Buyers getting discouraged

It’s been a seller’s market for many years now. It started as early as 2018 in some purchase price point areas – mainly first time home buyer price points back in 2018. It soon spread throughout the market, and became just as an extreme of a seller’s market as it was a buyer’s market during the housing crash well over a decade ago.

I can understand why buyers are frustrated and discouraged:

• The easy one, I see it every day with my job and talking to buyers.
• Home values continue to increase and are up by 7% (or more) year to date in some markets.
• Mortgage rates are on the rise and have risen above 5% for the first time in many, many years.
• Home affordability is close to an all time low. Combine the rising home values from the past few years with interest rates at 5%, and we’ve almost past the all time level for worst home affordability set in 2006.

While there are many things to be discouraged over, there are some positive signs:

• As of this post, mortgage rates have calmed down. Rates shot up in Feb/Mar/Apr to their current highs. While rates are definitely higher now than at the start of the year, they have – for now – got into a steadier range.
• Homes are now sitting longer on the market, and we are seeing more and more price reductions on listed homes.
• The last several contracts my clients won included a sufficient amount of days for due diligence, the appraisal contingency and financing contingency.
• Most importantly, more inventory is on the way from two sources:
  • A Realtor.com survey found 64% of respondents looking to sell their home by the end of the summer. Pandemic related delays are coming to an end, and people are going ahead with plans to move.
  • Forbearance programs are over. Homeowners have a lot of equity in their homes so expect people to look to sell a home they can’t afford to gain the equity out of it rather than allowing the home to go into foreclosure. This isn’t 2008!

It is still a seller’s market, yet signs show the market beginning to balance. I’ve been telling my clients to hang in there as signs are pointing to things easing up for buyers looking for their new home!

Mortgage Forbearance in the Covid-19 World

Many aspects of our daily lives continue to be impacted by Covid-19. From social distancing, no going out to eat, job furloughs, job layoffs, to the Paycheck Protection Program, I could go on and on.  Here at The Mortgage Blog, let’s continue to focus on Covid’s impact in the mortgage world. One important topic right is now mortgage loan forbearance.  In this post, we will explain what forbearance means and its potential implications for homeowners.

A recent Wall Street Journal article defined forbearance as follows, “The stimulus package that Congress passed in March allows homeowners with federally-backed loans to suspend monthly payments for up to a year without penalty, if they face financial hardship.”  Forbearance is when the mortgage servicer allows the borrower to pause or reduce monthly payments for a specific time period.  Forbearance does not erase the payments owed.  The borrower must repay the missed or reduced payments at a future date.  Ultimately, forbearance is not a grant with no strings attached like other stimulus components.

As the article also notes, the law does not specify how loan servicers must handle loans when forbearance ends.  Some borrowers are hearing that their loan servicers may require a balloon payment when forbearance ends.  Other loan servicers have proposed adding the delayed payments (and accrued interest) to the loan balance, thus requiring full repayment when the loan is eventually paid in full.  At this point, the federal government has not issued guidelines, so homeowners are hearing different solutions from different servicers.

Here are some important thoughts about forbearance.  First of all, if a homeowner cannot make a mortgage payment due to a job loss or income reduction, forbearance is a better option than a late payment or default.  It would be wise for homeowners who cannot pay to contact their loan servicer about forbearance.  But know that forbearance may impact the borrower’s credit.  Forbearance is better than late or missed mortgage payments, but the forbearance status is noted on a credit report.  Lenders may consider forbearance status when applying for a home loan. For example, a potential borrower must be current on their mortgage payments to apply for a conventional loan. While the CARES Act states a credit score should not be negatively impacted by forbearance, being in forbearance could still be considered in evaluating the overall credit risk of the borrower.

In other words, forbearance is not a wise move for someone who still earns enough to pay the mortgage.  Borrowers with the ability to pay should not see this as an opportunity to skip payments. For those considering using forbearance to skip mortgage payments and save money for a down payment, this is not a wise strategy. Those doing something along these lines may be sad to learn they may not be approved for a mortgage on the new home.

