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Boomerang buyers return – qualifying after foreclosure or short sale

Homes

There is homeownership after a foreclosure or short sale. Home owners, who lost their homes to foreclosure or short sale during the housing downturn and recession, are apparently returning to the housing market in increasing numbers, such that their home buying activity is attracting economists’ attention.

Ken Fears, the National Association of Realtors® Director of Regional Economics and Housing Finance, wrote for the NAR Economist’s Outlook Blog (Return Buyers Prefer Safe, Affordable Financing; economistsoutlook.blogs.realtor.org; June 25, 2015) about the research and numbers associated with home buyers who previously lost a home. These “boomerang buyers” accounted for about 8% of home sales during 2014. Considering that there were about 9.3 million home owners who lost their homes between 2006 and 2014, the estimated 350,000 boomerang home buyer sales during 2014 may be just the beginning of the “homecoming.”

If you are a boomerang buyer, there may be a home in your future. Conventional, FHA, and VA mortgage underwriting guidelines have typically allowed for foreclosure, short sale, or bankruptcy with re-established credit and a waiting period. However, easing mortgage requirements may make it easier for you to qualify for a mortgage.

Fannie Mae underwritting guidelines (fanniemae.com) require you to wait at least seven years after a foreclosure, which is typically measured from the reported foreclosure completion date. If you had a short sale, the waiting period is four years. However, if you had a bankruptcy, you’ll have to wait four years after a chapter 7 bankruptcy is discharged; and two years after a chapter 13 is discharged (but four years if the chapter 13 is dismissed). However, if you had multiple bankruptcies within a seven year period, a five year waiting period from the most recent discharge or dismissal date is required.

FHA (hud.gov) has changed significantly in recent years. Besides reducing waiting periods due to extenuating circumstances, there are various caveats that may further reduce your waiting period. Nevertheless, the typical waiting periods include: three years after a foreclosure, two years after a chapter 7 bankruptcy discharge, and one year if you are current on a chapter 13 payment plan. The waiting period after a short sale is differentiated depending if the loan was in default: if the loan was not in default at the time of the short sale and your previous 12 months payments were timely, you may be eligible for a FHA mortgage without waiting; however if the loan was in default prior to short sale, you will have to wait three years.

If you are eligible for VA financing (benefits.va.gov), you will have to wait two years after a foreclosure, short sale, and chapter 7 bankruptcy (one year into a chapter 13 payment plan with court approval). However, if your foreclosure or short sale was on a VA mortgage, then your eligibility amount may be reduced.

Waiting periods may be significantly reduced if you can document that your foreclosure, bankruptcy, or short sale resulted from extenuating circumstances. However, such applications are subject to underwriter discretion; and not all lenders grant such exemptions.

If you are a boomerang home buyer, it is crucial that you consult with a lender before embarking on the home buying process. Besides guidance on mortgage eligibility, your lender can help you determine the appropriate mortgage for your circumstances. And as your lender will tell you, timelines and qualifying requirements are subject to change.

By Dan Krell
Copyright © 2015

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

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Stumbling housing market reignites housing policy debate

real estate

Surely 2015 is to be the year when the housing market would bounce back from its recent disappointing performance; at least that’s what I wrote back in November. But as January’s news from the National Association of Realtors® (NAR) is not as rosy as we expected; a housing policy debate, that has been subdued since 2010, gets heated.

The NAR revealed in a February 23rd press release (nar.realtor) that although the pace of home sales increased compared to the same time last year, existing homes sales have declined to the lowest rate in nine months. The typically optimistic Lawrence Yun (NAR Chief Economist) was cited as saying “the housing market got off to a somewhat disappointing start to begin the year with January closings down throughout the country.”   Adding that “seasonal influences” can make January data erratic, the combination of low inventory and home price gains over the pace of inflation seems to have slowed home sales – notwithstanding low mortgage interest rates.

Keeping mortgage interest rates low is not the sole solution; however, if it was, the housing market may have bounced back several years ago. Although a myriad of causes have been blamed for a lackluster housing market that has been trying to make a comeback for six years, most are correlational and incidental.

