How to Start Living a Debt Free Life

The Complete Debt Relief Manual

The Complete Debt Relief Manual is the best source of credit card debt elimination information you can find. It covers all aspects, in meticulous detail, of getting out of any form of debt, repairing your credit report, and rebuilding your credit. It even gives you step-by-step plans for dealing with creditors, collectors, lawsuits, bankruptcy, and the Irs. This book is a complete, step-by-step guide to debt freedom, from any angle. Discover the well-hidden secrets the credit card companies, credit card debt settlement services, collection agencies, the Irs, and the attorneys, Dont Want You TO Know! If you're battling debt problems, wondering how to eliminate your debts or repair your credit quickly, and you don't want to spend a fortune for help, learn to do it yourself. You will learn: The fastest way to achieve total credit card debt elimination. How to deal with creditors, collectors, attorneys, and the Irs. Why credit card debt settlement services are a Scam. How to negotiate credit card debt settlements. How to write a credit card debt settlement letter that gets results. How to avoid bankruptcy. How to declare Chapter 7 or Chapter 13 Bankruptcy (if you have to) How to rebuild bad credit. How to create simple budgeting sheets. More here...

The Complete Debt Relief Manual Summary


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Stop Thinking That Being Debt Free Is Good

Spurred on by the banks, new investors mistakenly thought that becoming debt free was desirable. They owned homes that were sometimes worth millions and certainly hundreds of thousands of dollars but they had no disposable cash making for an absurd situation. The banks and financial institutions have enshrined as a sacred value the notion that everyone should be debt free. The only way to do that, they insist, is to pay down a mortgage as quickly as possible until the balance is zero. Only then, say the banks, does it make sense to seek to extract profit from a property. Oh how the banks love it when this strategy is followed. The banks also convinced everyone that the most secure place for one's ''cash'' was in a mortgage program in a bank. Then the banks threw in that borrowers could be free and clear ofmortgage debt in a mere 15 years, making the idea sound most appealing. But being debt free doesn't help you build wealth. It just locks up your money in equity.

The role of the flexible amortisation of mortgage debt

How fast, in theory, can we expect borrowers to repay their mortgage debt and accumulate equity in their property In a sense this is a return to the theory of mortgage demand. The discussion in Chapter 2 demonstrated the critical relationship between net of tax mortgage rates and the net return on savings, in addition to the risk characteristics of these costs and returns. The US typically has a net of tax mortgage rate lower than the rate of return on savings. This implies that mortgage debt will be Seminal work by Plaut (1986) has indicated the importance of the ability to vary the rate of amortisation for liquidity constrained households. With constant payment scheduling, and no access to non-mortgage finance, increases in interest rates require a cut in consumption. An equivalent to this restriction is created by tax subsidies on mortgage interest payments that encourage the use of mortgage debt rather than consumer credit. Flexible amortisation scheduling could facilitate the...

Debt Consolidation Loans

One of the financial opportunities that homeowners enjoy is the ability to tap into their property's equity for funds. For most homeowners, the most popular and beneficial use of such equity cash-outs is for a debt consolidation. Homeowners seeking to consolidate debt normally have four basic mortgage instruments available Non-homeowners can sometimes still obtain debt consolidation loans, but these loans are often for low amounts and much higher interest rates. This is unavoidable, for the simple reason that these debt consolidation loans are unsecured.

Credit counselors and debt management firms do not improve your credit record or boost your credit scores

Why go to a credit counseling-debt management service Three reasons To get help with budgeting to seek legal advice about bankruptcy and creditor collection practices and to prevent or stop creditor collection efforts. If you've got good credit, budgeting assistance can help you retain it. If you've bruised or busted your credit, however, debt management or consolidation plans will not redeem you anytime soon. To most creditors, you either pay your bills on time or you don't.

Perspectives on the maturity of mortgage debt

The maturity of mortgage debt, as a contractual feature and a household choice, has played a variety of roles in the mortgage economics literature. For example, the analysis of mortgage credit rationing by Kent (1980) focuses upon maturity as an element of the mortgage contract that can be varied to clear the mortgage market when it is in temporary disequilibrium. Moreover, the maturity of debt can be used as an indicator of mortgage credit rationing. This view should be qualified to the extent that choice of maturity reflects cost minimisation behaviour. It is also possible that choice of maturity can signal a borrower's credit risk characteristics (Harrison et al. 2004, Ben-Shahar & Feldman 2003). That is, if shorter maturities carry lower risk premiums then more creditworthy borrowers may choose shorter-term contracts. In the US maturity renegotiation is the more common form of dealing with 'troubled debt' than discounting the outstanding principal (Harding & Sirmans 2002). The...

Debt Service Ratio

With most mortgage loans, the debt service refers to the Also called the debt coverage ratio, the DSR is the a measurement of a property's ability to handle a loan debt. The DSR is the projected debt service payments divided by the after-tax net operating income. Commercial lenders often impose minimum DSR restrictions of 1.10 to 1.35. The most common DSR is 1.2, which means that lenders require the property to produce net operating income that is at least 120 higher than the projected debt service payments. For more information, see the Real Estate Investment Analysis Tools article in the Real Estate Investing section.

Debt consolidation

Home equity loans and credit lines are often used to consolidate debt. A consolidation loan combines several debts into one, usually lower payment. In addition, homeowners are often able to deduct the interest that they pay on their home equity loan unlike regular consumer debts that charge non-deductible, exorbitantly high rates. For example, a small second mortgage may be around 8.500 . Compare that to the exorbitantly high interest rates of 16.00 to 25.99 on most credit cards and personal loans. Moreover, the lower interest rates on home equity second mortgages are usually tax-deductible. For more information, see the Debt Consolidation Programs article.