Ultimately, if a borrower still has their job, the wisest move is to keep making mortgage payments.  If someone finds themselves laid off or furloughed and cannot pay, forbearance is better than late or missed mortgage payments.

Do you know someone who wants to buy a home in Georgia?  If so, please refer them to me.  Dunwoody Mortgage will help home buyers navigate the new more stringent loan guidelines to successfully close on a house soon.

Waiting Periods After Derogatory Credit Items – Foreclosures

Our nation’s economy has shown positive growth for several years now, following the Great Recession.  Many folks who were hit hard during the recession have rebounded and are doing well now.  Back when times were tough, they may have faced financial crises like home foreclosures or bankruptcies.  These financial crises appear as “derogatory items” on a credit report.

So let’s say your cousin Phil went through a really tough stretch financially.  But he persevered, got that new job, has been paying his bills on time and is saving some money.  He asks you if you think he can win mortgage approval now so he can buy a new home.  Like most people, you really don’t know how to counsel Phil, until now!

You can tell Phil that certain derogatory credit items carry mandatory waiting periods – he must let a specific amount of time pass before he can apply for a new mortgage.  There are different waiting periods for foreclosures, bankruptcies, and short sales.  And the waiting periods also vary by the type of loan Phil can get – FHA, VA, jumbo, or conventional.

Let’s start with a foreclosure.  Phil wasn’t able to make his home payments and the bank foreclosed.  Here are the required waiting periods by loan type:

• FHA – 3 years
• VA – 2 years
• Conventional – 7 years, unless the foreclosure was part of a bankruptcy, in which case the wait is 4 years
• Jumbo – 7 years

It is important to note that the waiting period “clock” starts when the foreclosure deed is recorded with the county.  In some cases, it may take the foreclosing bank several months to document and record the foreclosure deed after seizing the property.  So as a borrower with a past foreclosure, Phil needs to understand that the waiting period clock does not start on the date that the bank seizes the home.  I have run into situations where the bank took quite a few months to record the foreclosure deed, and this little date detail almost delayed the new mortgage.  Many times, the borrower may not know when the prior bank filed the deed after the foreclosure; however, this information is public record and most counties have the data available online now.

We will look at waiting periods after bankruptcies in the next post.  For now, if you or someone you know is like Phil and wants to buy a home, but has a past foreclosure, please refer them to me at Dunwoody Mortgage.  I will pay close attention to the details and even look up the old property online, if necessary, to make sure the borrower meets all lending guidelines.  Don’t waste time looking for a home until you have a high degree of confidence you can close!  I’ll work with you up front to give you the confidence you need.

Using government loans after a derogatory credit event

Last week, we focused on using conventional loans to purchase a home after a major derogatory credit event such as a bankruptcy, short sale, foreclosure, etc. This week, we will focus on VA and FHA loans offered by the government.

In every instance, a government loan has a shorter waiting period after one of these events. It is the loan of choice to use if it will fit your needs. Let’s discuss the waiting periods:

• Chapter 7 bankruptcy: requires a 2-year wait
• Chapter 13 bankruptcy: requires a 1-year wait from the beginning of the payout period
• Multiple bankruptcy filings: VA requires only 2 years, but FHA is a case-by-case basis
• Foreclosure: VA once again is only 2 years, but FHA is 3 years.
• VA Specific: in order the qualify for a VA loan (in addition to being a veteran), there must be a 1 year minimum of re-established after the judgement dates and other derogatory events paid/resolved
• FHA Specific: If HUD has a claim against a borrower for a foreclosed/short sold home (and that home was financed using an FHA loan), a borrower isn’t eligible for a new FHA loan until after 3 years from the date of the claim being paid.

