foreclosure

There is a lot of misinformation going around about what the impact of a Short Sale is on your credit and whether you can get a new mortgage after short selling a home. Below are the current Guidelines for FHA, and Fannie Mae.

FHA has recently changed their rule so that if a short sale occurred and all of the borrowers payments were made on time (no late payments) then they may be eligible for a new mortgage as long as the short sale was due to extenuating circumstances and not to simply take advantage of market conditions (see below). As you can imagine, this may be difficult to demonstrate. Otherwise, if any payments were made late or you cannot demonstrate extenuating circumstances, then it is a 3 year period before new FHA financing can be considered.

Fannie Mae policy is pretty straight forward – It is a minimum of 2 years to re-establish credit after a short sale.

It is very difficult to predict how a short sale will affect an individual’s credit score because there are so many different factors involved; How good was the credit to begin with? How many house payments were made late? Did they pay all of their other bills on time? Etc, The short sale will most likely be reported as a settled account paid for less than the amount owed and will have a dramatic impact on credit score even under the best of circumstances.

Here is the excerpt straight from FHA:
Borrowers are not eligible for a new FHA- insured mortgage if they pursued a short sale agreement on his or her principal residence simply to
•take advantage of declining market conditions, and
• purchase at a reduced price a similar or superior property within a reasonable commuting distance.

Reference: For detailed information on converting existing principal residences into rental properties, see 4155.1 4.E.4.g

Borrowers Current at the time of Short Sale
Borrowers are considered eligible for a new FHA-insured mortgage if, from the date of loan application for the new mortgage
•All mortgage payments due on the prior mortgage were made within the month due for the 12 month period preceding the short sale, and
• All installment debt payments for the same time period were also made within the month due.

Borrowers in Default at the time of Short Sale
Borrowers in default on their mortgage at the time of the short sale (or pre-foreclosure sale) are not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale.
Note: Borrowers who sold their property under FHA’s pre-foreclosure sale program are not eligible for a new FHA-insured mortgage from the date that FHA paid the claim associated with the pre-foreclosure sale.

This is Fannie Mae’s Guideline:Preforeclosure Sale
A two-year period is required to re-establish credit, measured from the completion date.

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When we started selling homes in 2001, short sales were unheard of in Metro Detroit.  Foreclosures were rare in Oakland County.  But times have changed and this year we have had an enormous uptick in our short sale business.

Short sales are taking place in every price range.  In the last 30 days we’ve helped buyers and sellers to close on homes with list prices between $110,000 and $999,000 in communities like Bloomfield Hills, Royal Oak and Orchard Lake.  We’ve got 5 other short sale homes in the pipeline right now, all with offers on them and in to the bank for evaluation.

Some scenarios can make a short sale even more challenging to handle successfully.  Dmitry recently navigated treachorous waters with a short sale that involved private lien holders in addition to the banks.  Three individuals had made personal loans to the owner and did not really want to accept anything less than payment in full.  The banks were offering a few grand to them to scram.  If the home and gone to foreclosure they would not have seen a nickle.  In the end there was intense drama for a few weeks but Dmitry got everyone to the closing table.  The buyers got a great house and the seller got out of a bad situation.

Buyers, you can get a deal with a short sale, but it comes at a price.  If you have the time and the patience you could be rewarded handsomely.

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I have been hearing people saying lately that foreclosure is so common now that being foreclosed really doesn’t have the same negative impact on credit and borrowing ability as it used to. Can this be true? Absolutely not. This article is directed at those folks who are considering walking away from a property they own because it has lost value – not because they are having a financial hardship, like job loss. If you choose to “give it back to the bank” you should understand the long term implications. A foreclosure will have at least 5 potential long term issues associated with it.

Credit Score Damaged
OK, it goes without saying that your credit score will be hammered. This is not an exact science and depending on what your credit report looks like now will affect the score reduction. However, you can expect your score to go down by 100 maybe 200 points or more and stay that way for several years. The foreclosure itself will stay on your credit report for a minimum of 7 years and you’ll be explaining that to creditors any time you apply for new debt.

