This article will attempt to address the following:
1. Define a short sale

2. Talk about the different ways it can come about and be structured

3. Talk about how it’s different that foreclosure or bankruptcy

4. Talk about the implications for the seller

5. Talk about the implications for the buyer

6. Address investor related questions on capitalizing on short sales (which you will soon find based on the definition is not really what you investors are looking for)

7. If your question is not answered in the article, see the Short Sale FAQ.
Definition:
A short sale is an “arrangement” between the current owner of a home and the bank that lent them the money to buy their home to accept an offer for less than the total amount owed to pay off the home. The “deficiency” is the difference between the amount owed and what the bank collects at the short sale.
Although, the “arrangement” can take many different forms, there is no other definition of a short sale. I say this because many realtors and some investors simply throw the term around as if it meant “a sale under market value.” No. A bank owned (foreclosed) house is not a short sale. A seller deciding to lower their price and take less profit is not a short sale. An old lady that owns her home free and clear, selling a $150k home for $75k, IS NOT A SHORT SALE. For it to be a Short Sale, someone must be getting “shorted.” Either the seller, or the bank. I will explain how both of those happen in more detail presently.
Free Foreclosure List
Another important definition of a short sale is how it differs from foreclosure. In foreclosure, the homeowner falls way behind on their payments and the bank repossesses the house and sells it. In almost all cases, THE BANK PURSUES THE HOMEOWNER FOR THE DEFICIENCY!!! No one seems to know or believe this, but just ask someone who has gone through foreclosure, they will tell you the only way out of this was to file bankruptcy.
How It Can Happen - The Arrangement
Most short sales arise when a seller owes more on their house than they can sell it for (upside down). The owner of the home then attempts to make an arrangement with their lender to sell the house for less than is owed.
The term “arrangement” was used in the definition and is intentionally broad because the arrangement depends on the bank that holds the loan. Though there are general practices, every bank does it differently. This article will give you the most common arrangements, but if you take part in a short sale, it’s crucial you assume nothing until you have the bank’s policies in writing.
There are some overriding principles:
1. There is no such thing as a free lunch. This is not some dream come true alternative to foreclosure where the money you owe magically disappears. The deficiency will be accounted for. The deficiency can be 100% loaned to the seller in the form of a promissory note, which they then must repay. If any portion of the deficiency is “written off” meaning that the bank eats it, you can be sure that they will report it as 1099 income to the seller or even as a judgment which will show on your credit for 10 years (not 7 years, 10 years).

2. It is a cumbersome process. If you are entering into a short sale as a buyer or seller, don’t expect it to go as quickly as any other sale. There’s a lot of “back and forth”.

