Credit Card Debt and Your Mortgage


photo by B Rosen quoted me in Fannie Mae Taking a Closer Look at Applicants’ Credit Card Payments. It opens,

If you feel like you’ve been managing your debt just fine, making the minimum payment on your credit cards on time every month, you might want to change your ways before applying for a home loan.

Fannie Mae, which offers government-backed loans to more than a quarter of mortgage applicants nationwide, has just revised its risk assessment software to factor in more details about how borrowers pay off their debts.

Historically, the credit report generated by Fannie Mae—and scrutinized by lenders—mainly showed how much of your available credit you’d used and whether you’d made your monthly payments on time. But the newest version of Fannie’s Desktop Underwriter software (used by about 2,000 lenders and more than 10,000 mortgage brokers) kicks things up a notch. Now, it also details just how much you coughed up each month over the past two years—whether you’re parting with only the minimum, laying out the full monty, or hovering somewhere in between.

Fannie officials say these new details, known as “trended credit data,” can help lenders better assess how well people manage their debts—and, consequently, how well they’ll manage their mortgage payments.

“Generally, the new underwriting model gives weight to how borrowers pay off their credit debt,” explains David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “While it is not clear how finely tuned the new system is, there is clearly a move toward a more granular approach to debt repayment.”

How this news affects your prospects of a home loan

So far, FICO and other credit score measures aren’t factoring in this extra info, so your score won’t get dinged. But your application could be affected in another way.

“If you compare two people with exactly the same credit profiles except that one pays more than the minimum amount due or the entire balance, that person would be considered to be a lower credit risk by Fannie Mae,” says Reiss. “As a result, that person would be more likely to be approved for a mortgage.”

But you might not have to pay much more than the minimum to boost your chances of getting that loan.“At this time it’s unclear what impact to mortgage scoring and automated underwriting the payment history will have, but we believe anyone that is paying 30% or more of their balance monthly will see improvement,” says San Diego loan officer Michael Rosenbaum at CrossCountry Mortgage.

Of course, people who pay off the whole balance every month will be favored even more, and with good reason.

“Research has indicated that borrowers who paid off their credit card debt every month are 60% less likely to become delinquent than borrowers who make only the monthly minimum payment,” Rosenbaum adds.

And while this might sound ominous, it could actually be helpful if you had some credit blemishes in your past.

“Fannie has also indicated that paying more than the minimum due will particularly help borrowers with delinquencies on their credit report, because it will allow borrowers to ‘demonstrate that a late payment was not deeply reflective of their general debt repayment ability and behavior,’” Reiss notes.

Evicted by Homeowners Association

photo by respres quoted me in Homeowner Evicted for Not Paying HOA Dues: Can This Happen to You? It opens,

Who knew? Even if you pay your mortgage on time every month, your home can still be foreclosed on and sold from under your feet. That, at least, is what Triss McQuiston from Tomball, TX, learned recently when she was notified that she’d have to vacate her place. Why? It turns out she was evicted for not paying her HOA dues.

According to ABC13, McQuiston admits that she was guilty of procrastinating on paying her HOA fees to the Canyon Gate at Northpointe Owners Association in 2014 and 2015. Because she was opening a new business, her HOA bills slipped through the cracks, for a grand total of $1,800 in unpaid dues.

An attorney for the HOA claims that since March 2014, they’d sent McQuiston 12 notices by first-class certified mail to collect these assessments, warning her what would happen if she didn’t. When they received no response, they proceeded with the foreclosure, and sold the home at auction back in September.

Yet McQuiston argues that she’d received no warnings, and was made aware of her dire straits only when she received an eviction notice on her doorstep on May 20. She has since hired an attorney to help fight the case and remain in her home.

“I would never have thought in my wildest dreams that an HOA … would go to these lengths and they’d have this much power,” McQuiston told ABC13.

If this story has you viewing HOAs in a harsh (and terrifying) new light, we don’t blame you. And while the laws vary by state, it turns out that in most cases, HOAs really do have the power to foreclose on your home for unpaid dues, as do condo owners associations.

“Contrary to common perceptions, even if a person is current on a mortgage, the HOA or COA may foreclose,” says Bob Tankel, a Florida attorney specializing in HOA law. “What’s the moral of the story? Pay your assessments. These are not huge amounts. People apparently think that just because assessments are small there’s nothing bad that can happen. But that’s not true.”

To know specifically how your HOA or COA handles late payments, homeowners should “check the Declaration of Covenants, Conditions & Restrictions (CC&Rs),” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. You should check not only what constitutes a late payment, but also how you’ll be penalized; additional fees could include late charges, fines, interest, as well as attorneys’ fees.

It’s also smart to check what rights and recourse you have in your state if you end up unable to pay these assessments. “Some states have enacted some procedural protections for homeowners,” says Reiss. “It’s worth figuring those out if you are not able to pay off your HOA right away.”

Risky Rent-to-Own

photo by Steve Snodgrass

The Pittsburgh Tribune-Review quoted me in Rent-to-Own Option for Home Shoppers Rife with Pitfalls, Experts Caution. It opens,

Finding the right rental house was more difficult than Phyllis Lombardi anticipated.

“It’s hard to find a big enough house that allows pets, for the number of people we have in South Fayette,” said Lombardi, 45. She and her husband have four children living at home.

The Lombardis are moving because the owners of the house they are renting want to sell. But the couple isn’t ready to buy. The husband’s income was cut by more than half when they relocated to the Pittsburgh area several years ago, and they are repairing their finances after a short sale on a home.

Finding no rentals in South Fayette that meet her criteria and price, Lombardi is going with an option suggested by her real estate broker: Pick a house for sale on the market and do a rent-to-own contract with an investor who would buy it.

Rent-to-own agreements require prospective buyers to pay rent with an option to purchase the house at a later date, usually within two to five years. It can broaden the options for people with checkered credit histories who think they might soon be in a position to buy.

But it is an industry with a lot of shady operators and which can prove costly to prospective buyers who are not careful, said David Reiss, a professor of law at Brooklyn Law School.

“In some cases, these programs are based on the idea of hope springs eternal,” Reiss said. “But a large percentage of them are likely to fail.”

The terms of these contracts vary, but renters often pay a premium above market price, with a portion of that going toward the eventual cost to buy the home.

Many times, renters reach the end of the agreement and are still unable to buy, forfeiting everything they have paid — rent, fees and any premium toward the purchase price — to the owner and walk away with nothing, said Max Beier, a real estate attorney Downtown.

“Traditionally, what you’re going to have in these agreements is a default provision that’s pretty harsh,” he said. “Commonly, you’re going to lose 100 percent of the equity you’ve paid.”

And many don’t come with the same renter protections. For example, maintenance and upkeep costs are often the tenant’s responsibility — just as if they owned the home.

Also, the penalty for late rent payments tends to be more severe than the standard 5 percent for a late mortgage payment, and even cause someone to be kicked out of the home, Reiss said.

“The rights you have as a tenant in a rent-to-own situation are not as clear and not as good as if you were a homeowner,” Reiss said.