Only recently have home values recovered their earlier losses that occurred during the housing debacle of the last decade.
Today, we’re still feeling the effects of the loose lending standards that caught too many in a bad situation but as time goes by, those effects are further in the rear view mirror.
In the current mortgage market, lending guidelines have returned to a more standard set of rules. Gone are the days of “no documentation whatsoever” loans where the borrowers didn’t have to verify anything about their income or assets.
Those with poor credit were also allowed to participate in the housing bubble that began in the mid-2000’s and some lenders began to require less money down to qualify for a mortgage.
When you combine the toxic mix of poor credit, little down and no verification of the borrower’s income or assets, the result is obvious. At least it is today. 10 years ago it seemed that anyone could finance a home. The thinking with some lenders and buyers alike was that if something went awry and the borrowers couldn’t make the mortgage payment, the home could be easily sold for a profit.
In fact, many buyers bought real estate with very mentality, to buy and flip a home within 60 or 90 days while never making a mortgage payment on the property.
For a while, that home buying party lasted. But at some point, there were no more buyers. Home ownership had reached record levels but many markets were saturated and buyers who planned on flipping a home they couldn’t afford found their plans wouldn’t work. There were no more buyers.
Loan programs designed for those with poor credit or no income vanished along with the lenders who made them. As the housing industry began to affect other areas of the economy, unemployment rose and people lost their jobs. Those buyers who did qualify with a standard mortgage with no intentions of flipping anything soon found they too were feeling the financial strain.
The financial crisis caused millions of homeowners to either sell their home with a short sale and for those who couldn’t sell, lost their homes due to a foreclosure.
Yet there is a prevailing myth that someone with a short sale or a foreclosure are locked out of the mortgage market and the only types of mortgage loans are those that require a 50% down payment and sky-high interest rates as well as waiting seven years to get a loan simply is simply not true.
Buyers can get competitive financing without having to wait seven years after a financial crisis, they just need to know their options and where to find them. So let’s take a closer look at both a short sale and a foreclosure to see how they work and how to get a decent mortgage loan after either event.
What Is a Short Sale?
When a mortgage company makes a mortgage loan it does so with the full expectation of being paid back on time, every time. If a lender continues to make poor lending decisions, the lender won’t be a lender very much longer.
That said, a short sale request occurs when an unexpected event or series of events happen causing the homeowner to fall behind on payments and unable to sell because they owe more on the property than the home is currently worth.
For example, a couple bought a house just a couple of years ago and paid a fair market price of $750,000 and put $150,000 down leaving a loan amount of $600,000. One of them lost a job and now there was only one income instead of two. They needed both incomes to buy the home. After a few months, they began to fall behind their mortgage payments. Their savings began to dwindle so they tried to sell their home. Yet they found they weren’t the only one trying to sell.
Others in the area lost their jobs too and soon there was a wave of foreclosures.
They contacted a local real estate agent to sell their home but the agent said their home was only worth maybe $500,000 in the current market. That’s about $100,000 less than what they owed and if they sold they would also have to pay real estate commissions and pay for closing costs.
Commissions and closing costs alone could add up to $40,000. Money they simply did not have. Foreclosure now loomed. But the agent told them about the short sale alternative.
A short sale is an agreement between the lender and the borrowers to accept less than what is owed on the property as a debt paid in full. The credit report will soon read, “paid less than what is owed” and the mortgage debt will show zero due. But the short sale agreement isn’t an automatic thing.
The lender is about to take a $100,000 hit on this property in addition to the lost equity and won’t take a short sale request lightly. There are some facts that need to be uncovered.
The lender wants to first make sure a short sale is warranted and is the only solution barring a foreclosure. Borrowers requesting a short sale must demonstrate they in fact are in dire financial straits and a foreclosure is imminent. Lenders will want to reverify employment and income. Lenders will also look at recent bank and investment statements. Most short sale requests also mean the homeowners are currently delinquent at some stage on the mortgage.
If a homeowner asks for a short sale and there is no evidence of a hardship and the owner is gainfully employed and has some money in the bank, the short sale request will be turned down.
As well, if a bank statement shows there is $50,000 in the bank and that’s the amount needed to pay down the mortgage amount, the short sale request will again be denied.
The lender will also want third party verification of current market value. This can sometimes mean a full appraisal on the property but sometimes lenders use an internal method called an Automated Valuation Model, or AVM, which looks up recent sales of similar properties in a database and then compare those values with the subject property.
