The Road Map Back to Home Ownership after. Short Sale, Foreclosure and/or Bankruptcy

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1 The Road Map Back to Home Ownership after Short Sale, Foreclosure and/or Bankruptcy Danny Poulos, Mortgage Banker The Elite Lending Team at FEMBI Copyright 2013

2 When Can I Buy a House Again? Alright, so you got fiscally beat up since 2007, and your finances and credit are not what they used to be. If you re thinking that the road to ruin goes on forever, you couldn t be more wrong! This publication is designed to give you a clear road map back to home ownership. We ve broken it down into 3 parts. First we examine the differences between the 3 major derogatory credit events - Foreclosure, Short Sale and Bankrupty. Next, we look at the mandatory waiting periods after these events for different loan products. Part 3 gives you a "road map back to home ownership" so that you are properly positioned to purchase when the appropriate waiting period is up. All the information provided is accurate as of January 1 st, PART ONE What's the Damage? In today s real estate and mortgage lending environment a most frequently asked question has become, What is most damaging to my credit score: A foreclosure, a short sale and/or a bankruptcy?. Here's how it breaks down: Foreclosure Foreclosure is a legal process (in most states) that results in the lender regaining title to the property due to nonpayment by the borrower. When applicable, the court awards a deficiency judgment to the lender the amount of which is determined by the difference between what the house is eventually sold for (minus expenses) and the borrower s mortgage balance. The foreclosure remains on the credit report for 7 years. The statute of limitations on the judgment varies from state to state and 20 years is not uncommon. Deed-In-Lieu of Foreclosure The borrower must document economic hardship and an inability to pay. If there is equity in the property (the home is worth more than the balance due) and there are no other liens, the lender may consider an exchange whereby the borrower surrenders the deed and is released of any obligation to the mortgage note. If it is reported as a foreclosure (lender s

3 discretion) it will remain on the credit report for 7 years but there will not be an unpaid balance reported. Short Sale If the lender is convinced that they cannot collect payment from the homeowner due to financial hardship they may accept a sale price of less than what is owed on the property. The price is normally discounted from a quick sale price in an effort of avoiding the costs and risks of the foreclosure process. In some cases, usually where there are second liens involved, the borrower may still be obligated for an amount owed but the loan would be unsecured. There are various ways for the lender to report the short sale, the most common of which are satisfied mortgage or paid settlement. As a satisfied mortgage the only damage to the credit score is due to any late payments prior to the sale. A settled account is more damaging as it reflects it was not paid as agreed but, in both cases the damage pales to a foreclosure and deficiency judgment. How the lender is going to report the short sale is rarely, if ever, a negotiable item. Bankruptcy Bankruptcy involves a settlement of debts through a variety of means, most commonly liquidation or reorganization. Bankruptcy is severely damaging to a credit score and remains on the credit report for 7-10 years. It is posiible to start building new credit again immediately after a bankruptcy is discharged. PART TWO How long must you wait? Bankruptcy The two most common types of bankruptcy (BK) are the Chapter 7 which involves liquidation and the Chapter 13 which is a reorganization of debts FHA lending guidelines require a 24 month waiting period after a Chapter 7 bankruptcy discharge. In a Chapter 13 bankruptcy there are some circumstances that could allow a new mortgage after 12 months IN bankruptcy. Conventional financing with Fannie Mae or Freddie Mac is available 4 years after a Chapter 7 bankruptcy discharge although there are some hard to meet extenuating circumstances that could reduced the waiting period to 2 years. There is also a possibility of obtaining an automated approval 4 years after the FILE date. The waiting period after a Chapter

4 13 bankruptcy is 2 years from discharge date. VA (Department of Veterans Administration) loans are available 2 years after a bankruptcy and that may be reduced by extenuating circumstances. USDA (US Department of Agriculture) has a mortgage program for designated rural areas that is available 3 years after a chapter 7 and 1 year after a Chapter 13 bankruptcy. Foreclosure In Florida, foreclosures are a legal process for the lender to take possession of the property when the borrower is in default. FHA requires a 36 month waiting period, barring extenuating circumstances Conventional financing is possible at maximum loan-to-values after 7 years but if there is a deficiency judgment filed as a result of the foreclosure, financing may not be available at all. In Florida, judgments are enforceable for 20 years! The VA waiting period is 2 years but there are restrictions if the foreclosure was a VA loan USDA generally requires 36 months BUT the decision can be left to an underwriter s discretion after 1 year if credit has been re-established.. Short Sale A short sale occurs when the lender is willing to allow a sale of the property for less money than is currently due. In most cases in Florida the seller is released without the risk of a deficiency judgment in the future. There may be income tax ramifications but the Mortgage Debt Forgiveness Act was recently extended through Dec 31, 2014 FHA requires 36 months in most situations. There is an exception for borrowers that did not have any late payments prior to their foreclosure that could allow them to secure a new FHA mortgage RIGHT AWAY no waiting period at all! The Fannie Mae waiting period is 7 years with less than a 20% down payment. With 10% down financing is available after 4 years and with 20% down the wait is only 24 months. Freddie Mac maintains a 48 month seasoning requirement VA guidelines call for a 2 year wait

