A Deeper Dive

Loan Modifications and Scams

A loan modification changes the terms of an existing mortgage to help a borrower avoid foreclosure. Only your lender or loan servicer can approve a modification, so be cautious of any company that charges fees to “obtain” one for you.

Warning signs of a modification scam include:

• Fees requested up front, before any service is performed
• Guarantees of approval, a money-back promise, or a specific low rate
• Advice to stop making your mortgage payments
• Requests to send your payments to them instead of your servicer

If you are struggling with payments, contact your servicer directly or a HUD-approved housing counselor.

Home Equity Lines of Credit

A home equity line of credit (HELOC) can be a flexible way to borrow, but the terms deserve a close read. Features to be aware of:

• Rates are often adjustable and can rise over time
• The account may be reported like a revolving credit account, which can affect your credit
• Some have interest-only payments for a period, followed by higher payments
• Some include a balloon payment, meaning the remaining balance may be due all at once

Ask how the rate adjusts, what your payment could be at a higher rate, and what happens at the end of the draw period.

Balloon Loans

A balloon loan has payments based on a longer term, such as 15 or 30 years, but the full remaining balance comes due after a shorter term, often 3 or 5 years. At that point, you would need to pay off the balance or refinance. It is similar to a car lease with a large lump sum due at the end.

Before choosing one, ask what happens if, when the balloon comes due:

• Your credit score has dropped
• Your income has decreased
• Your debts have increased
• Your home’s value has fallen
• Lending requirements have changed
• Your loan officer has moved on

Balloon loans can carry more risk than loans with a fixed payoff schedule. Ask about fixed-rate alternatives that fully pay off over their term.

Selling Your Home

Your net proceeds when selling are usually lower than the sales price. Market conditions, agent commissions, buyer concessions, and closing costs all reduce what you take home, and your mortgage must be paid off at closing.

Before you decide to sell and buy again, ask your agent and loan officer for an estimated net proceeds worksheet. Being realistic about your numbers helps you plan your next purchase with confidence.

Debt Settlement Companies

Ads promising to settle your debt for “pennies on the dollar” can sound appealing. Before enrolling, understand the fees, the possible impact on your credit, and the tax rules. Debt that is settled for less than you owe may be treated as taxable income, so ask a tax professional what it could mean for you. If an offer sounds too good to be true, it may be.

How Credit Scores Work

A credit score is a number that helps lenders estimate how likely you are to repay a debt. The most common model is the FICO score, which ranges from 300 to 850. When you apply for a mortgage, your score helps determine your loan terms and interest rate.

According to FICO, scores generally weigh these factors:

• 35%Payment history including late payments
• 30%Amounts owed, especially balances compared with credit limits
• 15%Length of credit history
• 10%Credit mix such as cards, installment loans, and mortgages
• 10%New credit including recent applications

Higher scores generally qualify for better terms, and scores below the mid-600s may lead to higher interest rates. Score ranges and requirements vary by lender and loan program. Your score is only one factor. Lenders also review your credit report, employment history, income, debt-to-income ratio, and the property.

A score is a snapshot in time. By using credit wisely, you can improve it over time.

Improving Your Credit

There is no magic fix for credit, only good habits and time. Steps that can help:

• Pay on time. Make at least the minimum payment by the due date.
• Keep balances low. Try to pay down accounts, and avoid using one card to pay off another, which only moves the debt.
• Be selective with new credit. Opening accounts can hurt your score and add to your costs.
• Address collections. Ask a trusted professional how to handle accounts in collections.
• Check your reports. Review your credit reports at least once a year at annualcreditreport.com and dispute errors promptly.
• Treat bankruptcy as a last resort. It can limit your options, raise your rates, and remain on your credit record for years.

Be wary of companies that promise to “fix” your credit. The Federal Trade Commission offers free guidance on repairing credit yourself.

APR and Other Costs

The annual percentage rate (APR) is a helpful comparison tool, but it does not capture every cost of a loan. Costs that are commonly not included in the APR include:

• Appraisal and appraisal review fees
• Credit report fees
• Home inspection and termite or pest inspection
• Survey and flood determination or certification
• Title insurance and other title services
• Recording and filing fees
• Notary fees
• Tax certificates and tax service fees
• Homeowners and flood insurance premiums
• Points paid by the seller

Fees vary by loan and location. Compare Loan Estimates from each lender to see the full picture of your costs.

Student Loans

Student loans are generally counted in your debt-to-income ratio, even when payments are deferred. Each loan program has its own rules for how a monthly payment is calculated, and some use a percentage of your outstanding balance. Share your student loan details early so your options are clear.

Self-Employed Borrowers

If you are self-employed and your income grew recently, ask about programs that may consider your most recent tax return. Eligibility depends on the loan program, your business history, and your documentation, so a conversation early in the process can help you plan.