3. The employees of the lender that are negotiating the sale ARE NOT there for the benefit of the seller. Their only goal is to collect as much money possible for the lender and they will use whatever means necessary. You can be sure they will misrepresent their own policies and flat out LIE to the seller in order to intimidate and scare them into paying more money. If you think I’m exaggerating, the joke will be on you.
For instance, I was once told by a lender negotiating a short sale that, as a policy, they don’t “write off” any of the deficiency and that the seller would have to have a promissory note for $40,000. This lender also told the seller that their hands were tied and this decision came directly from the investor who provides the money for the lender. The lender also said there is absolutely no negotiation on the amount owed, either pay the deficiency, or they will foreclose. The lender made the promissory note very manageable (20 years 0%) so that the seller would be more enticed to just roll over.
But the seller called the lenders bluff. The seller then provided a letter from an attorney stating they would qualify for a bankruptcy, thus rendering the lender incapable of collecting anything. That same day, the lender called the seller saying they would reduce the promissory note and write off $30,000 of the debt! It would have to be reported as 1099 income, but it would not have to be paid. Amazing change of policy! Then the seller saw what was happening and just said, “no thanks, we don’t want to owe you anything, we’ll just go ahead with the bankruptcy.” Two days later the seller received a written offer that the lender would completely forgive the debt and simply report it as 1099 income! Wow!
The moral of the story is that the lenders will LIE to obtain their money. Many of the managers of the collections departments are paid on COMMISSION on how much they collect. Just imagine if that seller had rolled over on the first offer! That employee would have been responsible for keeping $40,000 of his company’s money with one five minute phone call!
One other important thing to remember is that if the lender gets the property back (i.e. short sale doesn’t go through), they have to put it up for auction. This creates the risk that additional money will be lost if the house doesn’t sell for what it’s worth. In the case of the example, the short sale offer was for $550,000, and the amount owed was $590,000. The seller faxed in evidence to the lender that most similar houses in the area were now selling for $480,000. So this enabled the seller to make the argument that it was a much more prudent risk to write off $40,000 instead of running the risk of losing $110,000. This enabled the seller’s representative to intimidate the employee of the lender asking him “did he really want to be responsible for losing his company $110k, when he had the option, right now, to settle for 40k?”
If it seems like I know a lot about “this example” it would be because I was the mortgage broker for the people making the offer and seller of the property happened to be my wife.
The Details of the Arrangement
Different banks have different policies. The best case scenario is to get a bank that actually “writes off” the deficiency. All that happens here is that the seller has some minor derogatory credit reporting, but doesn’t actually owe the bank any more money. This credit reporting can consist of anything from “creditor settled for less than the amount due” all the way to “foreclosed.”
As the example noted, many banks will do a promissory note for the deficiency.
Some banks are stupid enough to require that the deficiency be paid at closing. Think about it. This does no good because it’s the same thing as the seller selling their house without doing a short sale and simply bringing cash to the table. If a bank tells as seller they need to bring cash to the table in a short sale, they are either idiotic, or more likely LYING.
In cases where the money is “written off” it’s important to understand that the lenders will never actually “write something off.” In most states (I don’t know the law in every state), the lender has the ability to show any deficiency as 1099 income for the seller. All this really means is that the seller has to pay taxes on that income. Depending on one’s situation, it could mean that people that are dependent on some form of aid because of “low income” will have some explaining to do come tax time.
Another way that the deficiency can be written off is in the form of a judgment. This will often occur in conjunction with the 1099 reporting. It might say something on the seller’s credit report such as “judgment filed against John Doe in the amount of $xx,xxx by ABC lender.” This will appear in the “public record” section of the seller’s credit report for 10 years (7 years is only for late payments, 10 years for public record info, don’t argue, trust me). It can either show up as satisfied or unsatisfied. Satisfied is obviously better because it means that the worst thing that can happen is that the lender will report 1099 income.
Unsatisfied could be a problem, because it means that a court has found in favor of the lender to collect the deficiency from you. Now they still might simply do the 1099 thing, or they might try to collect it from you. They can keep trying to collect it from you until they get it. They can garnish your wages. Your only hope then is that you qualify for a chapter 7 bankruptcy.
This brings up an important note. NEVER EVER ASSUME THAT A DEBT THAT YOU OWE A LENDER IS GONE UNLESS YOU HAVE THE DETAILS OF THE RELEASE OF THAT DEBT IN WRITING. For instance, someone who had done a short sale had a first and a second loan. The bank agreed to the short sale, which ended up being enough to pay off the first loan, but not the second. The seller had assumed that because the bank agreed to the short sale that they wouldn’t have to worry about the deficiency from the second mortgage. Now they are surprised that they are being pursued for the deficiency. REMEMBER, the lender(s) will always want ALL their money accounted for somehow. NEVER assume something is written off unless you have a formal, signed, written, unconditional release of lien and/or judgment from the lender specifically stating that no further action to collect this debt will be taken.
How did we get to this place in the first point?
A short sale can come about for many different reasons. In my wife’s case, she was the owner of the house and had been making payments. We bought an investment property and put it solely in her name to protect our family in the event that the market took a turn for the worse. It did. We owed 590k, but the best offer we had after 6 months was 550k. The short sale prevented her from having to file bankruptcy, and there was no derogatory credit reporting because there were no late payments made.
Despite popular belief, YOU DO NOT HAVE TO BE BEHIND ON YOUR MORTGAGE TO REQUEST A SHORT SALE. You just have to demonstrate that your house can’t be sold for what you owe.
In other cases, short sales happen when a seller can’t afford to make their payments and is nearing foreclosure or bankruptcy. It makes life much more complicated if you are living in the house in question. The bank’s ability to scare you is much greater in that case. In this case, a short sale is only slightly better than the alternatives. You will still lose your house, and your credit is still destroyed just because you’ve made 4-5 late payments on your mortgage.
Despite popular belief, A BANKTUPCY, FORECLOSURE, OR REPOSSESSION DO NOT HURT YOUR CREDIT AS MUCH AS THE MULTITUDE OF LATE PAYMENTS THAT OFTEN LEAD UP TO THEM!!!!! I just cannot stress this enough. People think that a bankruptcy damages their credit beyond repair in and of its own accord. I’ve had many clients file bankruptcy with 750 scores and no late payments only to have their score drop to 680. It’s the clients with 20+ late payments that are having their credit hurt.
A final note on how the short sale can come about… Most banks will not agree to a short sale in writing until you have a formal offer. You can simply call your bank and ask them if you could do a short sale at a certain price and they might say “sure, no problem, we’d be happy to facilitate that offer.” BEWARE. That doesn’t mean a thing. Before your short sale is APPROVED, you’ll have to submit an application, hardship letter, financial statements, tax returns, pay stubs, the purchase agreement from the buyer, a HUD statement from the pending transaction, payoff letters from all lenders involved, and several other things depending on the lender.
Once this huge packet of information is submitted to the lender, you will most likely hear back in 1-4 weeks on the TERMS of their “approval.” Be warned their approval will most likely be thinly disguised attempt to collect their debt and will almost never be the “write off” you were hoping for.
Investors
If you’re an investor, by now, I hope I’ve scared you off. Short sales are not some magic way for you to find properties under market value. They are a tool for sellers that owe too much on their homes to sell them at market value.
What you are looking for (or should be if you’re not) are sellers that owe far far less on their homes than what they’re worth. Sellers who don’t care how much they earn because they’re either desperate or have so many houses they don’t care.
Still if you see a house you want, there is one way that a short sale could come into play. Say there’s a distressed property that you’d pay 100k for that you know would be worth 180k if it was fixed up a bit. The seller doesn’t have the money to do it and the house is either vacant or they want out of their situation. In this case, if the seller happens to owe 130k (around there), and you will only pay 100k, AND the seller hasn’t had any viable offers because of the level of distress on the property, then a short might be just what the doctor ordered.
Don’t be unethical and take advantage of people. You’re only going for short sales if the person WANTS to sell their house and no one else but you will buy it because you’re not afraid to rehab a house that’s smells bad and is falling apart.
Conclusion
Again, a short sale is not a magic cure. It’s also not some mystical solution that only an elite few know about. If you’re curious about selling your house as a short sale, you should contact your lender and get information in writing. It’s usually not easy, and hardly ever will truly “win.” But in some cases, it can leave you much better off than the alternative of foreclosure and bankruptcy. If you’re an investor, there are much better ways to obtain undervalued homes.