New Loans Hard to Get
Lenders of all types – automobiles, credit cards, department stores, gas stations, installment loans, mortgages, home equity loans, every lender uses your credit score and credit report to determine your willingness to repay your debts. If you walk away from a mortgage loan every lender you currently borrow from, and those that you may apply with in the future, are going to wonder “If you didn’t repay that loan what’s stopping you from walking away from our debt?” You will not be able to obtain any mortgage financing for approximately 4 years (and only then if you have re-established good credit) and you may even have trouble leasing a place to live because landlord’s look at your credit score.

Existing Credit Cards Limit Reduced and Rates Increased
Surprising to some folks, your credit card companies review your credit report every year and even if you are paying that bill on time they can and will raise the interest rate on your credit card if your credit score goes down. They may also reduce your credit limit or change the terms on your card or even cancel and close the account.

Higher Insurance Rates
Insurance companies also use credit score as one means to determine risk and they may increase your rates if a score reduction occurs. This can impact your auto insurance, home insurance, even your health insurance!

Home Equity Loans and Second Mortgages can continue Collection Efforts
One thing that most people do not understand about foreclosure is what happens to a second lien on the house. If you have a home equity loan or a second mortgage on the property that lender will be forced to release their Lien on the home for the foreclosure to go through. However, this does not mean that they give up their legal ability to collect on the debt. The second mortgage lender will place a collection account on your credit report for the full amount of the debt and that collection account will not go away until you pay them off or settle the debt. This will make the impact of the foreclosure even worse for your credit score and ultimately you may be forced to pay the debt even after the foreclosure is completed.
The bottom line here is that the impact of a foreclosure has not changed. If anything has changed it’s the perception that letting a home go to foreclosure is somehow OK. Foreclosure will have far reaching implications on you and will continue to haunt you for years to come. If there is a course that you can follow that does not involve “giving the keys to the bank” then you should look hard and long at it because the foreclosure may seem like a good short term fix but in the long run it’s going to cost you a lot of money and heartache!

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So, you own a house and are wondering if you should refinance? Can you get a new loan? Are rates low and are they going lower? Man, you’ve got a lot of tough questions!

There has been a lot buzz lately about mortgage rates and mortgage availability; Rates are at 5% and the government is going to lower them to 4%. Nobody can get a loan. What’s the real deal? Well, we all know that the federal government does not “set” mortgage rates. Those rates are determined by the supply and demand for Mortgage Backed Securities (MBS) in the market place. When demand is high mortgage rates go down and vice versa. Lately, with all of the foreclosures the demand for MBS has fallen off because when a loan in a portfolio of loans (called a MBS and sold to investors) goes into foreclosure the investors in that pool all lose money, so mortgage backed securities are not the no-risk investment they were once thought of.

In steps the Federal Reserve with a mission to lower mortgage rates in an effort to stimulate the bruised housing market and what do they do? They become a buyer of mortgage backed securities – and a huge buyer to boot. The Fed announced last Wednesday a plan to purchase about a trillion dollars in MBS. The mortgage secondary market was elated and rates went down from 5.5% (conventional loan to $417,000) with no points to a low of 4.875%. Wow! The thing is that this can only be sustained if the Fed continues to support demand by buying and they can’t be a buyer everyday forever. So, as you can imagine, rates started creeping up the very next day and are currently at 5.375%. Still interest rates at or near 50 year lows.

The problem right now with keeping rates low is that the government is creating trillions of dollars of new government debt to pay for all of the various bailouts we are involved in and interest rates have to be attractive enough on this debt to encourage buyers to buy it and that is putting upward pressure on rates in general.

The bottom line on rates is that they are very attractive right now and although there may be some dips the likelihood of a significant drop is not very high.

In terms of availability, if you have good credit and equity in your home (or a down payment to buy) you can still get a great mortgage loan. Contrary to what you may have heard there are even some outstanding Jumbo loans available today. In my office we are doing loans up to $1.5 million at 5.25% on a 7 Year ARM. Granted, you have to have a 30% equity position in the property but if you do 5.25% is pretty incredible on a loan this size.

