likely forget about qualifying for a mortgage or a car loan. When lenders are ready to take a chance on you again, you’ll have to pay for the privilege, with stiff interest rates due to your default history.

Sometimes a strategic default is the best option. But make sure before you do, you can live with the results.

New mortgage lending policies are now being developed to classify mortgages and set the standards on who qualifies.  While the intent is to develop rules “in the spirit” of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, what essentially happens is it becomes even more difficult for regular people to qualify for a home loan.  From Real Trends,

However, the lower default rates, moving from QM to QRM come at a cost—the number of potential borrowers who would be excluded from the market. This is where real estate professionals and their customers really get whacked.

Items of concern include the elimination of 8.55 million qualified loans of the 19 million analyzed.   Also excluded are minorities and low income buyers, “Even at a 3% down payment, 25% of low-income buyers would be excluded, and at 10% down payment, 50% would be excluded.”

Scary stuff coming around the bend.  Looks like a lot of houses will sit empty.

The Home Affordable Refinance Program is expanding eligibility requirements, allowing homeowners who are underwater to qualify.  By refinancing, homeowners gain a lower interest rate, therefore save money on their monthly payments.  According to Bargaineering, more people may now be eligible,

Before, in order to be eligible for HARP, missing a mortgage payment was not allowed. Now, as long as you haven’t missed a payment in the past six months, it won’t disqualify you if you missed a mortgage payment in the last 12 months. The program has been extended through December 31, 2013, and gives time for homeowners to work to meet eligibility requirements for an eventual refinance.

The catch? Your mortgage has to be a Fannie Mae or Freddie Mac backed.  That makes it too good to be true for many.

Photo by nikcname.

The stigma of marketing a house via short sale for sellers can cause fear in the pit of your stomach.  However, Cathy McAlister, a real estate agent from Sacramento, points out that there IS life after a short sale,

I just closed escrow last week for a very nice couple; repeat clients who were short sale seller’s only three years ago. In the winter of 2007 I received a lead for a young couple who were facing the prospect of a short sale.   They owned a small 3 bedroom townhome which had been purchased in 2004.  Great couple with a good outlook on life and an amazing amount of patience and trust.  Life events had happened that necessitated a short sale.

Cathy reports that two months ago her former sellers became buyers again when they closed .  The dream of home ownership is not dead for people who have been forced to sell via short sale.  There is hope!

Just paying bills on time may no longer be enough to keep a good credit score.  According to RIS Media, things are about to get very personal,

But in an attempt to develop a more well-rounded picture of a person’s finances beyond credit, tools are being developed to help the lending industry dig deeper.

Fair Isaac Corp., or FICO, the company behind the widely used scoring formula, and data provider CoreLogic last week announced a collaboration that will result in a separate score that will be available to mortgage lenders and incorporates information that will include payday loans, evictions and child support payments. In the future, information on the status of utility, rent and cellphone payments may also be included.

Apparently lenders want to know a whole lot more about the financial stability and history of a borrower.  Big Brother is here to stay!

Continuing a three year trend, the consumer continues to pay credit cards before they make mortgage payments, according to MSNBC.com. This demonstrates the drop in housing values and increase in the numbers of unemployed.

The persistence of the reversal shows that consumers don’t want to lose access to credit on their cards, especially if they depend on using them to make necessary purchases. “You can’t buy groceries with your house,” [Sean] Reardon said.

Further, because a credit card payment is so much lower than a house payment, it’s easier to make.  As the consumer remains cash strapped, the trend is expected to continue.

The new reality is that if people do walk away from their homes, given the very challenging climate to get a new home loan – they may be better off staying put, making those house payments, and waiting (perhaps years) for the real estate market to return.

More people may be realizing this, according to CNN Money,

“There are two effects that suggest [walk aways] won’t happen so easily,” he says. “The first is the endowment effect. People tend to value their own house above its market price. Owners don’t want to sell at a loss. They have what we call a loss aversion.”

The second is that people weigh the importance of immediate outcomes more heavily than long-term effects. Walking away involves upfront expenditures of time, money and effort, while the benefits of walking away are back-loaded.

It is refreshing to see that people are recognizing the devastating reality of walking away from a home loan.  As long as people have the ability to make the payments, they should

Photo by nikcname via flickr creative commons.

There’s a fine line for first tie buyers doing their homework. Don’t do so much that it scares you off, but do enough so you will not get taken advantage of by an unscrupulous builder or lender.  Here’s a good video to start with,

I helped a buyer close on a house a couple of weeks ago and while we did our final walk-through, she told me about her great buy on a refrigerator, washer, and clothes dryer.  I probably looked like a deer in the head lights when I stammered, “NO!  STOP!”  I suggested that the buyer not buy any more big ticket items and that she should wait until after she closes before spending more money on furniture, blinds, and other new house items.

There are some very specific do’s and don’ts when in the middle of purchasing a house.  Realtor Charles Dailey of Minneapolis, Minnesota helps us to break it down.  Here are a couple that really resonate,

DO NOT charge any new items on your charge cards (higher balances will lower credit scores).
DO NOT change employment may result in loan denial.
DO continue to make all payments on time.

All good advice.  Take it seriously.

Photo by jim212jim via flickr creative commons.

While Money Blue Book probably didn’t mean this to be funny, I found humor in the post Dating Tips for the Financially Savvy Person (or 6 Signs Your Date is a Financial Dud).  This can easily be paralleled to people also unable to qualify for a mortgage loan.  For example,

If your date seems overly impressed by their own spending, it may be that they are forgetting an important fact: Eventually they have to pay for it all.

As stated, this is what happened in the mortgage crisis of the 2007-2010 (and now) years. People overspent – they could not afford what they bought.  Of course, not all was their fault.  When the job market took a big hit, job loss caused a huge volume of foreclosures as well.

Here’s another… won’t save for a rainy day,

But a little advance planning can go a long way when trying to pay for a wedding, a vacation or your first house. It takes a little discipline and an ability to go against the crowd. If your date thinks keeping a savings account at a bank is uncool, you know they may not be very adept at long term financial planning.

Forget this person!  They’ll lead you to financial hardship if you stick around long enough!

Photo by Andrew Magill via flickr creative commons.