The doom and gloom that you hear on the TV everyday about foreclosures, difficult lending parameters, massive sell-offs, and short sales has peaked the interest of smart investors nationwide.
While people with the capital and credit to take advantage of this turbulent time are making money hand over fist, what about normal folks like us?
What is the secret to making a killing in this perfect storm of real estate upheaval? Three words-Tax Lien Investing!
We are blessed with the best time in history to buy and profit from tax lien certificates. When people have either over-bought or have had a financial down turn, they often lose the ability to pay their mortgage. While this is horrible-it is a fact of life, a fact that we see splashed all over the news every darn day!
One very important factor in this inability to pay the mortgage is that these poor folks will also no longer be able to pay their property tax to the county. While you may have the chance to get an extension from your bank, the government wants their money!
The money the county tax assessor collects goes to fire services, police departments, road maintenance, etc. So needless to say, we want them to get their money too.
When people don’t pay their property tax for a year, the county has the right to auction off the lien (in most states) on that property to collect the delinquent taxes. This is where the smart investor steps in!
Not only do you get an ultra high interest rate, up to 50% and beyond, but if the property owner does not pay the taxes within the granted time period (as short as 4 months)…you have the GOVERNMENTALLY enforced right to foreclose on the homes and property!
In a nutshell this mean for literally pennies on the dollar ie., the cost of the tax lien certificate, you get a house, business, and/or land! Most tax lien certificate can be had for less than $3000; many can be bought for less than $500. That’s right you can get a house with NO MORTGAGE for less than $500!!!
Now that is a brilliant investment strategy that ANYONE can afford. No stock market speculating, no high dollar-high stakes house flipping, no slow-or-no growth bond investing. Just a governmentally guaranteed investment that at worst pays you ultra high interest and at best gets you a DEBT FREE property for pennies on the dollar…sound about right to you???

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A real estate short sale occurs when a property owner sells their property for less than the mortgage amount owed to their lender(s). On the surface, this may seem like only the borrower benefits from such a transaction. However, that couldn’t be further from the truth. Note:  See our “Are You a Short Sale Candidate” to find out if you or someone you know are short sale candidates.

For discussion purposes we are going to assume a homeowner is a short sale candidate.

For the homeowner, a short sale makes it possible to sell their home for less than the total amount owed. The sale of the property releases the homeowner from their debts and obligations without having to file bankruptcy or endure foreclosure. The homeowner is able to save their credit, regain their dignity and their peace of mind. Lastly, the homeowner will be closer to rediscovering the American dream of homeownership because they are able to amicably resolve their lender(s)’ concerns.

For the lender(s), a short sale can be less costly than foreclosure and can provide an acceptable hedge against future price declines within the market. Also, for lenders that have become insolvent and need to liquidate assets, a short sale is a way to quickly raise capital when compared to the foreclosure option – a process that could take a year or more to accomplish. Lastly, for lender(s), a short sale means a guaranteed loss now as opposed to an uncertain loss in the future. This may be in many instantances a much larger loss.

For the investor buyer, a short sale offers them the opportunity to “Buy a property for as much as 40% or more below market value.” This discount means that they are able to make substantial profits.

For the home buyer, a short sale offers them the opportunity to buy a more affordable home. For some, this is the only way to experience the American dream and obtain homeownership, as the lower price relates to a lower and more affordable monthly mortgage payment.

For the Realtor or consultant, a short sale provides the opportunity to earn a fee or commission for helping a struggling homeowner. In many down markets short sales are the only viable option for continued real estate sales. During difficult economic times and recessions, one or two extra sales per month may be the difference between earning a living or looking for another job. Those extra sales each month can come from negotiating a short sale.