5 USDA previously required a 3 year wait but that has been eliminated. In USDA designated rural areas (ALL of Martin County, for instance) there is NO WAITING PERIOD after a short sale assuming the rest of the credit profile is acceptable. PART THREE The Road Map Back to Home Ownership The waiting periods described above outline when you are eligible to apply for a new home loan. You still need to meet the qualifications and criteria of the program for which you are applying. The most important advice is this "Do not wait until you are eligible before you prepare yourself for being approved!" There are 3 legs that your mortgage application needs to be able to stand on 1. Income / Employment 2. Assets / Down Payment 3. Credit / Debt It is never too early to start getting your "ducks in a row" in any of these 3 areas. It is strongly suggested that you meet with a mortgage banker for a professional consultation very early in this process. Here's what the mortgage banker will do Pull a credit report and credit scores from all 3 repositories: Equifax, Experian and Trans Union. Carefully review and analyze all 3 credit reports for accuracy and then calculate applicable monthly debt totals. Calculate the income that will be used to offset your monthly debt. Explain the acceptable sources and minimum asset requirements for the applicable mortgage loan program. How will planning ahead help you? Income Certain types of income, commisions, bonus', part time, self employment, etc have to have been received for certain minimum periods. Other types of income need to

6 be documented that they will continue for designated periods. everything for some applicants. So, timing may be Down Payments It's best to know how much cash you will need to close so you can be ready when the time comes. Also, if you don't want to be buried in unnecessary documentation of a paper trail, the mortgage banker will show you what assets to consolidate so that aggravation can be avoided. Credit The best practice is to check your credit report yearly for accuracy and to checkfor signs of identity theft but it really becomes critical when applying for a mortgage. There is a fine line between approval and denial and it is drawn by your credit score! The rate of interest is also affected by your score, so if you don't make every effort to increase your credit score BEFORE application it may end up costing you an avoidable fortune over the life of your mortgage loan. In the case of a bankruptcy it is possible and necessary to immediately start rebuilding credit after the discharge. How can you raise your credit score? Your mortgage banker will consult with you to see if any derogatory information on any of the 3 reports is inaccurate or otherwise removable. Credit scores are most dramatically affected by payment history so any late payments that can be removed from the report could be critical. Your ratios of debt to income are also important but there are many ways to raise a credit score without having to pay off debt. The process of optimizing credit scores can take from 30 days to 6 months so you can understand why being proactive is imperative. Here are some general guidelines to follow if you would like your credit profile viewed in a postive light: Credit scores over 640, 680 is preferable and obviously the higher the better At least 3 active trade lines with a 24 month history No recent late payments No open judgments

7 These are of course, only guidelines. Your mortgage banker will do an extremely in depth analysis to determine any possible strategies to get you scores as high as they can be on the day you make mortgage application. Finding Your New Home Once you are confident that you have done everything you need to do to get approved for a new mortgage it's time to start building a real picture of your next home sweet home. You should be able to get a pretty accurate estimate of what price point you qualify for from your mortgage banker. Think about what type of propertysingle family, condo, town home, etc would best suit you and/or your family's needs. How many bedrooms and baths and how much living space would you like and where's the best location for you? Meet with a REALTOR and start investigating what properties are available in your price range that will best meet your desires. There is no sense waiting until your required waiting periods are up to find out that your means do not meet your wants. You will find the expertise of a REALTOR absolutely invaluable and here's the best part their services are paid for by the seller of the home you choose! So, there it is in a nutshell! No matter what type of financial crisis or hardship you have been through there is a road back to home ownership and The American Dream as long as you have a map! Don't despair and don't delay. Don't waste time failing to prepare. Now is the best time to get started while interest rates are low and real estate affordability is high. Call now for a personal, confidential and complimentary mortgage consultation. This week only we are including a free credit report including all 3 off your credit scores! You can even start the process yourself online at Danny Poulos Mortgage Banker / Branch Manager