Mechanics Limitations

These loans are normally restricted for debt consolidation purposes, although programs do vary. Because these loans are essentially over-leveraged or under-secured, they have very high risk exposure. If the homeowner ever defaults, these loans have no reasonable expectation of getting paid.

DebtToIncome DTI Ratio

The primary method used by lenders to qualify prospective borrowers for mortgage financing. The DTI ratio is basically the total monthly debt payments divided by the gross monthly income. Two types of income ratios are normally considered by most lenders the front-end (housing) ratio and the back-end (total debt) ratio. The housing ratio is the projected housing payment divided by the gross monthly income the total debt ratio is the projected housing payment plus all other long-term debt payments, divided by the gross monthly income. For more information, see the Analyzing Employment and Income article in the Loan Process section.

Mark Mouma The Handyman Who Buys and Sells Real Estate

I found another property. I tried to secure some financing but my debt ratio was out of whack. I was paying too much for these properties even though I was making a little bit of an income through rental and so forth. The banks have a formula, and my finances didn't fit. The banks would not extend me any more credit I would have to put much more money down. Instead of it becoming easier to obtain property, it was actually becoming harder. As you can imagine, this was very distressing.

Whats the Best Outcome

If your bills get out of control, consider a debt repayment plan only when you own substantial assets that you would lose in a Chapter 7 filing. Experience shows that more than 50 percent of the people who enter debt management plans fail to successfully complete them. Consequently, they continue to botch up their credit and merely postpone their day of reckoning. On the other hand, if you want to rebuild your credit as quickly and securely as possible, Chapter 7 can make sense. After you obtain a Chapter 7 discharge, you're debt free, except possibly for past-due taxes, student loans, and some types of judgments. Instead of plugging 300 to 3,000 a month into paying off debt, you can put that money into savings. Within a year or two, you'll be much further ahead financially than if you were still stuck in a payoff plan. As to credit profile, cash in the bank and no (or very limited) debt give you a better credit profile. Fannie and Freddie will each consider Chapter 7 bankrupts two...

No Endorsement for Bankruptcy

Remember, most reputable not-for-profit credit counseling agencies are funded by banks. Although these organizations employ dedicated people who would like to help you, their jobs depend on encouraging borrowers to elect partial debt repayment rather than Chapter 7. As to the disreputable for-profit and ersatz not-for-profit debt management companies, they reap credit repair fees by taking a slice of your monthly debt management payments. The debt counseling industry does not gain when debtors file Chapter 7.

Income qualification

Some non-conforming programs allow for high debt-to-income ratios. For example, conforming programs limit total housing and long-term debts to only 36 of the borrower's gross income. Non-conforming programs, however, allow the borrower to qualify with up to 55 of gross income targe

The general findings of United States research

Several important cross-section studies have been conducted using US data. Follain & Dunsky (1997) estimate a series of structural and reduced form models. They use the 1983 and 1989 Surveys of Consumer Finance (SCF). A major motivation is to evaluate the impact of federal income tax policy on the demand for housing debt. They note the importance of the elasticity of demand for mortgage debt with respect to tax policy changes and the effects of this on potential revenue gains for the federal government. The results of this research are therefore of interest to the UK, where tax benefits on mortgage interest payments have recently been removed (in April 2000). Follain and Dunsky found that the estimated coefficient on a tax price variable is positive and statistically significant. The tax price variable is measured by the difference between the after tax cost of equity in a property and the after tax cost of mortgage debt. Thus we are looking at the gap between the mortgage interest...

Summary and conclusions

An empirical implementation of a basic mortgage demand model using UK data highlighted the importance of the housing finance system under which mortgage demand equations were estimated. Interest only mortgage holders may have perceived a significant gap between the rate of return on the alternative investment and the net of tax mortgage interest rate. This would produce a lower elasticity of demand with respect to the mortgage interest rate. This was certainly significantly lower than that found in US research. Other differences between the housing finance systems may have produced this result. The tendency of UK fixed rate debt to be fixed for short periods of time is another possible explanation for lower interest rate elasticity. How the elasticity of demand for mortgage debt might have changed given the general demise of the endowment mortgage is a matter for further research. Certainly the potentially complex relationships between different mortgage choices, as depicted in Figure...

Make Minimum Monthly Mortgage Payments And Never Make Extra Payments

A man named Eric phoned our television program one day recently to say that he had been advised to enter into a mortgage program that put an emphasis on reducing the mortgage debt by paying off his mortgage as quickly as possible through bimonthly payments. He had also heard that he might be able to do just as well if not better by putting some of his mortgage payment into some kind of savings account. People come to us having bought into the lie that banks and other financial institutions perpetrate on them that it is better to pay off their mortgage as quickly as possible. We have had people come to our offices with Bible in hand and tell us that the Bible says it is good to be debt free.

Market adjustment and dynamic rationing

The usual approach to mortgage pricing valuation is to posit that the mortgage is a combination of a non-callable bond plus the value of the options to prepay and default (Kau & Keenan 1995 Vandell 1995). These values are all determined in a perfectly competitive no arbitrage economy. Thus, there should be no credit rationing due to inappropriate pricing. Another argument against dynamic rationing is that mortgages exhibit a menu of features that can be traded-off against price, allowing the borrower to achieve equilibrium. The ARM bundles caps, frequency of the adjustment, the choice of index to which the rate is tied, fees, etc. How these features are combined effects the price of the ARM (see SA-Aadu & Sirmans 1989). Consumers may choose combinations of features of the mortgage contract that do not leave them with excess demand for mortgage debt.

Paying off your current mortgage

For many people, the idea of giving up some of their loan in order to pay off a current debt just won't fly. If you don't own your home free and clear today, take a look at how much mortgage debt you have. How many years will it take to pay down your existing loan You may not want to wait that long before reaping the potential benefits of a reverse mortgage. By rolling your current loan into a new reverse mortgage, you'll also save money on future interest payments, which can add up pretty fast.

