Homeowners can recover from subprime meltdown
By Kevin Panet Special to the Acorn

There has been a lot of talk lately about the "subprime meltdown." According to Ben Bernake, chairman of the Federal Reserve, the current rise in foreclosures will only affect one-half of one percent of homeowners in the US. While the majority of American families will not be affected, this comes as little comfort to the thousands of families that are currently at risk of losing their homes, especially those in east Ventura County.

It's important to understand why people got into subprime loans to begin with. Generally, an individual with sub-standard credit cannot qualify for a loan at the prime rate. Why did their credit suffer? Often it's through little or no fault of their own. The three most common reasons are death or illness, job loss or divorce.

These three significant life events can create situations where it becomes very challenging to keep up with paying the bills, especially if the individuals were living beyond their means to begin with. For example, an individual with a 750 credit score (on a scale of 350 to 800), might find themselves with a score in the low 600s after missing a few payments and/ or maxing out the credit that is available to them.

While it's distressing that bad things happen to good people, there are several ways to recover.

The first option for many is to consolidate debts. Often people find themselves with maxed-out credit cards at very high interest rates. If there is equity available in the home, a borrower might be able to reduce their overall monthly debt, as well as gain a more significant tax write-off at the end of the year. Ideally, the borrower would get a 2- or 3-year fixed rate loan, improve their credit, and refinance at a better rate when their credit score has improved. In many cases, this can benefit the borrower with lower overall payments.

The second option, if outstanding debts are considered manageable, might be to simply refinance their mortgage at a lower interest rate. Borrowers need to understand that interest rates are based on many factors. A higher credit score can help reduce interest rates. Another factor lenders use is LoanToValue. A home owner financing a 90 percent LTV will have a higher interest rate than a home owner financing 70 percent. Lenders consider the homeowner with the lower LTV to be a better risk and they reward those borrowers with lower rates.

Another factor considered by lenders is the amount of money that is borrowed. The current conforming limit is $417,000. Loans above this amount are considered "jumbo" loans. Again, because of the higher loan amount, lenders are taking a greater risk and will charge higher interest rates. This explains why the best interest rates are for those loans below $417,000.

A third option, usually the least desirable, is to sell the home and purchase something that is more affordable. In this case, it's better to sell the home quickly and get on with life. In these situations, a professional real estate agent is needed to get top dollar for the home.

To enjoy successful home ownership, it comes down to some pretty simple math. If a homeowner is struggling with bills, they either need to increase their income or decrease their expenses. The worse thing a homeowner can do is wait and hope that things get better. Without constructive action, things usually get worse and costs increase. A professional mortgage broker can help clients review their mortgage and understand the options that are available before it's too late.

Kevin Panet, a loan consultant with Sabre Mortgage in Moorpark, is a member of the California Association of Mortgage Brokers and licensed by the California Department of Real Estate. E-mail him at Kevin@SabreMortgage.biz.