So, rates are great right now and are probably going to stick around this level for the immediate future, loans are still being made and if you are in the house buying market or considering a refinance the timing may be just right.

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Unfortunately, the number of people who owe more than their house is worth is increasing in Metro Detroit.  If you are staying in your house, you don’t have a pressing issue, though the new housing bill that is coming out on March 4th may provide you with some relief.  More on that later when the details come out.

If you have to sell your home now, and you are upside down, there are some things you should know. Some people have the cash to bring to closing when they owe more than it they’ll net at close. Most simply don’t.

One option is a Short Sale. This is when the lenders agree to accept the shortfall and write it off. They may ask you to contribute as much as you can, or they may write off the entire amount. If there is a first mortgage and a second mortgage, then both lenders will need to agree to the outcome. Other liens will complicate the picture too.

You need someone experienced in short sales to help you. Chose wisely. The bank is not expecting to deal with you: they are want the package put together by a professional.  In order to have any success with the bank, the transaction requires great attention to detail and follow through. Banks notoriously lose short sale packets over and over.  Last summer I faxed a short sale packet to a lender at least 12 times.  I called to confirm receipt.  Each time I called in, nobody knew where it was… That’s just the reality.

You will not be paying the Realtor’s commission, or, most likely, many of the other things associated with a short sale, like tax prorations, transfer tax, etc. The bank usually pays most of those expenses.

You need to be 100% committed to the process. Short sales are not quick and easy, but with a solid plan, the pain can be reduced.

There is really nothing “short” about short sales.  They usually take much longer than the typical sale, mostly because we are waiting for banks to make decisions.

Banks usually don’t tell you how much they will accept until after you have an offer. That means we start the process without knowing how it will end.  It is important to have a very good grasp of the market.  You need an offer to get things really started. Pricing and marketing are key.  Buyers can be scared off by short sales because they don’t want to take on the uncertainty.  We have to do a good job of demonstrating that we are on top of the process.

There are some things you will need to do to facilitate your short sale:

1. Write a hardship letter. In your own words tell the bank why you are not able to pay the shortfall on the mortgage. Typically banks are looking for things like illness, job loss, etc, but just tell them honestly what the problem is.
2. Gather your last 2 tax returns, w-2′s and current bank statements and current pay stubs.
3. Talk to the bank. The banks don’t want your house, and they need to hear from you. You might run into some brick walls, but start the dialog. If you chose to work with us on the short sale, we will take over most of the bank discussions after we list the property. We will also keep you informed about our progress with the bank. We have to work together as a team to succeed, so it is important that you keep us informed to any changes in your status.

Short sales have generally not impacted a seller’s credit score as much as a foreclosure. You may wish to consult with a tax adviser to determine if you will have an tax consequences from a short sale.

Short sales can be a great path toward avoiding foreclosure and a real relief for a strapped home owners.  If you need help or guidance about working on a short sale for your Metro Detroit home, we would be happy to talk to you.

Here are some other articles we have written about short sales:

11 Things about Buying a Short Sale in Oakland County

A Short Sale Question

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Last week Oakland County introduced a plan to help get some of the vacant foreclosed homes off the market in select Oakland County communities.  Their press release follows.

I need to call the county and ask some questions.  The program seems very generous and should help sell some foreclosed homes.  I am not sure why some communities were left off of the list.  For example, Birmingham is on it, but Beverly Hills is not.  Royal Oak Township is on, but the city of Royal Oak is not.  No go for Bloomfield Township, but a yes for Troy.  This has me questioning how communities became eligible.

As much as I know the foreclosures need to get off the market, this gives them a steep advantage over the regular resale homes that are already severly challenged for finding buyers.  The foreclosures are selling, for the most part, without much additional help.  Low prices do that.