However, Richard X. Bove (Equity Research Analyst at Rafferty Capital Markets) recently made a case for a sole cause in his February 23rd commentary (There’s a new mortgage crisis brewing; cnbc.com/id/102447414). Bove described how mortgage markets are in trouble; rules and regulations put into place to strengthen the market by increasing borrower standards have dried up a lot of the funding. And not necessarily in the way you might expect; besides shrinking the pool of qualified buyers, Bove suggested that the rules and regulations have made mortgage lending unprofitable and unpalatable for some lenders (leading them to walk away from the business).

As a response, it would seem as if the Federal Housing Finance Agency (FHFA) took steps to make mortgages increasingly available (returning to 3% down payment loans, and increasing the number of loans on Fannie and Freddie’s balance sheets). These actions, along with recorded losses in Q4 2014, Bove described, is making some nervous.

If you don’t remember, the FHFA was created in 2008 as a temporary conservator to Fannie Mae and Freddie Mac; whose original goals included: ensuring a positive net worth for Fannie and Freddie; reducing Fannie and Freddie’s mortgage portfolios; and facilitating a streamlined and profitable model for Fannie and Freddie.

Bove’s catch-22 conclusion, of either hindering the housing market by stopping Fannie and Freddie’s growth or increasing Fannie and Freddie’s debt obligations with continued growth, is not a new dilemma. The debate has been ongoing since 2008.

Having faded somewhat since 2010, the housing policy debate heated up during testimony given by FHFA Director Mel Watt on January 27th during the congressional hearing, “Sustainable Housing Finance: An Update from the Director of the Federal Housing Finance Agency.” Trey Garrison of HousingWire succinctly portrayed opposing views (January 27, 2014; FHFA hearing: GOP fear housing policy headed for Crash 2.0; housingwire.com): “Democrats said policies in the past year are necessary to expand housing opportunities to lower income and challenged borrowers…” while, “…Republicans…said the administration is adopting dangerous policies that risk another housing crash that will put taxpayers on the hook for billions.”

By Dan Krell
© 2015

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

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Preparations before you buy a home

House - Chevy Chase MDSo, you’ve been checking out homes online and have been bitten by the “bug.” You’ve patiently waited out the market and feel it’s time to jump in but not sure where to start. Whether you’re a seasoned or first time home buyer; don’t make the common mistake of overlooking the essential preliminary activities of the home buying process.

Experts agree that checking your credit report prior to starting the home buying process is essential. Your credit report is the basis for the credit score that is often used by mortgage lenders to decide if you qualify for a loan, and it may also be used as a means to decide your interest rate. If your credit report is inaccurate, it can cost you time and money.

Believe it or not, mistakes on credit reports are more common than you might think. According to the Consumer Financial Protection Bureau (CFPB), you’re entitled to a free annual credit report, which can be obtained for free from the “official” credit report website (annualcreditreport.com). The free report does not include a credit score, however, you can get it from the credit repositories for a fee; the CFPB cautions that the scores you receive may not be the same scores that lenders use for decisions on extending credit.

I often talk about doing due diligence, and many home buyers are attentive and thorough in negotiation, and home inspections; but many are not as careful when choosing their real estate agent and lender. Although buyers tend to work with the first or second agent they meet; there is a consensus that you should interview several real estate agents so as to know what to expect and to ensure you receive the service and attention you require. The same goes for any service provider you may use in the process, including the mortgage lender. And even though it has become more common for buyers to talk with several loan officers about mortgage programs and interest rates; however, it is recommended that you ask about lender fees as well.

Don’t be shy in choosing in choosing other service providers either – it’s going to be your home after all. Choosing a home inspector, pest inspector, and title company can take a little time, and it may seem easier to go with whomever your agent recommends; but sometimes price or proficiency is sacrificed for convenience. For example, a few moments of time to interview home inspectors can be the difference between having an adequate home inspection or a very thorough one.

Before you spend time visiting homes, it is highly recommended that you get qualified for a mortgage by a lender. An approval indicating that your income and asset documents and credit report were reviewed by the loan officer gives added credence to any purchase offer.

Don’t forget to make a housing budget. In addition to your mortgage payment, insurance, and property taxes, the budget should include utilities, maintenance and other expected expenses. The budget should also project increases in these payments as well. Rather than keeping to the maximum loan qualification, a realistic budget can reveal your comfort level on the price you’re willing to pay for a home.

Besides your real estate agent, more information about credit reports, mortgages and the home buying process is available from the CFPB (consumerfinance.gov) and HUD (hud.gov). With preparation, your home buying journey will be more enjoyable!

by Dan Krell ©
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. This article was originally published the week of April 21, 2014 (Montgomery County Sentinel). Using this article without permission is a violation of copyright laws. Copyright © Dan Krell.