As anyone can read here, government loans have a much shorter waiting period than conventional loans. As low as one year, but mostly just a 2-year wait. An FHA or VA loan would be the preferred method for buying a home after one of these major events. That said, there a couple of situations that make conventional loans the way to go:

• the borrower is not eligible for a VA loan (so you go FHA unless….)
• the loan needed to purchase a home will exceed the maximum FHA allowed loan amount
• there is a claim against the borrower from HUD
• a borrower is not eligible for an FHA loan due to CAIVRS (a government credit monitoring tool to ensure people who take out government loans pay them back)

The last two on the list are not that common, so buying a home within the FHA maximum loan limits would be the way to go. In addition to a shorter waiting period, the interest rate tends to be better than conventional loans, the borrower only needs a 3.5% down payment, and the monthly mortgage insurance rate is lower. A borrower’s credit score will confirm those items, but in general, those are all reasons why FHA loans are the best way to go after a derogatory credit event.

Completed a bankruptcy two years ago, and ready to buy a home in Georgia? If so, we can get started today in the process. Contact me and we’ll make sure you qualify for a loan, and then send you out looking for your next home.

Mortgage life after a derogatory credit event

An unforeseen event takes place… a medical event, job loss, divorce, death of a spouse… before you know it, bills are piling up and they never seem to end. Eventually this buildup could result in a bankruptcy, foreclosure, short sale… a major derogatory credit event. Once it is over, will you ever be able to buy a home again?

The answer is yes. During the housing boom, someone could apply for a loan the day after completing a bankruptcy. Let’s just say guidelines are different now, but not insurmountable. Most people assume there is a 7-year wait after something as big as a bankruptcy or foreclosure. That is true if you are looking to qualify for a Jumbo loan (any loan amount over $424,100). On the other hand, if you are looking to buy a home for say $350,000 with the minimum down payment, is it still a 7-year wait?

No, definitely not.

This post will focus on conventional loans. Next time, we’ll discuss government loans.

What are the waiting periods? Using today’s guidelines*:

• Chapter 7 bankruptcy: requires a 4-year wait
• Chapter 13 bankruptcy: requires a 2-year wait from the discharge date, but 4 years from the dismissal date if the Chapter 13 bankruptcy application isn’t accepted by the courts
• Multiple bankruptcy filings: 5-year wait
• Foreclosure: 7 years unless the home was included in a bankruptcy filing. In that case, it drops from 7 to 4 years
• Other: There is a 4-year wait for a deed-in-lieu of foreclosure, short sale, or the sale of a home during the foreclosure process

*Those are Fannie Mae guidelines. Technically, Freddie Mac does not have minimum waiting period. Underwriting goes by the Automated Underwriting Services findings from Freddie Mac. That said, the “findings” often mirror the guidelines of Fannie Mae. 

In only one of these instances is there a 7-year waiting period. That would be if there was a foreclosure on a home that was not included in a bankruptcy. In every other situation, one could be ready to purchase a home much sooner than 7 years. Government loans are much more forgiving, but conventional loans are to be used in situations where a borrower doesn’t qualify for a VA or FHA loan (more on that next week). Also, the maximum loan amounts on FHA loans are lower than conventional loans, so the purchase price could also play into determining which loan program to use.

Have you filed a bankruptcy, but want to own a home again? You don’t have to wait seven years. If you have re-established credit to a qualifying score, buying a home can come sooner than you think. Unsure of your situation? Purchasing a home in Georgia? If yes to both, contact me today. We can start the prequalification process and see how quickly we can get you into a new home.

 

The possible end of short sales – an annual tradition

It seems like a year ago this scenario was making rounds in headlines. Well, that is because it was in the headlines.

When a home is sold as a short sale, the seller (former homeowner) receives a 1099 for the difference of what is owed on the home they just sold versus the amount they sold the home for in the short sale. For example… a seller owes $300,000 on a home that sells as a short sale for $200,000. The seller receives a 1099 from the bank for the difference of $100,000. That difference of $100,000 is taxable income due to the IRS. The seller could have a tax liability around $25,000 owed to the IRS.