Some lenders will consider a short sale request only after an offer has been issued and a sales contract signed.
If the homeowners can establish they can no longer afford the home, are likely delinquent and there are no prospects to correct the current financial situation, if there is a willing buyer with a sales contract in hand and the lender agrees with the current value, a short sale request will likely be agreed to.
Short sales have been an option for homeowners for decades and not as a result of relaxed lending guidelines over the last decade. Yet even though short sales have been around for a long time there still a few myths floating around that never seem to go away.
For example, there are those that think a short sale can take more than a year to close. That’s not the case at all.
True, at the early onslaught of the housing crisis lenders were overwhelmed with short sale requests but in today’s market a short sale doesn’t have to take any longer than a standard purchase as long as the lenders short sale requirement are met.
Short sale buyers pay no more or no less than current market. There is a misconception that buyers pay a higher price than necessary yet the opposite is true. Real estate agents price homes that match the local market and can price the property based upon how long the home is likely to be on the market.
A home priced very low will receive multiple offers while a home priced too high will see few, if any reasonable offers. This is just like any other property, regardless of a short sale request.
Others mistakenly think they have to wait seven years after a short sale request to get a new mortgage but that again is false. There are multiple options for those who have experienced a short sale in the recent past. We’ll explore these options in this article.
Foreclosure
A foreclosure really is the last thing a lender wants. A foreclosure means something went very wrong from the time the original home loan was issued until today.
A foreclosure means the lender has lost thousands in mortgage interest, administrative costs and taking over a property that is very likely “upside down” on the mortgage and the owners not only can’t make the payments but they also can’t sell the property to cover the outstanding mortgage. When a lender does foreclose on a home, it tries to sell the home at a foreclosure auction and if the lender doesn’t get the minimum bid at the auction the home goes into the lender’s own inventory.
But lenders can’t just decide to foreclose without specific rules being followed. In the United States, there are two types of foreclosure states, a judicial and a non-judicial state. A judicial state is a state where the lender must sue the borrowers and appear before a judge and get the foreclosure approved by a court.
The lender must document the delinquency, legitimize the action and prove the lender has followed all local, state and federal laws. In states where it takes months or even a year or longer likely means the state requires a judicial foreclosure.
California however is a non-judicial state but still must document the lender is following proper protocol and if not the foreclosure can be avoided or at least delayed.
When a borrower makes a late payment that is more than 30 days past the due date, the lender begins to get a little nervous. When a payment is missed 15 days past the first of the month, a late fee will be charged.
As the calendar moves closer and closer toward the end of the month, the lender will begin making phone calls, trying to find out why the payment hasn’t been made. More than 30 days and the lender prepares for the next phase, the Notice of Default.
A notice of default is an official document that is typically sent via certified mail to the borrower notifying them that if the loan is not brought current then a foreclosure filing is imminent and can be filed when the payment is more than 90 days past the due date. The notice of default will list the amount needed to bring the loan current and the actions the borrowers need to take to avoid a foreclosure.
Should the lender ultimately file a foreclosure notice and has followed the proper procedures, a foreclosure can indeed take place. That doesn’t necessarily mean a foreclosure is imminent but is a protective filing on behalf of the lender that allows a lender to foreclose when all other options have been exhausted.
A common option is to offer a loan modification. A loan modification occurs when the lender changes some key elements of the original loan. When evaluating a loan modification request, lenders will review current income and assets and then structure a modified note that will make the mortgage payment affordable and avoid a foreclosure.
The lender might adjust the loan amount or the interest rate or both in order to get the mortgage payment down. During this time, a foreclosure may have already been filed but the borrowers and the lender are working together to avoid the foreclosure.
If nothing can be done and the borrowers cannot meet the modification requirements, a foreclosure will take place.
Since California is a non-judicial state which means the foreclosure not only doesn’t have to go to court but takes less time. In California, it takes a minimum of 120 days to complete the foreclosure process and put the home up for auction.
Conforming and Jumbo Loan Limits
Conventional loans under San Diego’s loan limits are called conforming loans because the loans conform to lending guidelines established by Fannie Mae and Freddie Mac.
In San Diego, the maximum conforming loan amount for a single-family, owner-occupied home is $580,750 for 2016. Most every mortgage lender in existence offers these mortgage loans and by far make up the bulk of all mortgage loans approved today. When lenders approve a loan using Fannie or Freddie standards, the lender can then sell that loan to other lenders or directly to Fannie or Freddie in the secondary market.
