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Real Estate Hangover

4 Steps to Recovery

Todd A Rooker

www.RookerFinancialConsulting.com

Todd@askToddRooker.com763-559-3800

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Course Overview

• Addressing outstanding mortgage debt• Proper recording of debt satisfaction• Rebuilding credit for future underwriting• Setting goals to build net worth with real

estate• Relapse prevention

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I. ADDRESSING THE EFFECTS OF

OUTSTANDING DEBT ON REAL ESTATE PURCHASES

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A. How long can I be pursued for debt?

1. Unsecured debt

2. Mortgage debt

3. Judgment debt

Professional collection services(1) Debt collection agencies

(2) Debt collection law firms

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B. Three ways to handle debt

1. How to address unpaid mortgages as a result of short sales or foreclosures

a) 100% payment

(1) Pay in full

(2) Payment plan

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B. Three ways to handle debt

2. Negotiate for a percentage of amount owed

a) Lump sum

b) Payment plan

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B. Three ways to handle debt

3. File bankruptcy

a) Chapter 7

b) Chapter 13

c) Title issues as a result of bankruptcy

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C. Necessary action items

5. Pay off, properly satisfy, and manage loose ends: debt negotiation to position for future mortgage financinga) Proper recording

b) Credit reporting

c) Bring closure and tie everything off before moving on

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D. Becoming mortgage-worthy via proper recording of debt satisfaction

1. With whoma) County

(1) Record in county of residence

b) IRS(1)10 years to pursue debt

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D. Becoming mortgage-worthy via proper recording of debt satisfaction

2. Verification of proper recording of all

mortgages and other debts

a)Utmost importance: save all documentation(1) You must assume you will be pursued for the

debt and have proof of satisfaction.

(2) Settled debt may be sold to a different collection agency, and you must have proof/documentation of satisfaction.

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II. KEYS TO SECURING THE NEXT MORTGAGE: A FUNDAMENTAL

CHANGE IN THINKING

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A. Change money management approach

1. Lifestyle versus building net worth: helping clients assess, “Can I afford the home I want?”a) Perception versus reality

(1)There is a perception that income buys a certain lifestyle, but in reality, take-home pay will not support the cost of that lifestyle.

(2)Just because you qualify for the mortgage does not mean you can afford to make the payments.

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B. Mortgage positioning/ preparation: establish two preliminary trade lines

1. Active trade lines

2. Begin to rebuild credit history

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III. FACTORS IN BUILDING A STRONG MORTGAGE QUALIFICATION RESUMÉ: REFOCUS ON ESSENTIALS

(Underwriting Guidelines for Future Mortgage Financing)

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A. Debt-to-income ratio (DTI)

1. Homebuyer’s formula for success: amount of debt divided by incomea) Example: $2,500 monthly debt ÷ $7,000

monthly income = 38% DTI

b) What are ideal percentages?

Highly subjective, use budget!

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B. Employment

1. Self-employed borrowersa) Last two full years of income

b) Is the business growing?(1)If first year’s income is greater, the lesser

figure is used.

(2)If second year’s income is greater, an average of the two years is used.• Second year increase to offset previous

year’s income

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C. Successfully manage two or more trade lines

1. Maintain ratiosa) What are the Ideal Credit Card to build

credit score?

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C. Successfully manage two or more trade lines

2. Consistent paymentsa) More payments, is better.

b) Impact of one missed payment (30 days late) can be up to 100 points on a credit score.

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C. Successfully manage two or more trade lines

3. Build reserves for qualification and down paymenta) Cost of mortgage insurance

b) FHA guidelines: premium established based on credit score

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D. Essential building blocks

1. Measured progressa) Never, ever miss a payment.

(1) This is a difficult mindset because settling debt involves doing that very thing.

(2) People become desensitized to it, thinking, “Hey, I can get away with this.”

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D. Essential building blocks

b) Avoid relapse; don’t relax or go back to old habits(1)Keep foot on spending brake while

increasing income

(2)Lifestyle not as important as net worth

(3)Have a second signer required to draw on accounts for accountability

(4)Share your goals with someone and check in with them on progress

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D. Essential building blocks

c) 70% of those who file bankruptcy do so a second time.

d) Credit counseling has a 90% failure rate.

e) The vast majority of people never regain their lost good credit.

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D. Essential building blocks

2. Must have mindset and great desire for financial stability above all elsea) Build long-term stability through solid real

estate purchases and other decisions impacting net worth

b) Saving for the sake of saving

c) How to make major purchases(1)Example: buying a car with cash

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IV. RELAPSE PREVENTION --Getting over the real estate hangover

1. Focus on money management and future financinga) Understand how difficult budgeting and

controlled spending is(1)Continue to work as hard after paying off

debt: use those same habits and hard work to build net worth