This nightmare scenario for homeowners underwater and attempting to short sale their home has not been a problem over the past several years. The Mortgage Debt Forgiveness Act passed in 2007 allowed short selling homeowners to not be liable for the difference of what is owed from the sale of their former home. This Act expired at the end of 2012, but was extended by Congress for an additional year.

Since Congress is basically done for 2013, and didn’t agree on a lot over the course of the year, this Act will expire at the end of the year. The one hope homeowners still in the short sale process have is that Congress will reconvene in 2014 and extend the Mortgage Debt Forgiveness Act retroactively for another year. If Congress fails to do this, then the debt forgiven by the bank on short sales becomes taxable income for the seller on their next tax return.

Since short sellers already face financial hardships (thus the reason for the short sale in the first place), this would not be welcome news as their choices would be a short sale with a tax liability OR foreclosure/bankruptcy.

Hopefully Congress can begin agreeing and working together a little better in the coming year. Extending the Mortgage Debt Forgiveness Act seems like a “win” for both sides. Let’s see how it all unfolds in 2014.

The end of short sales?

Homes being sold as “short sales” have increased over the last few years. A short sale is when a bank agrees to sell a home for less than what is owed on the current mortgage. It has been a driving force for some homeowners to get out of an underwater situation on their current home.

What many people do not know is that going through a short sale could result in additional income on your taxes. Let me explain. If you sell a home for $100,000, but you owed $150,000, you will receive a 1099 showing “income to you” at $50,000. The debt is forgiven by the bank (in most cases) on a short sale, but the IRS views the difference as taxable income. Depending on your tax bracket, this could result in taxes owed in excess of $10,000.

This scenario has NOT been a problem since 2007. Homeowners selling their homes as a short sale property have not needed to report the difference as income on their tax returns. Why? The Mortgage Debt Forgiveness Relief Act allows homeowners to be exempt from taxes on the difference between the purchase price and amount owned on a home when selling their homes as a short sale.

The Mortgage Debt Forgiveness Relief Act expires at the end of the year. If it isn’t extended, homeowners will be required to file their taxes with the difference as taxable income. This will cut down on the number of short sales as homeowners may turn to foreclosure and/or bankruptcy.

It will be interesting to see how this works itself out between now and the end of the year.

If you are selling a home as a short sale, you need to work now to do whatever you can to ensure the home closes before the end of the year as their is no guarantee of an extension to this act.

Flip this Alpharetta Foreclosure

I – Clay Jeffreys and overseer of this blog 🙂 – thought it would be great to include this post from regular guest contributor Van Purser. While this blog details flipping a home, it also provides some insight into work that can be done on a home as a primary residence or investment property using the Fannie Mae HomeStyle loan I discussed in an earlier post.

In our last newsletter we reported on the status of a HUD foreclosure we were planning on purchasing to renovate and sell.  Since that time the renovation was completed and the property was resold and closed on April 12th.

We felt that this particular home, located in The Hunters Forest subdivision, off of Jones Bridge Rd, should sell for the mid to upper $140’s.  We had originally planned on adding a sunroom to elevate the price to the mid $150’s, but decided not to.  We felt that with our purchase price of $71,000 we would still be able to make a profit without adding the sunroom.

Our plans were to close just before Christmas, and to begin the renovation shortly after the beginning of the year, so that we would have it ready to return to market by March.  Instead we closed on November 30th, and started the renovation immediately, in order to provide work for our crew in advance of Christmas.  It worked out great. We finished on Christmas Eve.  Three weeks, and over $32,000 later we were finished and ready to put property on the market.

We started out $154,900, but after a month realized that the market would not support it and reduced the price to $149,900.  This increased activity, but did not yield a contract.  We continued to monitor the market and decided to reduce the price again to $144,900 after a couple more weeks.  Within a few days we were under contract at $142,000.  Not exactly what we had hoped for, but still worth the effort.