Revisiting the themes of the book

Several major themes have been pursued in this book. One of these is the importance of household behaviour in the mortgage market and the validity of using a variety of perspectives to better understand it. The perfectly competitive no arbitrage economy, assumed in the option theoretic work, provided invaluable insights into behaviours based upon rational financial calculation. Increasingly sophisticated econometric modelling had established the empirical validity of this approach. Such work also facilitated the valuation of mortgage debt, and the efficient pricing of contracts. Effective mortgage valuation was an important issue for the management of financial intermediaries' balance sheets and risk positions, and ultimately the development of efficient mortgage markets. However, perspectives based upon affordability, liquidity constraints and incomplete markets are also valid and fruitful areas for research.

Mortgage markets and mortgage market economics where to

One spreading feature in mortgage markets is the unbundling of origination, servicing, investment and risk management of mortgage debt via securitisation. The trend towards unbundling mortgage products provides an interesting example of the different ways that housing finance systems can evolve. Van Order (2000) adopts a contrary view for the US in suggesting that the trend towards unbundling might actually be reversed. Unbundling has created information problems for secondary market institutions. Primary lenders have superior knowledge of the performance of the loans that they sell on to the secondary market. Thus we have classic cases of adverse selection and moral hazard. However, improved access to, and processing of, information to remove this problem reduces the need for specialisation in origination, servicing and investment, thus rebundling might occur. Van Order notes that the extent of any rebundling will depend upon the secondary market charter and regulations....

The secondary mortgage market

The essence of secondary mortgage market development is the separation of the origination, funding, holding and servicing of mortgage loans. In traditional lending, for example by building societies in the UK, each of these functions is carried out by the provider. Secondary mortgage markets do not require securitisation, though this is the ultimate refinement of secondary mortgage market development and capital market integration. The key characteristic of securitisation is that when a pool of mortgages is packaged for sale to investors then the funding of mortgage debt is moved off balance sheet and is separated from the origination and servicing of that debt. So exactly how quantitatively important is the securitised mortgage market This market is most fully developed in the US. Figure 1.1 shows the rapid growth in the mortgage-backed securities issued by the US federal home loan agencies. During 2001 the issue of mortgage-backed securities by the major US agencies reached a peak...

The state of the art of mortgage market economics retrospect and prospect

Of in the discussion of mortgage demand in Chapters 2 and 3. The basic model with certainty has been used to explain loan-to-value ratios Other than option theoretic approaches uncertainty models have not yet received a lot of theoretical or empirical attention in the study of mortgage demand. More work on the portfolio setting of mortgage debt would be welcome, particularly critical approaches to the relevance of the propositions of Modigliani & Miller for a household's mortgage choices and financial decision making.

Approach Owners with Empathy

No magic system succeeds with owners who face foreclosure. Such owners contend with financial troubles, personal anguish, and indecisiveness. In addition, they probably have been attacked by innumerable foreclosure sharks, speculators, bank lawyers, and recent attendees of get-rich-quick foreclosure seminars. These owners are living with the public shame of failure. For these reasons and more, they are not easy people with whom to craft a deal.

External Credit Enhancements

When a borrower files for personal bankruptcy, there is a risk that a bankruptcy judge could reduce the borrower's mortgage debt. This debt reduction, called a cramdown, usually occurs only when the value of the borrower's home has fallen so that the mortgage loan balance exceeds the home's market value. If a cram-down is ordered, the loan's terms can be altered by reducing the unpaid principal balance or the loan's interest rate. A few cramdowns have occurred in recent years in settling Chapter 13 bankruptcy cases.2 However, the 1993 Supreme Court case of Nobelman versus American Savings ruled that a borrower filing under Chapter 13 cannot effectively reduce his or her mortgage debt.

Debtto Income DTI Ratio

A homeowner's housing-related payments (including principal, interest, real estate taxes, and home insurance payments) by gross income. A back-end ratio divides total monthly debt payments (including housing-related payments plus all credit card and automobile debt, as well as child payments and other long-term obligations) by gross income.

Home Prices over Time

There were a number of factors, including falling interest rates, driving this threefold increase in borrowing power in only six years, but by far the biggest was that lenders grew willing to lend up to the point that debt payments consumed 60 percent of a borrower's pretax income, whereas historically the permitted ratio didn 't exceed 33 percent. Worse, little or no down payment or documentation was necessary, and interest-only loans proliferated.

Mortgage termination behaviour and alternative mortgage instruments

Determining the relative contribution of these factors is important for the lender's cash and risk management, and for MBS valuation. Prepayment is also an issue insofar as the cap and adjustment terms establish boundary conditions that create a call option on the adjustable rate mortgage debt. There is evidence that the rates of prepayment on ARM mortgages in the US during the 1990s, have significantly exceeded the rates for FRM borrowers (Ambrose & LaCour Little 2001). Mortgage termination studies that have considered mortgage instruments other than the US standard FRM have also found for the importance of the option theoretic approach. The competing risk methodology has proved effective in analysing ARM loan performance. However, there has been some evidence of clientele, or selection effects. Research needs to account for potentially important selectivity biases arising from the choice of mortgage instrument. This has implications for mortgage...

The links between prepayment and default behaviour

Mortgage debt (Kau & Keenan 1995 Pereira et al. 2002). This involves analysis of the different components of the risky mortgage, that is the embedded options and the value of the cash flows on the debt. Default and prepayment are seen as a joint probability of mortgage termination. A related consideration, and the main focus of empirical work, is the likely rates of default and prepayment. Numerical analysis offers insights into interactions between prepayment and default value, and thus mortgage termination behaviour (Schwartz & Torous 1992).