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Foreclosures in the country have pushed past over one million homes. Couple that with folks just trying to sell their home for whatever reason and there is a glut of homes in many markets. While this level is high it is within many historical swings of the past. The point of this discussion is to point out the incredible buyers market that exists in many areas of the country.

Arbitrage in the financial markets takes advantage of price differentials between more than one market. Money is made taking advantage of the differences. In real estate, with the benefit of trained Certified Property Managers and the like, there exists the potential to invest in areas, which are depressed and hold good value in the future. Like examining the financials of a company so the same type of play can be marshaled with investment situations across the country. In crafting offers, returns in the 25% plus range over say a two-year period must be factored in even consider the ramp up into these venues outside of one’s backyard. Finding deals in the backyard would be best, however, lacking that one must look elsewhere. In an example of buying a rental condo in a resort area that has abundant inventory and has plenty of foreclosures forcing prices down some investment play may be possible. If a rental condo is listed at $300,000.00 and has and existing mortgage of $280,000.00 with a pending foreclosure pressing the owner this might be a deal worth looking at. Owners with ARM mortgages with accelerating payments and/or other pressures have come to bear on owners who find themselves in a fix. Many of these condo rental properties with onsite rental offices make for a decent cash flow. In some water front properties the gross rents will approach $30,000 plus per year. In trying to negotiate with a lender with a foreclosure action in hand it is best to have ones own financing or cash to bring to the table. That lender will not cut the price (mortgage) if they are being asked to hold the mortgage. In this example, a proposed “Short Sale” would be probed as a possible action. In this case, the owner receives nothing. The owner may save a foreclosure nick on their credit but that’s it. The lender on the other hand will be offered an offer in the $240,000 range IF the return is figured. The lender takes a $40,000 plus hit on the deal with additional costs for legal fees, past payments, late charges, etc. in addition to the “short” settlement. This is a big hit for the lender. However, Real Estate Owner (REO) properties have to be liquidated. If the lender foreclosed and sat on the condo for another six months and took another hit at sale time, the proposed $40,000 plus hit starts to look pretty good.

An investor needs to determine the condition of market place in a year or two. The economy still has strength, employment is strong, so then it is a question of what will be happening in the market down the road. If that analysis comes up positive then one would continue on the track. An outside force on these waterfront investor condo properties will come to into play as when possibly the dollar falls against the Euro or Pound. Those buyers coming into the market with stronger currencies will see these situations as strong buying opportunities and prices may spike back up. A Realtor needs to market to these buyers immediately. In addition, with stronger currencies abroad vacations in these waterfront condos can almost look cheap with a good deal of safety. A few years down the road, the rentals could be pumping and the demand could be up for these specific properties which can be rented when not being used by the owners. Naturally, there is no guarantee that this will play out exactly that way, but it is an educated analysis basis on the facts currently in hand. When depreciation, interest deductions and other factors are put into the equation, perhaps a $40,000 “short” is not enough. Perhaps it will take a little more. In any case, an investor’s numbers should be shared with the lender to shore up the case for the “short sale” and give a little cover to the work out specialist who is signing off on the deal. The lender will have several BPOs (Broker Price Opinions) of the value as several AVMs (Automated Value Models) to further peg the value. However, if things have not been moving with say six months exposure to the market place, then the lender may be compelled to pull the plug.

Much like when the accelerated depreciation plug was pulled in the 1986 Tax Code, properties must stand on their own. Limited Partnerships and REITs were being offered with low (50% LTV) leverage to realize any kind of cash flow. In this case, a highly leveraged mortgage would insure a negative cash flow. Thus the return on investment will be calculated on a low leveraged situation. The 25% plus return then would be possible. Each case needs to be turned inside out before making an offer. If there has been several price reductions over the listing period with offers of paying all the closing costs and such, then this will garner further investigation. To save a lot of time, the question phased as: “To save us both a lot of time, I’m looking to buy at a deep discount from a motivated seller or a lender who will consider a deep “short sale. I’m very liquid in cash and can close quickly. Is there any shot at a deal on this property?” If not move on.

This glut of properties won’t be here forever. It took a few years to absorb the Savings and Loan fiasco and major write-downs that took place, but it was absorbed and money was made by many. The original owner being in an overly leveraged mortgage situation may have cast the initial foreclosure situation. High leverage kills when the underlying financing is an Adjustable Rate Mortgage in a rising interest rate market. Cash flow disappears. The bleeding begins.

It’s no place for the faint of heart. Like arbitrageurs in the financial markets, it takes a strong will, liquid cash and a good feel for the current market and the future market and how it will all play out. The climate for a play is here and now in some targeted areas. Over 1,000,000 foreclosures, a glut of listings on the market, a falling dollar making attractive situational buys to foreign borrowers makes for a play now. “Knock, knock.” “Who’s there?” “Deal” “Deal Who?”

“To Deal Or Not To Deal, That Is The Question”

Dale Rogers
www.BrokenCredit.com
www.sellerhelpsbuyer.com

All rights reserved. Article may be reprinted as long as the content remains intact, unchanged, and all links remain active.