“Pontiac, Michigan, February 17, 2009 — More families in Oakland County may be able to find homeownership within their means thanks to a new program administered by the Oakland County Community & Home Improvement Division. The Oakland County Home Buyer Program is aimed at helping low and moderate income families take ownership of vacant, foreclosed single family homes and condominiums as their primary residence.

An informational workshop for prospective homebuyers will be held Saturday, February 28, from 9 a.m. to noon at the Oakland County Executive Office Building Conference Center, 2100 Pontiac Lake Rd., just west of Telegraph Rd., in Waterford. Pre-registration is not required.

“Families who thought they could never afford their own home now have the best opportunity to become homeowners through this unprecedented program,” Oakland County Executive L. Brooks Patterson said.

Oakland County can provide no-interest loans for down payment assistance, closing costs, home improvements or other financing. The homebuyer must prequalify for a fixed rate mortgage loan from a lending institution. This loan represents 51% of the purchase price. Oakland County will finance the remaining 49% of the purchase and rehabilitation costs up to $100,000. The homebuyer must also provide $2,000 to initiate the purchase. The homebuyer only pays on the conventional mortgage obtained from their lender. Payment on the down payment and home improvement loans is deferred until the property changes ownership.

Homebuyers with incomes at or below 120% of Area Median Income (AMI) are eligible for assistance. For example, a family of four earning up to $83,900 per year is eligible under this program.

Funding for the Oakland County Home Buyer Program is provided by the U.S. Department of Housing and Urban Development’s (HUD) Neighborhood Stabilization Program (NSP). This one-time $17.4 million emergency funding supplements the Community Development Block Grant (CDBG) program to purchase foreclosed homes at a discount, and rehabilitate or redevelop the homes to stabilize neighborhoods impacted by foreclosure and abandonment, and reverse the decline of neighborhood housing values.

The Oakland County Home Buyer Program covers properties in select Oakland County communities. Contact Farmington Hills, Pontiac, Royal Oak, Southfield, or Waterford directly to inquire about home buying assistance programs in their communities.”

You can find more information on the programs on the county’s web site.  If you need a Realtor to guide you through your purchase, I would be happy to assist you.

Photo by TW Collins

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Birmingham is certainly known for its upscale downtown, incredible restaurants and it’s wonderful neighborhoods.  We have pricey real estate here too, compared to much of the rest of the region.

On Inauguration Day, I showed Birmingham’s only HUD home active in the MLS.  To date, there are have been few HUD homes in Birmingham, but we could have more in the future.

My client asked me, “Aren’t HUD homes in bad areas?”  This seems to be a common perception, but HUD homes are the product of people who had FHA guaranteed mortgages losing them to foreclosure.  2009 FHA loan limits for Oakland County are up to $273,700, and we certainly have many homes in that price range in Birmingham.

FHA loans have allowed people to get into homes with lower down payments, and have been of particular assistance to first time home buyers.  In the last 9 years we didn’t see that many FHA loans financing Birmingham/Bloomfield Hills homes.  It was much more common to do a piggyback loan, with a first mortgage and a second mortgage to avoid PMI.  Piggyback loans gone now that underwriting guidelines have tightened up.

HUD homes are sold via incredibly transparent on-line auctions, which frees them from some of the issues that have surrounded the sales of other foreclosed homes. The bids are made through HUD approved brokers (like us), and the auction results are posted daily. Owner occupants are given preference and may bid earlier in the process, without competition from investors.

Investors also need to conduct any inspections prior to making an offer. Owner occupants are given much more leeway in this regard.

These homes provide an incredible opportunity for buyers, though one should proceed with caution.

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I want to stand on the rooftop and shout Screaming Deal! Screaming Deal! But I know that won’t go over too well with the neighbors, so I am keeping my large mouth closed.

I can’t believe the price on this house. We just reduced it by $50,000 today and it is priced below market for a quick sale. You will LOVE the quality and the amenities offered. This truly is a rare opportunity to own at this price in downtown Birmingham. It is priced better than the foreclosures and it is in perfect condition. Call me before it is gone.

For larger pictures and more details, visit 731 S. Bates on our web site.