Interest rate expectations and mortgage contract heterogeneity

The calculation is represented by expression (7.7). The term Ra is expected interest rate costs, the arguments ra and rf are the current interest rates on adjustable and fixed rate debt respectively, B is a constant, p is a parameter which results in expected costs expressed as a positive function of the premium on fixed rate mortgage debt. Notice the presence of a borrower's mobility, MOB. More mobile borrowers who prepay their debt on moving have a smaller risk of facing a large interest rate rise. There is some interesting work on the comparative costs of the choice of different mortgage instruments over time (Milevsky 2001 Tucker 1991 Sprecher & Willman 1993 Templeton et al. 1996). Though largely normative it could be suggestive of the drivers of mortgage choices. The discussion in Chapter 4 outlined the cost minimisation hypothesis that might determine the choice of mortgage maturity. Households who were not constrained by affordability considerations might also look at the total...

The choice of mortgage instrument in the United Kingdom

The sale of endowments in the UK has been at the centre of some controversy, with suggestions that third party originations (mortgage brokers rewarded by commission on sales) have led to widespread 'mis-selling'. The 'mis-selling' relates to the contention that consumers were not made aware of the risk that endowment funds might not grow sufficiently to eventually pay off the mortgage debt. The appropriateness of using a risky investment vehicle for this purpose has also been questioned. A low interest rate environment and depressed stock market returns in recent years have led to widespread endowment shortfalls. The analysis of so called 'mis-selling' is a linguistic and analytical minefield and an issue that has not really been explored in the mortgage analysis literature (for an exception see Leece 2000c), though there is US research on agency problems and third party originations that is relevant to this issue (see LaCour Little & Chun 1999 Alexander et al. 2002). Econometric...

Disequilibrium rationing

Rationing raises the user cost of owner occupation and reduces housing absolute mortgage demand. Dougherty & Van Order also note that in the case of a binding loan-to-value constraint then the interest rate term in the user cost equation should be a weighted average of the mortgage interest rate and opportunity cost of equity in the property. This forgone rate of return reflects the marginal cost of mortgage finance, which is not likely to be effected by the household chosen loan-to-value ratio. This means that lenders cannot remove excess demand for mortgage credit by changing their underwriting rules (Nellis & Thom 1983). The marginal cost of mortgage debt remains constant and credit rationing will persist. Financial deregulation should ease or remove credit rationing, and the user costs of owner occupation, and real interest rates, become a more applicable specification in housing mortgage demand equations.

What Is a Subprime Mortgage and Who Is a Subprime Borrower

National Distribution Fico Scores

The term subprime generally refers to borrowers who do not qualify for prime interest rates because they exhibit one or more of the following characteristics weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, or bankruptcies low credit scores high debt-burden ratios or high loan-to-value ratios. Figure 3.2 illustrates the components that make up a FICO score. Although a score captures a great deal of useful information, it clearly omits certain factors that could be critical to lenders in making credit decisions most notably salary and employment history. Lenders may also consider criteria such as the loan-to-value ratio (whether the borrower is able to contribute a significant down payment) and the income-to-debt ratio (whether the borrower can reasonably be expected to handle the required monthly loan payments given their income). Figure 3.3 shows the distribution of prime and subprime borrowers by FICO score. It is...

The prepayment behaviour of the wealth maximising borrower

Green & LaCour Little (1999) make the interesting point that the loss of the value of the call option on prepayment is to some extent offset by the option acquired with the new mortgage. Assuming that these two options cancel out can be a useful device for empirical work where the focus can then be on the pure refinancing strategy subject to transaction costs.6 Yang & Maris (1996) also offer an interesting perspective by examining the effect of uncertainty regarding the holding period of the mortgage, that is the T in expression (9.8) is considered stochastic. The results of Yang & Maris suggest that the model with certainty underestimates the interest rate differential required to financially justify prepayment. These considerations will be important when we address the issue of why some households do not prepay their mortgage debt when the financial conditions suggest that it is optimal to do so. The question will be whether premature, delayed or non-occurring prepayments represent...

An Overview Of Mortgages And The Mortgage Market

The mortgage market in the United States has emerged as one of the largest asset classes. As of the end of 2004, the total face value of one- to four-family residential mortgage debt outstanding was approximately 8.1 trillion, with roughly 60 of the outstanding balance securitized into a variety of investment vehicles. By way of comparison, at the same point in time, the outstanding amount of U.S. Treasury notes and bonds totaled 3.9 trillion.1 For a variety of reasons, such as product innovation, technological advancement, and demographic and cultural changes, the composition of the primary mortgage market is evolving at a rapid rate older concepts are being updated while a host of new products is also being developed and marketed. Consequently, the mortgage lending paradigm continues to be refined in ways that have allowed lenders to offer a large variety of products designed to appeal to consumer needs and tastes. This evolution has been facilitated by attendant increased...

An overview of the option theoretic approach to mortgage valuation

The modelling presented in this chapter is based upon the idea that the household maximises its wealth by minimising the value of its mortgage debt. So what is meant by the value of a mortgage Take the example of a household with a fixed rate contract. The cash flows on this contract can be discounted at the current market rate of interest. Assume that the current mortgage rate is lower than the contract rate. Discounting the mortgage payments at the current mortgage rate, over its expected life, will increase the present value of the cash flows. A wealth maximising mortgage holder will be tempted to quit this contract and adopt an alternative lower value mortgage. Remember that prepayment might not take place depending upon the values of the embedded call and put options. The value of these options reduces the value of the mortgage to the borrower. That is, they are benefits that reduce the liability.