When you are starting to be behind your mortgage payments, you need to avoid undergoing foreclosure. The negative impact of foreclosure is deeper compared to other ways of settling the unpaid debt. This can scar your credit for years and this is a much- dreaded way to lose your homes.

This is the reason why most people would look into the possibility of short sale. Undergoing short sale does not mean you can escape the negative effects on your credit. However, it certainly has more advantages compared to foreclosure. One, you can be eligible to get a new mortgage after 2 years as opposed to foreclosure which is after 5 years. Second, you can keep your dignity because. Third, credit scores deduction can be as low as 50 points and the effect can be as little as 1 and a half years.

There are so many good things about short sale. However, the challenge lies on how to get your lenders approve your offer. Short sale is known to be a tedious process in the sense that lenders are being critical about it. They want to ascertain well if your offer is worth absorbing the loss.

One way to get your lenders to accept your offer is by understanding their point of you. There are certain things you should know about your lenders and short sale.

Reasons why lenders would settle for short sale

You may wonder why lenders would allow a loss for sale in exchange for the forgiveness of you debt. Well, here is the real reason. They want to reduce their number of non-performing loans.

In lending, loans are considered performing if the borrower is able to keep up with payments on a regular basis. However, once the borrower starts to be in default for 90 days or more, the loan will be considered non-performing. Lenders do not want them because if their number rises, they could be in trouble financially. Non-performing loans can have a negative impact to their financial statements and eventually would put them out of business.

This is the reason why lenders would opt for a short sale. This transaction can minimize the number of non-performing loans of the bank. They would take their chances from this transaction, especially if they already have an increasing number of non-performing loans.

On the other hand, short sale loss is usually lesser than foreclosure. Banks can set an allowable loss for short sale to take place. Moreover, banks would also avoid the hassles of foreclosure if they accept short sale offers.

Additional information about lenders and short sale

The chances of being approved of your short sale offers lies on several considerations. One, if the application of short sale falls within the 180 days grace period before the non-performing loans of the bank will be considered a liability. And two, the loss of short sale is acceptable for the third party investors involved like Fannie Mae and Freddie Mac. For Fannie Mae, it is acceptable if the loss is less than foreclosure. For Freddie Mac, it is acceptable if the offer reaches 90 to 92 percent of the BPO or Broker’s Price Opinion.

Here’s how it began…..

Despite having spent the last 22 years in the mortgage business I have never seen a time where such a high percentage of transactions where “negative equity” sales, either short sales or purchases of bank owned real estate.

The most successful real estate agents are clearly those who have become experts at short sale negotiating or have contracted with experienced, professional negotiators. Granted, the process is time consuming and sometimes frustrating, but some estimations suggest that these types of transactions represent over half the real estate market in many parts of the country.

I started attending classes on short sale negotiating and inevitably teamed up with an extraordinary negotiator and began providing our service to real estate agents, usually at no cost to them. When properly presented, the lender would agree to pay for our very valuable services. Of course it was a natural that our mortgage business grew as real estate agents were drawn to our ability to get their short sales closed.

Anyone that’s been involved knows of the absolute biggest frustration: you work hard (very hard), for months and finally get an offer accepted by the bank only to find your buyer, for whatever reason, is no longer interested in proceeding. The buyer may have had a number of different offers in on other properties and they came together first, or they may have lost their financing in the time that passed. In many instances the due diligence clock doesn’t start until the offer is accepted by the bank and the buyer can then choose to walk with no consequences.

The most challenging obstacle in today’s marketplace might be time. On the selling side it takes the form of the time spent negotiating with the lender and keeping the buyers engaged, all the while trying to keep the property from getting to the courthouse steps.

From the buyer’s side of the market, there is a teeming interest in purchasing these deeply discounted properties but without waiting for 4-6 months to see if an offer will be accepted while other opportunities come and go. So, here we are. Everyone’s time an effort has been spent and nobody is getting paid! That’s when I had my “Aha!” moment. Let’s take these “accepted offers” and present them as not only the best deals in the market but ready to close immediately. The lender doesn’t care who the buyer is as long as the bottom line remains the same so we just need to provide new buyers.

RealEstateRoadKillUSA.com was born!

Real estate agents and buyers are flocking to it like bees to honey (or vultures to carrion). These are the absolute hottest deals in town and all the work has already been done to prepare them for closing. Wouldn’t you have to be crazy to buy any property without looking here first?

After appearing on ABC-TV News and being written about in LoanOfficerMagazine we have had an outpouring of interest from real estate professionals throughout the country that want to put the program in effect in their area. I’m not surprised because honestly, in 22 years, this is the biggest “no brainer” I have ever seen for both mortgage brokers and real estate agents. It has absolutely saved my mortgage business and is providing instant transactions for real estate agents (and mortgages for us).

