Had a Foreclosure or Short-sale? All is Forgiven….Sort Of

March 7, 2014

 

Time flies when you’re having a mortgage crisis, doesn’t it?

 

Can you believe that it’s been almost 9 years since the US housing market began its downward spiral?  Although there were variations by market, in Sacramento County, it was just about August of 2005 when real estate prices peaked, and the party was over.

 

According to RealtyTrac, nearly 7 million people lost their homes to foreclosure or short-sales since 2007.

 

Although the days of the ‘stated income’ loans (just tell us what you make and we’ll believe you without making you prove it) are long gone, and lending guidelines are strict, approximately 1 million of those who lost their homes during the crisis are now eligible for everything from VA loans with zero down, FHA loans with 3.5% down to conventional with 10% down.

 

VA and FHA have only required a 2 year wait after short-sale or foreclosure, but had other income and credit requirements, while conventional loans required a 4 year wait if one could prove a financial hardship rather than mismanagement or inconvenience caused the lose of the home.  Without proof of hardship, the wait on conventional lending is 7 years, and like I said, it’s been almost 9 since this whole thing started.

 

So, if you or someone you know lost their homes during the crisis, you might be able to come back to the market, and with home prices  still about 25% below peak,  could end up buying a home for considerably less than before the crash began.

 

Too good to be true? Not really, but it’s not as easy as claiming an outrageous salary and signing on the dotted line.

 

Andrew Vierra of Wealthwise Mortgage has wisely put together a list of tips to help you get in position to re-enter the housing market, if you so desire. Andrew says:

 

You went through a short sale or foreclosure—maybe a bankruptcy—but you keep thinking you’ll own a home again. But thinking of the home-buying process is like thinking about going the dentist when you haven’t been in a few years: “It’s gonna hurt!”

 

Well, I’m here to tell you: Not so much.

 

Here are 6 quick tips to get you back in the game with little or no pain:

 

1.  Ask. Don’t bury your head in the sand and think you can’t qualify. Underwriting guidelines are changing all the time. They’ve actually gotten looser and you might be closer than you think. Remember: The answer’s always “no”, if you don’t ask.

 

2. Credit Review. I’m not talking about going to www.annualcreditreport.com (this is the place that you can run your credit—free—once per year for each of the three credit bureaus) or other online services. You can do that—and they will show you current and past creditors (people you’ve owed and paid), as well as if you paid anything late. No, what you need to do is get a credit review with a reputable mortgage company you trust. You see, the report a mortgage company uses gives your FICO score using the specific scoring model used by lenders in evaluating creditworthiness. Other services either don’t give you a score, or use a scoring model that doesn’t translate to getting a home loan. A good lender will review your credit report and give you tasks to complete—if any are needed—to be in a position to qualify and buy. Most will give you a copy of the report, too. Tasks to complete may be quite small—like paying down balances on revolving (credit card) bills, etc.

 

  • DO NOT do any of the following without the advice of a mortgage, credit or legal professional

  • DON’T pay off judgments and/or collections. Doing so may lower your score.

  • DON’T pay down/pay off bills. The money you use to do that may not be necessary to getting qualified and may either lower your score (really), or might better be used towards down payment and/or closing costs. Things that make “logical” sense—when it comes to credit—may sometimes actually prove detrimental to your credit. Seriously.

 

3. Short Sale/Foreclosure/Bankruptcy Documents. In addition to what the credit report will show, a lender will want to verify the timing/details of a short sale, foreclosure or bankruptcy.

 

Short Sale: When you closed on the sale, from the escrow company you received a final HUD1 Settlement Statement. This is 2-3 pages—lots of lines and numbers—showing the financial details of the sale. The one your lender will want is the one you received in the mail with the words “FINAL” and a signature/initials of the Escrow Officer.

 

Foreclosure: You will receive information from the institution who foreclosed on your property. That paperwork is needed for the loan file.

 

Bankruptcy: Timing is from the date of discharge. Gather the discharge notice and a full set of the bankruptcy papers.

 

With all of this, the lender needs all pages of anything. They need to see the full picture.

 

Save yourself frustration from going back for more—don’t just grab page 1 and call it done.

 

4. Put the horse before the cart. Don’t start looking for a home until you’re qualified.

 

Even though guidelines have loosened, it can be heartbreaking to look around and find the “home of your dreams” only to find that you’re not ready financially, or you just don’t qualify. And what a waste of you and your real estate agent’s time if you can’t buy what you find.

 

You want to go through the entire “Approval” process with your lender. They should be looking at—and verifying information—from: Tax returns; pay stubs; bank statements; credit report. A lender may do a pre “qualification” where they do calculations on your income and monthly debts and come up with a number for the purchase price of a home for which you “qualify”. But you want your documentation reviewed because income you say you get and that which is “usable” for qualifying aren’t always the same.  Be safe, not sorry.

 

5. Timing & Savings. The timing since a foreclosure or short sale (or even bankruptcy) to be able to buy again varies with the loan program. Many are as short as one year (the new FHA Back-to-Work program is one) if you’ve had a “qualifying extenuating circumstance”. With most programs you’ll need a down payment and closing costs, but that varies as well. VA offers no down payment up the VA county loan limit (and a small down payment above that); FHA requires three and a half percent; Conventional will require a minimum of ten percent down.

 

6. Don’t wait. Start today. Right now. A New Resolution.

 

Some perspective that may help ease your frustration, fear and annoyance with your lender.

 

  • Don’t fight the process. The underwriter is not looking to say, “no”. They’re looking for reasons to say, “yes”. Questions are just need for clarification. Provide them with the ammunition to say, “YES.”

  • What would you want to know about someone who wanted to borrow hundreds of thousands of dollars of your money? Pause. Think about that question. Just like you would do, the lender is evaluating you to determine if they believe they’ll get their money back. Makes sense, right?

  • Find a lender you like and with whom you feel comfortable; one that you feel explains things well and is looking out for your best interest. If it doesn’t feel good, move on. There are plenty of really good lenders available to help.

 

Some people will never come back to the housing market, and maybe that’s a good thing, but if you or someone you know want to get back in, here’s your road map.

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