Contingent liabilities

If an applicant has co-signed for a loan but does not make payments on that loan, mortgage lenders will exempt those debt payments from consideration against the applicant. For this exemption, the applicant must provide copies (at least 12 to 18 months' worth) of the canceled checks that the primary borrower used to pay the monthly charges of that loan. By showing that someone else was making the payments, the applicant can avoid having the co-signed debt counted against him or her.

Equilibrium rationing separating equilibrium and liquidity constraints

Repayment (annuity) mortgage holders displayed behaviour consistent with liquidity constraints, that is they responded to changes in nominal interest rates, and showed no significant sensitivity to changes in expected house price inflation. Endowment mortgage holders were more responsive to user cost arguments. The estimation indicated that income, reflecting affordability constraints, was a significant explanatory variable for annuity mortgage holders only. The evidence tentatively suggested a group continuing to be credit rationed after financial deregulation. The results might also reflect credit rationing of non-housing finance but if borrowers cannot substitute cheaper mortgage debt then some mortgage credit rationing is at least inferred.10

A classification of credit rationing in the mortgage market

This section explores the various conditions under which credit rationing can occur. Rationing arises when the effective demand for funds exceeds the supply, with the observed amount of mortgage debt being equivalent to the short side of the market. Some writers have defined mortgage market rationing in terms of the use of non-price features of mortgage contracts, for example the loan-to-value ratio, to decide the allocation of credit when mortgage markets are in disequilibrium (Kent 1987). For the purposes of Equilibrium rationing is where non-price loan terms and the mortgage interest rate adjusts to achieve a new market equilibrium. However, if lenders face default risk, asymmetric information on the extent of this risk, and costs against which they are not insured, then rationing can persist for some households. Interest rates and loan-to-value ratios can be varied to accommodate the needs of some borrowers but there may still be unsatisfied demand. This may lead to some potential...

Default and prepayment behaviour as competing risks

The use of a competing risk methodology has made significant improvements in the ability to predict mortgage terminations (Deng et al. 2000 Clapp et al. 2001). The approach also removes various biases in estimation and makes for more efficient and consistent parameter estimates (Pavlov 2001). Modelling unobserved heterogeneity has had a particularly important impact, and has actually enhanced the explanatory power of the variables reflecting the embedded call and put options in mortgage debt (Deng et al. 2000) though not all studies have corrected for this. New results have emerged from correctly identifying the competing risks. In particular, recognising household mobility and adjustments in housing demand, as a competing risk has led to different estimates of the influence of key variables on mortgage termination (Pavlov 2001 Ambrose & Buttimer 2000).

You can make your qualifying ratios look better

For many (but not all) loans, lenders judge your borrowing power through their use of two qualifying ratios the housing cost (front) ratio, and the total debt (back) ratio. Both the housing cost ratio and the total debt ratio give lenders a way to measure whether your income looks like it's large enough to cover your mortgage payments, monthly debts, and other living expenses (see examples below). Because the lender with whom you are talking has set a housing cost guideline ratio of 28 percent, your numbers look reasonable. Next we figure the total debt ratio. Total Debt Ratio The total debt ratio includes housing costs plus your monthly payments for your installments (such as auto loans) and revolving (credit cards, department store accounts, and so on) debt. At present, your BMW hits you for a payment of 650 a month the Impala adds in 280. Your credit card and department store balances total 8,000 and require a minimum payment of 5 percent of the outstanding balance per month (...

Information asymmetry and mortgage contract heterogeneity

Theoretical work in the US has been mainly concerned with the trade off between mortgage points and the interest (coupon) payable on mortgage debt (Dunn & Spatt 1988 Yang 1992 Stanton & Wallace 1998). A few cases have explored the possibility of a separating equilibrium for the FRM ARM mortgage choice (Brueckner 1992 Posey & Yavas 2001). The points coupon trade off is important partly because if it leads to a separating equilibrium then the points attached to a mortgage can be used to predict the likelihood of prepayment. This is particularly useful to financial analysts who wish to value pools of mortgage-backed securities (Stanton & Wallace 1998). Mobility is important because the majority of mortgages in the US have 'due on sale' clauses, meaning that a mortgage must be paid off on the sale of the property, thus mobility determines the holding period of the mortgage and therefore impacts on the value of the mortgage debt.9 The work of Stanton & Wallace (1998) significantly advances...

Modelling mortgage demand under conditions of certainty

The general structure of models with certainty is as follows. Typically we examine choices over two periods, or within a single period with a focus on wealth (W) at the beginning of period 2 (end of period 1). The consumer chooses between housing (H) and a non-housing composite consumption good (c). The consumer's problem is to maximise utility (U) over the two periods. This involves choosing optimum amounts of housing, non-housing consumption, and levels of mortgage debt. Of course, this maximisation is subject to the constraints set by income, prices and the rate of return rs on any savings s used to generate wealth. So for example, the amount available for spending in the first period will be limited and the amount of potential wealth at the end of the second period will also form a constraint. Wealth in housing and mortgage demand models yields positive utility. Intuitively, varying the amount of mortgage debt will effect final wealth via the lost opportunities from saving, and...

Modelling mortgage demand under credit rationing

Most (pooled) cross-section research has used a simple discrete choice model such as a probit or logit specification to model the mortgage housing choices of constrained and non-constrained households. Also, most of the research has been concerned with the impact of mortgage underwriting criterion on the probability of home ownership. A comparatively neglected consideration is the nature of the interdependence of the discrete and continuous choices. That is the decision to take out mortgage debt (that is enter or renew owner occupation) together with the decision on the size of debt or gearing. Theoretical work on mortgage demand typically takes the tenure choice decision as given. This issue can be usefully explored via the so called double hurdle model (Cragg 1971 Leece 1995a, 2000b). The discussion of this model also provides a framework for a consideration of approaches to estimation. If a household makes an equilibrium decision then any choices involving zero debt (including...