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When Can I Buy A Home Again After Foreclosure or Short Sale?
One of the concerns a consumer has after experiencing a bankruptcy, foreclosure, or short sale (referred to as a “preforeclosure sale” by Fannie Mae) is the ability to obtain credit to purchase another home. Fannie Mae has updated its credit guidelines. This legal article summarizes those guidelines.

Q 1. How long is the time period after a foreclosure before a consumer can be eligible to obtain credit to purchase a home?

A Five years from the date the foreclosure sale was completed.

Additional requirements that apply after 5 years and up to 7 years following the completion date are as follows:

. The purchase of a principal residence is permitted with a minimum 10 percent down payment and minimum representataive credit score of 680.

. Purchase of a second home or investment property is not permitted.

. Limited cash-out refinances are permitted for all occupancy types pursuant to the eligibility requirements in effect at that time.

. Cash-out refinances are not permitted for any occupancy type.

(Source: FNMA Announcement 08-16, 6-25-08 )

Q 2. Why do the additional requirements for foreclosures in Question 1 only apply from 5 to 7 years following the foreclosure completion date?

A According to Fannie Mae policy in Part X, Section 103 of the Selling Guide, Fannie Mae requires only a 7-year history to be reviewed for all credit and public record information. The 7-year timeframe also aligns with the information provided by the borrower on the loan application relative to disclosure of a past foreclosure action. (Source: FNMA Selling Guide, 4-1-09. )

Q 3. Does a shorter time period apply if the borrower has “extenuating circumstances” that led to the foreclosure?

A Yes. Three years from the date the foreclosure sale was completed. The same additional requirements apply as listed in Question 1 except the minimum credit score of 680 is not required. (Source: FNMA Announcement 08-16, 6-25-08. )

Q 4. What are”extenuating circumstances” ?

A Fannie Mae describes “extenuating circumstances” as follows:

Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.

If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower’s claim. Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower’s inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.).

The lender must obtain a letter from the borrower explaining the relevance of the documentation. The letter must support the claims of extenuating circumstances, confirm the nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate the borrower had no reasonable options other than to default on their financial obligations.

(Source: FNMA Selling Guide, 4-1-09 at 391. )

Q 5. How long is the time period after a deed-in-lieu of foreclosure before a consumer can be eligible to obtain credit to purchase a property?

A Four years from the date the deed-in-lieu was executed.

Additional requirements that apply after 4 years and up to 7 years following the completion date are as follows:

. Borrower may purchase a property secured by a principal residence, second home, or investment property with the greater of 10 percent minimum down payment ro the minimum down payment required for the transaction.

. Limited-cash-out and cash-out refinance transactions secured by a principal residence, second home, or investment property are permitted pursuant to the eligibility requirements in effect at that time.

(Source: FNMA Announcement 08-16, 6-25-08. )

Q 6. Does a shorter time period apply if the borrower has “extenuating circumstances” that led to the deed-in-lieu of foreclosure?

A Yes. Two years from the date the deed-in-lieu was executed. The same additional requirements apply as listed in Question 4 after 2 years up to 7 years. (Source: FNMA Announcement 08-16, 6-25-08. )

See Question 4 for the definition of “extenuating circumstances.”

Q 7. How long is the time period after a “preforeclosure sale” before a consumer can be eligible to obtain credit to purchase a property?

A Two years from the completion date. No exceptions are permitted to the 2-year period due to extenuating circumstances. (Source: FNMA Announcement 08-16, 6-25-08. )

Q 8. What is a “preforeclosure sale” mentioned in Question 6 and is that the same as a short sale?

A “A preforeclosure sale involves the sale of the property by the borrower to a third party for less than the amount owed to satify the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer” (Source: FNMA Announcement 08-16, 6-25-08 ).

Although the terms preforeclosure sale and short sale have been used interchangeably, there is a significant difference for purposes of obtaining credit. For Fannie Mae purposes, a preforeclosure assumes that the borrower has been delinquent in paying his or her mortgage and the lender agrees to accept a lesser amount to avoid the time and expense of a foreclousre action. A short-sale, however, can also refer to situations in which the lender of the mortgage agrees to a payoff of a lesser amount than is actually owed, even on a current mortgage, to faciiate the sale of teh property to a third party. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

Q 9. Does a shorter time period apply if the borrower has “extenuating circumstances” that led to the preforeclosure (short) sale?

A No. There are no exceptions to the 2-year time period. (Source: FNMA Announcement 08-16, 6-25-08. )

Q 10. If a borrower sold his or her property as a short sale but was never delinquent on that mortgage and is now attempting to purchase a new primary residence, will Fannie Mae purchase the loan?

A The loan will be eligible for delivery to Fannie Mae provided that the borrower’s previous mortgage history complies with Fannie Mae’s excessive prior mortgage delinquency policy-that is the borrower does not have one or more 60-, 90-, 120-, or 150-day delinquencies reported within the 12 months prior to the credit report date-and the borrower has not entered into any agreement with the short sale lender to repay any amounts assoicated with the short sale, including a deficiency judgment. (Source: FNMA Announcement 08-16 Q&A, 8-13-08 ; FNMA Selling Guide, Part X, Chapter 3, Section 302.09. .)

