Cash is King – Upside Down Mortgage Solutions

November 20, 2008

The Info on Impounds

Whether you are purchasing a new home, refinancing as a method of loss mitigation, or doing a cash-out refinance to pay off debt, at some point you will have to make a decision about impounds.

What are Impounds?

Impounds, or escrows outside of California, are basically a forced savings account that your mortgage lender sets up for you, in order to pay your property taxes and homeowners insurance. They make those payments for you, from money you pay with your mortgage every month. If you’ve ever had a property tax come due, and not had the cash to pay it, an impound account might be a wise idea. If your loan has a 90% or greater LTV (loan-to-value ratio), California lenders require such an account.

Advantages and Disadvantages of Impounding

The advantages of impounds all have to do with making it easier to budget. In California, property taxes are late on December 10th (just before the holidays) and April 10th, just as income taxes are due – not having to plan for a large payment at those times is much easier for average homeowners, who may sometimes live paycheck to paycheck.

With homeowners insurance impounded as well, you get the benefit of a monthly payment, without your insurance company tacking on a convenience fee for allowing it.

If you own a second home, or rental property, setting up an impound account may make accounting easier, as you’ll be factoring in the same payment from month to month. With rental properties, especially, it makes it easier to set rental rates that will meet the expenses of the property.

Impound accounts can also protect you from sudden changes in market conditions. In an article in the Los Angeles Times on Sunday, April 1st 2007, real estate journalist Kenneth R. Harney gave an example of a couple who had a sub-prime home loan, one of the 2/28 ARMs that are so much in the media this year. Sub-prime lenders generally don’t offer impound accounts, and if they do offer them, don’t require them. This is done with the intent of keeping mortgage payments relatively low. In Harney’s example, however, he speaks of a colleage who:

“…recently refinanced a young married couple on the verge of foreclosure. They had bought their first house in 2004 with a “2/28” sub-prime adjustable rate loan at 7%. With no escrow account, the monthly payment was just $703. After the first two years, their payment jumped to $857.”

That may not seem so bad, but this couple didn’t have an impound account, and compounding their problems was the fact that their insurance company went out of business, leaving them with no coverage.

What happened next is fairly typical of the industry. As the article states, “Their lender then ‘force placed’ substitute insurance costing $1,700 a year, nearly double the $900 premium they’d had before. Also, because they hadn’t been able to pay their property taxes, the lender paid, leaving the couple owing an additional $5,000.” And then what? Well, in order to recoup the money spend on taxes, “…the lender increased their monthly payments to $1,646,” which was significantly more than what the couple could afford.  If this couple had impounded just their taxes, they would have had a month to find new insurance, and could have approached a refinance from a much more relaxed position.

As Harney pointed out, the lack of required impounds on subprime loans is a significant factor in the current state of the mortgage industry. Says Mike Calhoun, president and COO of the Durham, North Carolina-based advocacy group the Center for Responsible Lending: “It’s an upside-down world. The people you’d think need an escrow the most aren’t required to have them, and the people who need them the least are forced to use them.” Clearly, for some people lack of impounds is the equivalent of a string of car accidents.

As for the disadvantages of impounding, there largest one is: if you are financially stable enough to not have to budget, but can leave the equivalent of your tax payments in a bank or investment account, you’ll earn interest on the money.  Another point against impounds is that you don’t have control over the funds – the bank does.

Still, lack of control of a few thousand dollars seems a small price to pay for the knowledge that your taxes and homeowners insurance will never be late. It’s also important to remember that these payments are factored into your qualifying ratios when you apply for a loan. The “TI” in “PITI” stands for “taxes and insurance.”

The bottom line: even if your lender doesn’t require impounds of taxes and insurance, you should do it anyway. Then you can move on to worrying about more important things, like where to get the best auto insurance quote for your car.


November 4, 2008

Hope for Homeowners: Calculating your Debt-To-Income Ratios to Qualify

Useful Information:

Upside Down Mortgage Help Get started Here!