Empirical studies of amortisation behaviour

Breslaw et al. (1996) reported research on the Canadian mortgage market. The authors made an important distinction between the term and the maturity of the mortgage debt. The term is the time period for which the interest rate is fixed on the FRM. The maturity is the usual life of the mortgage over which payments are calculated, and implicitly represents the rate of amortisation. It is worth remembering that Canadian fixed rate mortgages are similar to those obtaining in the UK, that is rates of interest are typically fixed for between 1 and 5 years. The choice between this term and the maturity of the debt (that is the rate of amortisation) was modelled simultaneously. The estimation involved the use of an ordered bivariate probit model and covered the period 1980 to 1988.

List of Illustrations

Figure 2.2 Mortgage Debt Enables Homeownership and Leads to Wealth Accumulation (Quarterly, 1952-Q2 2008) 11 Figure 2.3 In 2008, Mortgage Debt Accounts for More Home Mortgage Debt Share of Household Home Mortgage Debt as a Percentage of of Mortgage Debt Nationwide of Mortgage Debt for California

Mortgage demand under uncertainty and mortgage contract heterogeneity

The above models have not considered the choice of mortgage instrument in the context of the demand for housing services and mortgage debt as modelled under conditions of uncertainty. This involves the trade off between housing and non-housing consumption and investment in an alternative asset to housing. Alm & Follain rectify this omission and adopt the mean variance approach to mortgage choice that was outlined in Chapter 2, equations 2.5 to 2.8. We have already seen how the choice of mortgage instrument can impact upon the variance of the borrower's portfolio. Plaut's model of optimal amortisation discussed in Chapter 4

The simultaneous determination of mortgage demand and choice of mortgage instrument US

The research reported under this heading relates back to the demand for mortgage debt discussed in Chapter 2 and the possibility, raised in Chapter 7, that mortgage costs were endogenous to mortgage housing demand equations. In Chapter 2 we noted the possibility that the choice of mortgage instrument and the size of the mortgage debt might be simultaneously determined. Theoretical work has suggested the possible importance of this simultaneous determination (Brueckner & Follain 1988 Brueckner 1994a).5 Not allowing for such endogeneity in mortgage demand equations can lead to biased and inconsistent parameter estimates. There is a surprising neglect of this simultaneity in the literature.

United Kingdom disequilibrium mortgage credit rationing research

Muellbauer & Murphy (1997) estimated housing demand equations for the UK covering the period 1957 to 1994 and found that real interest rates were more relevant after financial deregulation. If households are at a corner solution with their demand for housing mortgage debt then real interest rates will not be relevant. Muellbauer & Murphy also argued that expected income growth would reduce housing mortgage demand under rationing as this was used to finance increases in non-housing consumption, a result borne out by the econometric estimation. The role of the nominal mortgage interest rate in econometric estimation of mortgage demand was also reinforced by the results of pooled time series cross-section research (Leece 1995a, b, and 2000a). The tilting of mortgage payments, liquidity constraints and other capital market imperfections mean that nominal cash flows are an important consideration for some borrowers. This

Asymmetric information and equilibrium credit market rationing

Posey And Yavas 2001 Equilibria

The R & S model deals with high and low risk customers in the insurance market. The asymmetric information in this case is the probability of having an accident. An example for the mortgage market is the propensity to default on mortgage debt. Consumers may vary significantly in the financial and psychic costs of default which are likely to remain hidden from the lender (Brueckner 1994c, 2000). So called ruthless default occurs when the option to default is 'in the money', that is the value of a property is less than the market value of the mortgage. However, hidden costs may explain why this default option is not always exercised. Moreover, this information asymmetry can lead to the emergence of separating equilibrium with credit rationing. With full information lenders would offer two separate contracts representing the equilibrium choices of two types of borrower (at W and X). So, for example, those borrowers with high default costs (type h) would be offered take up...

Contact the Credit Source and the Repository Simultaneously

This is good advice except for one critical fact Credit repositories primarily report only that information given to them by your creditors. Unless the repository has botched the data it's been given (quite possible), the repository must contact the (mis)reporting creditor. If the creditor does not respond within 30 days, the repository must remove the disputed item.

Bankruptcy Chapter doesnt necessarily ruin your credit

Many hapless borrowers are talked into ill-fated debt management repayment plans including Chapter 13 bankruptcy. They are told that bankruptcy (Chapter 7 liquidation) will ruin their credit. It stays in the credit file for 10 years. In response, these troubled debtors quake with the fear of stigma and the thought of becoming a credit leper.

How do lenders decide how much I can borrow

In general, the lender assesses the adequacy of the borrower's income in terms of two ratios that have become standard in the trade. The first is called the housing expense ratio. It is the sum of the monthly mortgage payment including mortgage insurance, property taxes, and hazard insurance, divided by the borrower's monthly income. The second is called the total expense ratio. It is the same, except that the numerator includes the borrower's existing debt service obligations. For each of their loan programs, lenders set maximums for these ratios, such as 28 and 36 , which the actual ratios must not exceed.

Mortgage demand other mortgage choices and the nature of the economic environment

This section of the book examines the links between mortgage demand and the other major mortgage choices. These choices include mortgage prepayment, default on mortgage debt, rates of amortisation, and choices between different mortgage instruments (contract design). The choices will in turn be influenced by the nature of the economic environment, for example the existence and extent of credit rationing, or the ability to hedge against risk and uncertainty. Although seemingly disparate topics a preliminary discussion of these issues will illustrate the complex ways in which they are related. In the language of econometrics the interactions between mortgage choices highlights the multiple sources of endogeneity and simultaneity involved in mortgage market modelling. Figure 2.1 places mortgage demand at the core of the conceptual schema, with clear links to the other choices such as prepayment. Much will depend upon the assumptions that we make about the economic environment when...