Q 11. Are preforeclosure (short) sales and deed-in-lieu of foreclosure actions identified on a credit report?

A Preforeclosure sales may be reported as “paid in full” with a “settled for less than owed” remarks code, and the mortgage tradeline would indicate any recent delinquency. A deed-in-lieu may be reported by a remarks code indicating a deed-in-lieu. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

Q 12. How long is the time period after a bankruptcy (all except Chapter 13) before a consumer can be eligible to obtain credit to purchase a property?

A Four years from the discharge or dismissal date of the bankruptcy action (Source: FNMA Announcement 08-16, 6-25-08 ).

Q 13. How long is the time period after a Chapter 13 bankruptcy before a consumer can be eligible to obtain credit to purchase a property?

A Two years from the discharge date and four years from the dismissal date (Source: FNMA Announcement 08-16, 6-25-08 ).

Q 14. Does a shorter time period apply if the borrower has “extenuating circumstances” that led to the bankruptcy (all actions)?

A Yes. Two years from the discharge or dismissal; however, no exceptions are permitted to the 2-year time period after a Chapter 13 discharge (Source: FNMA Announcement 08-16, 6-25-08 ).

See Question 4 for the definition of “extenuating circumstances.”

Q 15. How long is the time period after multiple bankruptcy filings before a consumer can be eligible to obtain credit to purchase a property?

A Five years from the most recent dismissal or discharge date for borrowers with more than one bankrutcy filing within the past 7 years (Source: FNMA Announcement 08-16, 6-25-08 ).

Q 16. Does a shorter time period apply if the borrower has “extenuating circumstances” that led to the multiple bankruptcies?

A Yes. Three years from the most recent discharge or dismissal date. The most recent bankruptcy filing must have been the result of extenuating circumstances. (Source: FNMA Announcement 08-16, 6-25-08. )

See Question 4 for the definition of “extenuating circumstances.”

Q 17. What is the difference between a Chapter 13 bankruptcy and a Chapter 7 bankruptcy?

A Chapter 13 permits a borrower with a regular income to propose a plan to repay some or all of his or her obligations over a period of up to five years. A borrower who files a Chapter 7 is permitted to retain exempt assets and receive a discharge of the borrower’s debts. Chapter 7 is a relatively quick liquidation process that is generally completed within 120 days. Chapter 7 cases are rarely dismissed. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

Q 18. What is the difference between a Chapter 13 dismissal and a Chapter 13 discharge?

A A borrower who files a Chapter 13 can dismiss the case at any time (voluntary dismissal) or the case may be dismissed by the court based on the borrower’s failure to comply with the requirements of the Bankruptcy Code or to make the required payments. If the borrower who files a Chapter 13 case makes all of the payments required by the plan, the borrower receives a discharge at the end of the plan. A borrower who doesn’t make all the payment required by the plan may still receive a discharge if the court finds, among other things, that the borrower made a certain amount of the payments and the borrower’s failure to make all of the payments was due to circumstances beyond the borrower’s control. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )

Q 19. What are the requirements to re-establish a credit history?

A After a bankruptcy or foreclosure-related action, a credit history must meet the following rquirements to be considered re-established:

. It must meet the requirements for elapsed time (as discussed in this article.

. It must reflect that all accounts are current as of the date of the mortgage application.

. it must include a minimum of four credit references. At least one of the references must be a traditional credit reference, and one of the references must be housing-related.

A housing-related reference must cover the period following the bankruptcy discharge or dismissal, foreclosure, or deed-in-lieu, and can be in the form of mortgage payments or rental payments.

If rental payments wre not reported to the crdit repositories, the lender must obtain copies of bank statements, money orders, or cnacled checks for the most recent 12-mnth period as a supplement to the rent verification.

. It must reflect three of the four credit references, including rental housing references, as active in the 24 months preceding the date of the mortgage application.

. It must include no more than two installment or revolving debt payments 30 days past due in the last 24 months.

. It must include no installment or revolving debt payments 60 or more days past due since the discharge or dismissal of the bankruptcy or the completion of the foreclosure-related action.

. It must include no housing debt payments past due since the discharge or dismissal of the bankruptcy or the completion of the foreclosure-related action.

. It must include no new public records since the discharge or dismissal of the bankruptcy or the completion of the foreclousre-related action. Public records include bankruptcies, foreclousres, deeds-in-lieu, preforeclosure sales, unpaid jdugments or collections, garnishments, liens, etc.

(Source: FNMA Selling Guide, 4-1-09 at 392. )

Erin Bucaro had her eye on a four-bedroom home in Fairway Canyon, a golf community in Beaumont, Calif.

Driving around the neighborhood, she noticed papers posted on the door, a sign that a bank had taken it over. She’d have to move fast.

Bucaro lost out on a nearby foreclosure in February. By the time she put in an offer a week after it listed for sale, it had already gone to escrow.

