Sunday, August 22, 2010

Bouncing Back from Short Sale or Foreclosure

Homeowners who have suffered a Short Sale or Foreclosure are advised to develop a recovery strategy from the day you decide to negotiate your settlement terms with your bank. The fact you have failed on a financial obligation, on the face of it, is an agreement to move forward with you life. Congratulations. Take a deep breath!

You may be able to qualify for an FHA home loan as your fastest track back to homeownership sooner than later. FHA currently has no minimum credit score, although most lenders do have their own underwriting overlays on what they will accept. 620 FICO is the starting point for most.

What about timing?
The clock starts ticking in your favor the day your home title is transferred to a new owner. NOT unfortunately, the date your foreclosure is registered. Since Short Sales keep you on title throughout the process, you could be putting off home ownership however long it takes to settle your sale. If you were able to keep making your payments or miraculously did not have months of ‘late payments’ pile up on your credit you could theoretically apply for a new mortgage right away. How an underwriter views your situation is very much up to your complete presentation and their investor's particular requirements.
FHA could be your ticket!
FHA Loans, the flagship of HUD (US Housing and Urban Development) are the most lenient with general underwriting compared to conventional lenders largely due to the government insured mortgage insurance paid for by the homeowner.

NOTE page 2 of the below HUD FHA Mortgagee Letter of December 2009. This outlines the ability of a Borrower to apply for an FHA insured Mortgage following a Short Sale of a previous property. (It is likely these standards will be revisited as they often are!)

“Borrowers are considered eligible for a new FHA-insured mortgage if
• they were current on their mortgage and other installment debts at the time of the short sale of their previously owned property, and
• the proceeds from the short sale serve as payment in full.”

Both situations above are rare if your short sale lags more than 90 days. More commonly:
“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. Lenders may make exceptions to this rule under certain circumstances.”  

What about Conventional Loans?
Traditionally, Conventional Loans, i.e., those sold to Fannie Mae and Freddie Mac have pretty strict guidelines (now) that you won't really be considered 'fundable' for seven years after a foreclosure. This varies widely in practice!

If you live in a rural area or are a US Military Veteran:
USDA and VA usually defer to the HUD guidelines with some exceptions, usually established by the lending institution on a case by case basis. VA will officially consider a borrower after 2 years  from Bankruptcy or Foreclosure and with some exceptions possibly sooner. These organizations are essentially charged with sponsoring home ownership for people needing assitance with no down payment. Search USDA properties:  

Don't fall for: "Short Sales have less effect on your credit"
This is a popular real estate myth! For anyone considering enduring months and months waiting for their home to sell as a distressed short sale; please understand: essentially a foreclosure or short sale has very similar effects on your credit. After 120 days the ‘lates’ register on your report with the same effect as a foreclosure. Since on average a short sale takes from 6 to 13 months imagine that month after month your credit continues to tank with each successive late and each late is fresher and fresher. Recent negative impacts have more effect than older ones. Your score can only start recovering when you do and the late payments stop. NOTE: one 120 day 'late' entry for a mortgage payment can have up to 130 -200 pts immediate negative effect on your score. Credit scores go down lke a rock (fast) with any negative impact and up like a feather in recovery mode (slow).

Bank Ratings on the Short Sale Process:
HousingWire magazine recently rated banks for their short sale negotiation timing. Surprisingly, some banks took over 13 months on average. Of course many of the larger banks inherited their bad porfolios so they had help getting the worst rating. Another bank rated at the top of quick negotiators at 6 months on average was previoulsy rated as a predatory lender. This turn of events for 'tough banks' becoming quick negotiators may be a direct proportion to the amount of Federal Reserve TARP money they have put to good use rebuilding their staff levels and bottom line.

Build a Credit Recovery Strategy!
More on rebuilding your credit after a Short Sale or Foreclosure on our other blog:

To your prosperous future! equitytalks

© 2010 susan templeton
*Susan Templeton is not a loan modification advocate