Posts Tagged ‘short sale’

Using government loans after a derogatory credit event

February 21, 2017


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

February 14, 2017


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

December 16, 2013


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?

November 8, 2012

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.

Sell first. Ask questions later.

August 8, 2011

First, I must give credit where credit is due. That title is in a CNN Money article from a quote by Paul Zemsky, who is the head of asset allocation with ING Investment Management. Zemsky’s full quote was “investors are having one reaction to the downgrade: sell first and ask questions later.”

Over the course of the day, I received several calls and emails from clients concerned about interest rates rising. In actuality, it has been a good day for interest rates as they have improved over the course of the day. Why would interest rates improve when stocks plunge?

That reaction is typical- as stocks surge, rates rise… as stocks plunge, rates get lower. Why? As money leave stocks, it usually heads for the safe haven of bonds. Then mortgage backed security bond prices improve, and interest rates improve.

Now I know what you may be thinking, “why would investors put money into US Bonds after the downgrade by the S&P?” It is a great question, and there are a couple of logical reasons for this:

  • During times of financial strife, money often leaves riskier (but higher rate of return) investments such as stocks. That money is moved into the safer (but lower of return) investments like bonds. Viewed at that angle, today’s events followed a logical pattern. If you don’t believe me, ask this guy for a second opinion.
  • The Euro is not a safe bet right now either. With the continued strife and more plans to rescue and/or bolster countries who are struggling, investors don’t have a great choice with the Euro right now. If investors don’t like the Dollar since the downgrade, are they in a hurry to invest in a currency that might become insolvent?
  • The Dollar is still being viewed as a safe haven currency. Even though the Dollar is not a part of the “AAA Club” anymore, it is still a safer bet (for now) than the Euro or any other currency in the world. With the size of the GDP, most investors feel at some point things will turn around.

Bringing this all back to the mortgage world, if you are out looking for a home or thinking about refinancing, what should you do?

  • If thinking about refinancing and have been waiting, now is the time to jump. Interest rates have improved into the low 4’s after being in the mid 4’s most of the year.
  • If you are looking to buy a home, you could consider using the Lock n’ Shop feature we offer. Lock in a rate now for 60 days. That gives you 30 days to make an offer, and then 30 days to close.
  • Buying a short sale property? This one is trickier because you never know how long it will take to get an approval letter from the bank that owns the propety you wish to buy. The Lock n’ Shop wouldn’t exactly fit that scenario. Even so, I wouldn’t panic. Even if interests rates rise, it will probably be only an increase back to the pre-downgrade levels, which were in the mid 4’s.

Remember, investors may be selling now, but they will ask questions at some point in time. When they do begin to think about and question their actions, the markets will more than likely correct themselves and move back to where they were prior to the recent panic attack. That is a typical and logical response. So… logically, you should take advantage of the lower rates while they are available!

types of home purchases

November 2, 2010

My post last week debunking the myth of short sales led to several questions about the different types of purchases. That is a great question, so I thought it would be ideal to follow up the “myth” post with more details on the different types of home purchases.

The first category would be the retail sale. A retail sale is a more traditional view of the home buying process. It involves a buyer looking to purchase a home from its current owner. The current owner may have a mortgage on the house, but they are looking to sell the home for more than what is owed on the house (distinguishing this from a short sale). A retail sale would include homes for sale by owner, negotiated with a real estate agent, and owner financing transactions. This is the quickest purchase transaction.

The next category would be a foreclosure sale. With a foreclosure sale, the bank that held the mortgage (also known as a NOTE in Georgia) took the home back into its possession because the home owner failed to make their mortgage payments.  Theoretically, the bank owns the foreclosure and there are no title issues (though there has been some debate lately. See this recent post for more info).  In most cases, buyers must work with a real estate agent to purchase a foreclosure. These transactions take a little longer than a retail sale for two reasons.

  • As we’ve read/heard lately in the news, there could be title issues or delays in getting clear title back from the attorney on the bank that owns the property.
  • The bank that owns the property typically wants the closing package 3-5 business days in advance of the closing date. In retail purchase cases, the closing package can arrive the day before closing (day of in some cases), but the 3-5 day requirement simply adds 3-5 days onto the total time needed to close.

The final category is the short sale. If you read my previous post, you already know about short sales. In this transaction, the current home owner sells the home for less than what is owed on the mortgage. In order to do this, the bank that holds the mortgage (NOTE) must also agree to this. It is the agreement process that delays short sales from being completed in a timely fashion. The average time is about six months to complete a short sale start to finish (I worked with a couple buying a short sale and it took 10 months).

Which is the right path for you? That is a much better question to ask a real estate agent, but my quick thought is that it all comes down to two factors – time & money.

  • if the goal is to get the best deal possible, that is more likely to happen looking for a foreclosure/short sale property.
  • if the goal is to be in the home as quickly as possible, then one should definitely look to go the retail sale route

I am not in a position to help anyone look for homes. BUT before looking at homes, getting prequalified to buy a home is essential. If your future home is in Georgia, that is something I can do for you. To get started, call or email me!

myth about short sales

October 25, 2010

I regularly receive phone calls or emails from potential home owners wanting to know more information about short sales. A common statement I hear is “I want to get a good bargain and into a home fast, so a short sale seems to be ideal.”

I usually follow up with a clarifying question asking what they know about short sales, and the typical response is – “they are called ‘short’, so the process must be quick.”

For those of you who have been through a short sale process, you know buying a short sale is anything but “quick.” Depending on the article read, short sales average about 6-8 months to complete.

Why this misconception? People hear the word “short” and believe the word refers to time. In this application, “short” refers to the bank that owns the home. In a short sale, the bank that owns the home allows the current home owner to sell it for less than the amount owed on the mortgage. The owning bank “shorts” itself on the funds received at closing and writes off any unpaid balance.

That process is where the term “short sale” originates, and is also why short sales take so long to close. It isn’t the buyer’s bank or even the seller that typically delays the process. Instead, it is the bank that owns the mortgage on the subject property that slows everything down. It isn’t intentional per say, but it takes time to get approval to sell a home for less than the amount owed.

My advice to anyone looking to buy a home, get a good deal, and close in a hurry is to go through the traditional retail purchase scenario (buy the home from the current home owner who isn’t looking to sell it as a short sale transaction). With all of the great and available homes on the market, buyers will be able to find the home of their dreams, get it at a good price, and close on the home in a timely fashion.

Ready to get started with the prequalification process, if you are in Georgia, I’m ready to help. Give me a call or email me to get started!