Why study household behaviour The rationale of this book

Radical changes in housing finance systems give the study of consumer behaviour in mortgage markets extra imperative. Financial deregulation during the 1980s paved the way for major structural changes in mortgage markets. In both the US and the UK the right to sell mortgage debt was extended to a wider range of financial institutions. Recent history has seen the rise of specialist mortgage banks, securitisation, the cross-border sale of mortgages, the growing importance of information technology and the emergence of new mortgage instruments. An impetus to these changes has been the development of fiercely competitive mortgage markets. Neven & Roller (1999) found econometric evidence of an increasingly competitive environment across European mortgage markets. Bennet et al. (1998, 2001) have argued that the supply side of the US housing financing system has undergone fundamental structural changes over the last 25 years. Competition has reduced the points19 and fees attached to mortgage...

Bogus credit counselors can scam you too

If you select some other counseling or debt management advisor, get all promises in writing. Do not accept glowing hype. Read your written contract carefully in the comfort of your home. Federal law (the Credit Repair Organization Act) gives you three days to rescind. Do not pay any fees, costs, or debt installments until after you thoroughly investigate the organization.

Mortgage market adjustment and dynamic credit rationing

The growth in the securitisation of mortgage debt should also have improved market efficiency and effected the speed of mortgage market adjustment. There is some evidence for the UK that interest rate changes have occurred more rapidly for lenders who have used securitisation (Pais 2002). Dynamic rationing should be less evident in this case. For the US, Gabriel (1987) found that changes in fixed rates had become more responsive to changes in the cost of finance. Roth (1988) argued that securitisa-tion had increased both the volatility of interest rates and the speed of interest rate adjustment.

Long Term Debt Liabilities

Liabilities that will take at least 10 months to repay. When qualifying an applicant's income, the lender will consider the total long-term debt payments as a ratio against the applicant's gross income. Installment loans normally have set monthly payments that are used for the income qualification ratios. Except for very low balances, most revolving accounts are qualified based on the minimum required monthly payment at the time of application. For more information, see the Analyzing Liabilities article in the Loan Process section.

Modelling mortgage demand under conditions of uncertainty

The decision problem for the household remains the same, that is to choose utility maximising levels of housing, non-housing consumption, savings and mortgage debt. A variety of models have been applied to this decision problem. A good representative model is that presented by Alm & Follain (1987) a version of which is discussed here (see also Follain & Dunsky 1997). Uncertainty in this modelling framework is present in all markets, save the interest rate on the mortgage debt.9 Such a model can prove analytically intractable, and difficult to estimate. It does demonstrate that housing has a place in the consumer's savings and investment portfolio, as well as the utility function. Alm & Follain simulate the model numerically. In some cases the results of their analysis confirm the results of the certainty model, that is corner solutions emerge. However, their answers prove very sensitive to the choices of values for the cost of debt and the expected rate of return on risky assets...

Empirical research in the United Kingdom

There are few studies of mortgage demand for the UK. This section presents the estimates for a basic mortgage demand equation, with expectations based upon the uncertainty case, reflecting the theoretical arguments presented by Brueckner (1994a). The key variables discussed in Chapter 2 were the discrepancy between savings and borrowing rates, the level of housing expenditure, income and initial wealth. The theory also indicated the importance of time preference and attitudes to risk. The latter factors proved to be influential arguments when the net of tax mortgage interest rate was greater than the net of tax savings rate, or when there was uncertainty and the rate of return on savings was higher than the net of tax mortgage rate. In these cases households would not necessarily attempt to maximise their mortgage debt, but would limit the extent of their gearing according to their individual preferences. In this estimation it is argued that the mortgage interest rate was lower than...

Talk The Talk And Walk The Walk

What the strategies that the Cutaias taught me enabled me to do with these variable rate loans and these interest-only loans and the businessman's loans was to cut my payments in half. That gave me more monthly income, which made my debt ratio flip so on paper I could afford as many properties as I could find. And that's what I did. Having a lower debt ratio also meant that I could get a lower interest rate on my mortgages.

Overview of the Real Estate Investment Process Preparation Planning Real Estate Investment Analysis Tools

For lenders, the bottom line often focuses on the Debt Service Ratio (DSR). With larger investors, the focus is normally on the anticipated return on investment (ROI) and the capitalization rate. If you are serious about real estate investing, you must understand the key financial and analysis terms involved with real estate investments. Debt service ratio

The different mortgage markets

Roche (1999) notes how debt financing has emerged as the 'nearly universal alternative' to paying for a house outright, obtaining the generally valued benefits of home ownership. She evokes the sense of an international phenomenon nicely by citing examples of the many names given to mortgage debt throughout the world, financiaci n de la vivienda in Mexico, credit au logement in France.2 Internationally there are a variety of mortgage instruments. This variety reflects the degree of competition in the respective mortgage markets, together with the institutional and regulatory features of the housing finance systems which delimit the risks faced by lenders and borrowers. This book adopts the view that the fundamental nature of mortgage contracts, their variety and household choices, can also be understood in theoretical terms, and that the extant empirical studies offer insights along with methodologies which can be applicable in many economies. However, we do need to note the...

A comparison of United States and United Kingdom research

A direct comparison of parameter estimates obtained in US and UK research are difficult, and may not be very meaningful. However, there are a number of general lessons to be drawn from such a comparison. The importance of locating the appropriate opportunity cost of equity in property has been noted. The elasticity of demand for mortgage debt with respect to the mortgage interest rate may vary according to the discrepancy between net of tax mortgage rates and the appropriate forgone rate of return. Key characteristics of the system of housing finance, including prevalent mortgage designs might also influence these relationships. For example, the short periods for which mortgage rates are fixed on fixed rate debt in the UK may have resulted in a more short-term perspective on movements in interest rates, and a focus upon comparative costs of mortgage instruments (Leece 2001a). Later chapters will provide further comparisons between US and UK decisions on mortgage size, in particular...