This time the 29-year-old nurse made sure her offer would be first on the table the morning it listed.

The 3,000-square-foot home went up for sale at $227,000 — less than half of what it sold for brand-new a couple of years earlier.

Bucaro agreed to the list price, but asked the bank to pay $8,500 in closing costs. It countered at $234,000, including costs. Bucaro accepted.

Buyers are out in force — and aggressive — in many markets hard-hit by foreclosure, such as Riverside and San Bernardino counties in Southern California’s Inland Empire, where Beaumont is. Other major foreclosure spots are Las Vegas, South Florida and Phoenix.

With prices cut up to 50% from their peaks, low interest rates and $8,000 tax credits for first-time buyers like Bucaro, people are vying for bank-owned bargains as hungrily as speculators during the housing boom. Multiple bids are common.

“Supply and demand takes over,” said Mark Stark, owner-broker at Prudential American Group Realtors in Las Vegas, which has the highest foreclosure rate in the U.S.

Troubled Properties Sell

Homes banks took back and are selling off make up anywhere from 40% to 80% of the inventory in these markets. Many go at prices that barely cover construction costs.

“If you’re Mr. and Mrs. Smith and you want to sell your house, you can’t compete with the bank properties,” said broker Bob Wasson of ReMax Results in Moreno Valley, Calif.

Distressed homes made up a third of May sales, downwardly distorting the U.S. median existing-home price, the National Association of Realtors said this week. The median fell 16.8% from a year ago to $173,000.

In just the last year, purchase prices in top foreclosure markets dropped nearly 30%, by various first-quarter estimates. Miami fell even more.

Foreclosed homes in Riverside and San Bernardino counties are selling at 2000 prices. It’s the same in Las Vegas. South Florida is back to 2003.

“Foreclosures are devastating for values,” said Peter Zalewski, principal of Condo Vultures, a brokerage in the Miami area. “That said, as first-time buyers pick off properties, it’s working to stabilize prices.”

And clear out inventory: The number of unsold homes on the market at the end of May fell 3.5% from April to nearly 3.8 million, the NAR said.

Price Risk Persists

Some surveys suggest month-to-month price drops in hard-hit markets are getting less severe. But an expected new wave of foreclosures as payment-option adjustable rate mortgages reset higher, plus more job losses, might stall a recovery and push prices down further.

For now, though, demand for bank-owned homes in foreclosure-heavy spots is so high that contracts are being signed at prices above original, albeit deeply cut, listings. It’s especially true for homes in good shape.

“We have qualified buyers who are willing to pay more than the listed price,” said Garey Teeters, a broker with Coldwell Banker-Teeters in Yucaipa, Calif.

But appraisals often come in under the agreed-upon sales price, quashing the deal. “It’s the biggest problem we have now,” Teeters said.

Close to 20% of contracts over the last two months have been canceled due to low appraisals, he says, as new government appraisal guidelines make appraisers more cautious.

Prices have dropped the most — and are still falling — in exurbs farthest from urban coastlines. They include new developments bordering the Florida Everglades and the easternmost reaches of the Inland Empire in California, like Beaumont.

Taking advantage of the steep dip, a Jamaican banker is assembling a portfolio of $40,000 homes in Homestead, some 20 miles south of Miami. In this region, new housing tracts reach to the brink of the Everglades.

In Las Vegas, as other foreclosure markets, the low end is seeing the steepest drops. Here, homes going for $70 per square foot are common.

“If I had a bucket full of money, I’d buy 10 myself,” said Heidi Kasama, broker-owner at Windermere Summerlin Real Estate.

Investors Flash Cash

Stark says about 38% of Las Vegas deals are cash, indicating investor activity. Most financing is through government-insured Federal Housing Administration loans.

Bucaro says she “got into the perfect storm” of motivating factors. As first-time buyers, she and her ironworker husband get an $8,000 federal tax credit. And as an Air Force veteran, she qualified for a zero-down Veterans Affairs loan. She got a 30-year fixed mortgage at 4.85%. The couple and their two young children plan to move in by July 1.

“I’m so happy,” Bucaro said.

But real estate agents complain that moratoriums on foreclosures have kept back a lot of new inventory, limiting the number of homes they can sell to now-eager buyers. Also, they say banks are releasing foreclosed homes to the market in a slow and controlling way.

Bank Buys Take Time

Complicated guidelines for selling bank-owned homes also are slowing what would otherwise be a much faster sales pace, says Mike Novak-Smith, a broker with ReMax Results in Riverside, Calif.

In Las Vegas, inventory is about half what it was a year ago, brokers say. “If we got it back to 25,000 or 30,000, I’m very confident we could handle it. The market is selling about 3,500 homes a month,” Stark said.

But Teeters said, “The dam is about to break. We’re told that in July, banks will release more REOs (real estate owned by banks).”

Las Vegas broker Kasama sees more bank supply coming on as well.

“Banks have a large backlog of inventory they will bring back on the market,” she said. “That will continue to keep our prices low.”

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