Doing so means replenishing their credit line in order to make even more loans.
Jumbo loans are so-called because they exceed local conforming loan limits. There is also a secondary market for jumbo loans though historically the rates for jumbo loans are slightly higher than their conforming cousins.
Jumbo loans may also require a higher down payment, especially when compared to government-backed mortgages such as VA, FHA and USDA programs.
Borrowers can get a mortgage after a short sale or foreclosure using various mortgage programs in today’s market. A conforming conventional mortgage can be available for those with a short sale after two years has passed and credit reestablished and seven years in the instance of a foreclosure.
For those that are VA eligible and want to buy a home with no money down, VA guidelines ask that at least two years have passed and credit rebuilt after a short sale or foreclosure.
FHA and USDA mortgage programs need at least three years to have passed since either event. FHA does have a new program called the Back to Work program yet the qualifying and documentation guidelines cause many to be declined for this option.
For loans above these various loan limits a jumbo loan are the option.
Lending Alternatives
Conventional and government-backed loans are the standard loan choices and we of course offer them. But there are also other alternatives when these programs aren’t the right fit for whatever reason, especially for those who want to buy and finance a home with a short sale or foreclosure in the past but the loan balance is too high for a conventional or government loan and a jumbo is the only choice.
Less Than 20% Down?
One such program requires, depending upon the size of the loan, only 15% down on a jumbo purchase and asks for at least four years to have passed since the derogatory event with a loan amount up to 1.1 million.
This program has competitive rates and does not penalize the borrowers with higher rates or additional requirements and the rates and terms are the very same for someone without a short sale or foreclosure with the full suite of mortgage products including adjustables and fixed rate loans.
25% Down?
Another highly competitive jumbo loan program finances someone with a short sale or a foreclosure with only two years since the derogatory event. Two years. Even though a foreclosure can appear on a credit report for 10 years this loan program can be used by someone with a foreclosure that’s only 24 months old.
The minimum credit score for this important loan is just 700 and there is a maximum loan amount of 1.5 million. That’s a purchase price of $2 million or with a refinance with $500,000 in homeowner equity. This option is one of the few jumbo programs that finance borrowers with such a recent short sale or foreclosure.
Less Than Two Years?
Perhaps our best program for those who want to make a jumbo purchase but don’t want to wait two years requires a credit score of 700 but will also lower the interest rate for a rate reduction of .125% with a credit score of 740 or better.
Here are some of the more outstanding features of this unique program—
- Can be used just one day after a short sale or foreclosure
- 20% down to 1.5 million
- 3/1, 5/1, 7/1 and 15 year and 10 year fixed
That’s right, borrowers can put 20% down and borrow up to 1.5 million and can finance a home the next day after a short sale or foreclosure.
One caveat with this program is there can only be one housing event in the borrower’s past. More than one short sale and foreclosure won’t work.
How about someone who wants to finance a jumbo purchase with just 10% down and a short sale or foreclosure in the recent past?
If either event is more than two years old this program allows for 90% financing up to $5 million. Rates are obviously higher and the program isn’t for everyone but under the right circumstances this program is the perfect solution.
Finally, any of these options work just as well with a purchase money loan as well as a refinance. In the case of a refinance request, the lender orders an appraisal that will verify the current market value of the home using the standard loan-to-value guidelines as with a purchase.
Refinancing the Jumbo Loan
When using any of these loan options, it’s always an option to refinance later to another mortgage. For example, if a 10% down jumbo purchase on a loan amount of say $2 million, the rate might be 7.00% or an adjustable and the owner want to refinance to a lower fixed rate.
Even though a loan program that has a higher interest rate due to a recent short sale or foreclosure, buyers can still buy and finance a jumbo home while putting the date of the short sale or foreclosure further in the past. Once the time frame for a more competitive mortgage option has been acquired and credit scores are reestablished, borrowers can refinance into another mortgage type without penalty.
These are some very little known loan programs and again they’re not the only option but for those who do want to buy and finance a home and not have to wait anywhere from three to seven years these loans can help those stop renting and start owning once again.
If this is your or you know someone who has experienced some financial difficulties in the past don’t let the idea of having to wait for so long to buy and finance a home when you don’t have to.
It just takes a phone call and a short discussion with a loan officer to find out if these options work.