Should I consolidate credit card debt in a second mortgage

If the second mortgage results in your total mortgage debt exceeding the value of the property, you may lose your mobility. Suppose you are offered a better job in another city that would require that you relocate. If you owe 120,000 on a 100,000 house, selling the house means finding 20,000 in cash to pay off both mortgages. If you can't find the cash, the only way to relocate is to default, which would prevent you from buying a house in your new location. I have received a number of letters from people who have found themselves in exactly this situation, asking whether they can transfer the second mortgage to a new house Of course, they can't.

Pros Cons

Using your property's equity for debt consolidation is ideal for debts with high interest rates and long repayment periods. For example, most personal and unsecured loans charge interest rates in excess of 20.00 . Also, with the exception of low teaser rates, most credit cards charge interest rates of 16.00 to 23.00 . A debt consolidation loan can cut in half the interest rates the borrower is paying on those debts. Moreover, mortgage interest rates are often tax-deductible. However, debt consolidation loans are not always the best choice for debts with relatively low interest rates, such as student loans and car loans. A debt consolidation loan can still be advantageous for borrowers who need to lower their overall monthly debt payments. To clarify, remember that your future dollars will probably be worth much less than your current funds. For example, a 1998 dollar is worth only a fraction of what the dollar was worth in 1968. Apply that to a 10-year or 15-year debt consolidation...

Fixed Price

Voila Sarah has purchased a property with no down payment. In fact, she can turn around and cash-out that established equity ( 15,000 in this case) immediately after the purchase is finalized. She can then use that extra cash for debt consolidation, home improvements or to invest in even more properties.


An informal term referring to borrowers and applicants with damaged and poor credit. C-grade consumers are usually delinquent on several accounts, and demonstrate an inability to efficiently manage debt they usually have credit scores obetween 500 to 579. For most C-grade consumers, their only financing hope would be with non-conforming loan programs. In the mortgage industry, C-credit borrowers usually have one or more of the following traits (1) a bankruptcy, foreclosure or repossession during the past two to three years (2) at least 6090 days behind on mortgage or large installment debts (3) at least nine late payments on revolving accounts in the past two years and (4) more than one open collection account. However, with proper attention to debt payments, a C-credit borrower can usually return to A-grade within two to three years. For more information, see

Buying a New Home

Here's how it works If you own your home free and clear, you can use the equity that you've built up over the years to help pay for your new home, without ever having to make a mortgage payment until you permanently move out of that new residence. If you don't own your home debt-free, but you're close, Fannie Mae allows you to work the remaining balance into your new loan (finance it) by taking out a sum of money right away and using it to pay off the remainder of your existing mortgage. The downside is that, unlike a regular reverse mortgage, you won't receive payments. You won't have payments of your own to make either, which may make this option worth it to you. i Any outstanding mortgage debts must be paid off (either by you or by the loan) before you can apply the money to a new home.

General background

The growth of secondary mortgage markets, and their refinement through securitisation where pools of mortgages are packaged for sale to investors who receive interest and capital payments, has been a major spur to research into the mortgage choices of households. For example, both the prepayment of mortgage debt and default on payments have implications for the cash flows accruing to mortgage-backed securities (MBS). These phenomenon then effect the valuation of these financial instruments. The MBS market is now substantial, particularly important in the US, and of growing significance in other countries and Europe. Securitisation can lead to the integration of mortgage markets with other capital markets, reduced interest rates for borrowers, with a reduction in mortgage credit rationing. When mortgage markets are inefficient they place restrictions and implicit taxes on the operation of other capital markets. However, efficient mortgage markets facilitate efficiency in other capital...

Appraisal value

For example, Larry and Lisa bought a house for 200,000 three years ago, with a 180,000 (90 LTV) loan. Because of value increases in the area, they have the property reappraised. The appraisal report estimates their current value at 225,000. By this time, their loan balance is now 178,000. With this new appraisal, they can refinance their current loan at an LTV of 79 . This could eliminate their 95 month PMI payments. They could also opt to take out a home equity loan against their increased equity to consolidate debt or make improvements.


Back-end debt-to-income ratio, defined by the total monthly debt payments divided by the gross monthly income, at origination. A higher debt-to-income ratio makes it harder to make the monthly mortgage payment. Equals one if the mortgage loan is a cash-out refinancing loan. Pennington-Cross and Chomsisengphet (2007) show that the most common reasons to initiate a cash-out refinancing are to consolidate debt and to improve property.

Aging gracefully

Look at Table 3-1 for an example of how your age can work for you in a reverse mortgage. Let's say our borrower, Nathaniel, owns a home worth 235,000 in Jenkintown, PA, and owes no outstanding mortgage debt. He's choosing a Home Equity Conversion Mortgage (HECM) reverse mortgage product and wants a lump sum, giving him all his money in one big check. We'll pretend for our purposes that interest rates don't change into the future (although in real life, Nathaniel's initial loan amount would be affected by rising and falling rates). The table shows how much Nathaniel could expect to borrow if he closed the loan at particular ages. Notice that the older our fictitious borrower gets, the more money the lenders are willing to loan him.

Bank Loan Busters

Bank Loan Busters

There are many physical and mental implications when one is in debt, especially if the said debt is of a considerable amount. Many people don’t realize the extent these implications can have both in the long term and short term. Therefore careful consideration should be given to the following to understand just how debt impacts one’s life.

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