We were so please with the renovation, and the BEFORE & AFTERS show the transformation that took place.  One thing we did differently on this home was re-trim the entire home.  This added a lot of character to the home.  Another thing we did was add the dividing wall between the living room and dining area, to provide some separation.  Also, we had to add a new deck and start over in the bathrooms.

Homes like these are available for purchase, and will provide an opportunity to improve the neighborhood and to make a profit.  If you would like to try one, let me know.

Flip this house

This home is a recent foreclosure we purchased in Lawrenceville.  It was actually listed through our Multiple Listing Service and was originally on the market for $69,000.  We made an offer for $58,000 which was accepted. The inspection revealed a couple of structural issues that needed to be addressed, so we amended our purchase price to $54,800.  For a complete Before & After click here or on the image below.

The renovation took a longer than usual, three weeks instead of two, but not bad considering the amount of work that was done.  The largest contributor to the extra week was the amount of landscaping that was needed.

The yard had eroded over the years due to water run off.  We decided to remove several trees in the front yard, add a rail road tie retaining will in the rear yard and front yard, and we added a tie wall and walk way on the right side.

Cris Abbott, a local contractor, did the work at a very reasonable price. Additionally Cris piped all of our downspouts away from the house.  The balance of the project included the normal things you would expect in a house with deferred maintenance; a new roof, siding repair, new gutters, exterior paint, and we had to side the utility building before painting.

On the inside new light fixtures, plumbing fixtures, new HVAC, plus appliances, painting, counter tops and new vanity tops plus refinishing the hardwoods completed the make over.

By the way; if you have extra money now is a good time to pick up some REALLY GOOD DEALS to resell or to rent out.

Van Purser is a licensed real estate broker in Georgia.  Since1981 he has successfully purchased and renovated over 400 homes.  His expertise is in the area of foreclosures, rehabs and fixer uppers.  Additionally, he has represented hundreds of clients over the years as a broker with Metro Brokers, RE/Max and now with his own firm.  He and his wife, Jeanne, who is also a broker, have been married since 1977.  Van can be reached at 770-623-3313 or by email VanPurser@VanPurser.com

Contingency Reserve Requirements on Renonvation Mortgages

I’m staying with the “renovation” theme from my last several posts. This week I want to address a common question I get regarding one of the requirements on the Fannie Mae HomeStyle Renovation Mortgage, Fannie Mae HomePath Renovation Mortgage, and the FHA 203k Mortgage… “Why do these programs require a 10% contingency reserve?”

The first thing I should do is define a contingency reserve. Fannie Mae and HUD (FHA loans) require a 10% contingency reserve on these renovation mortgages for unforeseen costs associated with the project.

The last thing anyone wants is to get into a renovation project on a tight budget with no additional assets and an unexpected problem occurs. Some potential issues that arise during a renovation cannot really be accounted for until the process is underway. That is why the 10% contingency requirement exists.

The contingency reserve is not an option. Since this is the case, a better question becomes “what happens to the 10% contingency reserve if it isn’t used?”

As anyone who has gone through a renovation project on a home knows, most of the times costs end up going over budget, so it probably won’t be a problem. 🙂 In the event there are funds remaining, usually one of the following occurs with these three programs (203k, HomeStyle, HomePath):

• additional work on the home – in some cases, the contingency reserve could be used to fund additional work on the home. If this isn’t allowed, then the other option is a…
• principal reduction – the remaining funds are used to pay down the loan balance. Depending on the renovation program (and lender originating the loan), the borrower could request a recast of the mortgage. In other words, re-amortize the mortgage to lower the monthly payment
• receive the contingency reserve as cash back – this is typically not an option for the borrower

Contingency reserves can be annoying, but they are definitely needed. As previously stated, the last thing anyone wants is to get near the end of the project and run out of money. What happens then? That is a scenario you never want to face!