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Any Realtor that has sold a short sale will warn you that the process is arduous for the buyer, the seller, the agents, and everyone else connected to the process. Right now the system works requires that the seller, who owes more than the value of the home, first find a qualified buyer before they can begin negotiating with the bank or banks. In other words, nobody knows what the banks will actually accept, and it can take months for a file to pass through the system with uncertainty at the end of that long wait. Lots of agents are steering their buyers away from short sales because there are enough other good deals out there that the uncertainty becomes unnecessary.

Fannie Mae announced yesterday that they are testing a pilot program in Phoenix and Orlando that will pre-approve short sales for 400 sellers.

I am hopeful that they will have quick success and will roll out a nationwide program. A short sale is often the best way for a seller to save themselves from foreclosure and do whatever they can to protect their credit history along the way.

Even with this protection in hand, a short sale seller will need to good advice and counsel. If you are a Metro Detroit home seller, you need to make sure the agent you are working with has experience handling short sales. The knowledge required is very different from a regular retail transaction, and the agent and seller have to both be very committed to making sure the sale is successful. Without that commitment and knowledge, it really will not work. Our team has been working with Oakland County home sellers on short sales for the last few years. If you need help, we are happy to talk to you.

h/t Santa Clarita Real Estate Blog

photo by Dimitri Neyt

Other short sale information:

From the Mailbag: A Short Sale Question

Short Sales: The New Frontier for Bank Fraud

11 Things About Buying a Short Sale in Michigan

The Foreclosure Process in Michigan

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From the doom and gloom we are hearing around town these days, I bet most Michiganders would be surprised to know that RealtyTrac said we were 5th in foreclosures in November.  1 in 309 Michigan homes is in foreclosure, compared to the nation’s leader, Nevada, where 1 in 76 homes is in foreclosure.

A few big banks agreed to stop foreclosing until after the new year, so the January numbers could bounce significantly, especially with all of the recent layoffs across the country.

Chart from Realtytrac.com

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This week I have gotten a flurry of phone calls from people who found super exciting homes “on the internet.”  Actually, they all found homes on Trulia or on Realtor.com and then they called me to ask to see them.  Amazing bargains waiting to be snatched up by eager buyers.

I like Trulia a lot.  They provide some outstanding resources for buyers and sellers.  I answer lots of questions on Trulia Voices because I want consumers to have good information.  But buyers need to know that some of the listing data that Trulia offers is not always what it seems to be.  Good for me, I guess, because then the buyers call me.

Rule # 1:  If it seems too good to be true, it probably is.

Everyone across America has heard about the house in Michigan that have sold for $1 on ebay.  Of course, most houses sell for much more.  I get many calls from people who find homes in Bloomfield Hills, which is home to America’s 4th wealthiest zip code, for $10,000.  What these prospective buyers are really looking at are rental homes.  Beautiful newer homes over 5,000 square feet with high-end appointments.  I have seen rentals in Birmingham and Bloomfield go for up to $18,000 a month this year.  In all fairness, most of these calls come from Realtor.com.

Rule # 2:  Just because you find it on Trulia does not mean it is for sale

Trulia seems to be picking up information from sources other than the MLS.  I am not sure if some of it is public record data, or it is all from sites like Realtytrac.com.   Some of the ”homes for sale” on Trulia are actually pre-foreclosures, and Trulia is reporting the amount the bank foreclosed.  This could be significantly different from the amount the bank will accept, if and when they get control of the home and put it on the market.  There could be second mortgages, tax liens and other money that the bank will try to recoup.  And the seller could redeem.  I had some prospects who found a home on Trulia for $450k recently.  The last list price was $1,500,000.   The home is not on the market.  How often have I heard a buyer say, “Oh, that is why I can’t find it on any other sites.”  Yep, that is why. It is not for sale.

If you want an accurate home search tool, I invite you to use mine.  Take a look at http://familyhomes.skbk.com  If you find something you like, just give me a holler!  I promise everything you find there is for sale, and at the price advertised.  That is the beauty of the MLS.

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