Listen in on a Interview I did on Loan Modifications and the Fannie Mae and Freddie Mac Streamline Loan Modification Program

Need Help with Hope for Homeowners FHA refinance program?- Start with a foundation in Upside Down Mortgage Solutions HERE!

In an effort to help those in need who want to calculate their income and ratios on their own I thought I would use an email I just received and how we can learn from our mistakes!

Dear Brent:

I received your email concerning the “H4H” program and would like to use your team.  However, we currently do not qualify due to the “31%” mortgage debt to income ratio requirement.

Our current gross income is 131,050.16.

Our current mortgage payment is 2381.00 per month.  That does not include homeowner’s insurance or property tax.  Our property tax this year was $3740.84 and our insurance was $1281.00.  The total of these two amounts is $5021.84, which divided by 12 is $418.48.  We currently put aside 520.00 each month in a savings account in order to pay these “escrow amounts” ourselves.

When {company “W”} corporation first started servicing our loan, I tried to set up an escrow account with them, but encountered such difficulty with their customer service that I decided to pay the taxes and insurance myself.  Also, so far I have been unable to get them to divulge exactly who owns our loan.  They just keep offering to “modify” our loan, but when I ask who owns our loan so that I can avail myself of the “H4H” plan, they say that they don’t know, they just repeat that they only “service our loan”.  Isn’t it illegal to deny this information to me?

I used these calculations to determine our “front end mortgage debt to income ratio“–gross income $131.050.16  divided by 12= $10,920,84, multiplied by .31 =3,385.46.  So we spend 2799.48 on housing per month, but we are not spending 31% which would be $ 3,385.46.  If I calculate it using the $520.00 figure that I actually put away in savings for our escrow we spend $2901.00 for housing, which still falls short.

However, our loan is an “arm/balloon payment” loan that is due to start adjusting in December,2009.  We are trying to take proactive measures in order to avoid a situation where we cannot afford our payments.  We owe 380,949.69 on our loan, and the last time I looked (l ast month) our house value had gone down to app. 230,000.00.

So you see we are “upside down” and face major difficulties when the “arm” starts to adjust.  Is there any assistance you and your team can provide?  What do you suggest that we do?  We thought that we had a 30 year fixed rate when we got the loan because that’s what the loan officer for [company B] kept saying on the phone; when we signed the papers we stupidly did not read them well enough and now have this terrible “ARM” loan hanging over us.  Also, we should be able to get a better rate than 6.985% which is what the rate is right now.  Please write back and advise us.  We would love to use your team if there is any way you can help us out of this mess.  Also we need to know if mitigating our loan will impact our credit scores. Thank you very much!!!! L M


Hi L!

Thanks for the email!

I appreciate all the detail!  It makes my response more useful!

OK let’s take a look at your situation.

It is important to use the correct gross income.  If you are a W-2 employee then it is straight forward BUT if you are a 1099, receive bonuses or are a self-employed person there are additional calculations that need to be considered.  Your income will probably be the most important calculation we make because if we can prove you have less income using different tax records then we need to be doing so to help you qualify.

Next, using the right mortgage payment is important.  You are on the right track with your numbers above so it would come down to your income to determine if the underwriter would truly use all $131K of that income.

Being upside down isn’t the end of the world it is only a minor speed bump.  We need to handle the situation differently but that is easily done.

If the H4H program isn’t a good fit there are other choices for us out there!

When you get some time give me a ring and I will walk you through the process and the paperwork.

Be in touch.
Brent Lane

As you can see calculating the income and mortgage payments correctly are very important in qualifying for the Hope for Homeowners FHA refinance.  If your are slightly off on your numbers then you may head in the wrong direction.

If you need additional help figuring out your income or if you have a complicated situation then please feel free to contact me!

Learn more about Refinancing an Upside Down Mortgage– Get Your Free Report Here

Learn the Basics and Foundation to Coping with an Upside Down Mortgage




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