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A new housing finance system is one step closer

Closing Fannie & FreddieThe end is near for Fannie and Freddie.  The next step to remaking the housing finance system.

Like FHA, Fannie Mae and Freddie Mac were also financially battered during the financial and housing crises.  While FHA became the mortgage to rescue many distressed home owners, the Federal Housing Finance Agency (FHFA) was created in 2008 as conservator for the hemorrhaging Fannie and Freddie.  Although the writing was on the wall about necessitating change in the conventional mortgage sector, there could only be speculation about what that change would entail.

Fast forward to June 2013, and the bipartisan bill S.1217 Housing Finance Reform and Taxpayer Protection Act of 2013 was introduced as the groundwork for replacing Fannie and Freddie with the (to be created) Federal Mortgage Insurance Corporation (FMIC).  Moving along to last week, Senate Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) released a draft for “A New Housing Financing System” (banking.senate.gov).

Building upon S.1217, the Bipartisan Housing Reform Draft’s intention is stated to “…protect taxpayers from bearing the cost of a housing downturn; promote stable, liquid, and efficient mortgage markets for single-family and multifamily housing; ensure that affordable, 30-year, fixed-rate mortgages continue to be available, and that affordability remains a key consideration; provide equal access for lenders of all sizes to the secondary market; and facilitate broad availability of mortgage credit for all eligible borrowers in all areas and for single-family and multifamily housing types.”

In addition to supervision and enforcement authority, the purpose of the FMIC is to maintain a re-insurance fund that will insure mortgage backed securities meeting FMIC guidelines.  The re-insurance fund is to be modeled after the Deposit Insurance Fund (maintained by the FDIC), and to be funded by private companies.  Additionally, the new system is meant to protect taxpayers by requiring future mortgage backed security guarantors to be private and hold a minimum of 10% private capital as a first loss position; bailouts of these private institutions are to be prohibited.

The FMIC will also institute underwriting guidelines that are to “mirror” the Qualified Mortgage (QM).  The recent definition and rules for the QM announced by the Consumer Finance Protection Bureau (CFBP) were effective January 10th.  The QM is characterized to be a safer loan compared to some loans originated prior to the crises because the lender must assess and the borrower must demonstrate the ability to repay the loan; the ability to repay is based on typical factors that include the borrower’s income, assets, and debts.  Additionally, the borrower cannot exceed a total monthly debt-to-income ratio (all monthly obligations including mortgage payments) of 43%.

Conforming loan limits will be maintained, so as to provide the additional credit needed to purchase homes in “high-cost” areas.  If you’re a first time home buyer, you will need a minimum down payment of 3.5%; however if you’re not a first time home buyer you will need at least a 5% down payment for your home purchase.

The transition period is expected to be at least 5 years, however possible extensions may be required to prevent market disruptions and cost spikes to borrowers.  The plan is to simultaneously wind down Fannie and Freddie’s operations while increasing expansion of the new system.  The FMIC will take over the functions and duties of FHFA; and as of the FMIC’s certification date, Fannie and Freddie won’t be able to conduct new business.

by Dan Krell
© 2014

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

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RESPA empowers home buyers and consumers

Housing

Although the Real Estate Settlement Procedures Act (RESPA) is one of those laws that you don’t hear much about, it’s a consumer protection statue that has been around for while.  Enacted in 1974, RESPA was intended to help home buyers be better shoppers by requiring the disclosures regarding the nature and costs related to the real estate settlement process.  Keeping RESPA relevant, there have been modifications and clarifications through the years, most notably the change of administration and enforcement in 2011 from HUD to the Consumer Finance Protection Bureau (CFPB).

RESPA is generally known for empowering consumers in the real estate process by allowing consumers (in most cases) to choose service providers, and prohibiting kickbacks (e.g., unearned fees) for referrals.  Section 8 of RESPA prohibits real estate service providers from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage. While Section 9 prohibits a home seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale.

RESPA also requires the disclosure of affiliated business arrangements associated with a real estate closing.  An affiliated business relationship is considered to exist when there is a direct or indirect referral from a service provider to another provider of settlement services when there is an affiliate relationship or when there is a direct or beneficial ownership interest of more than one percent.  The disclosure of such a relationship must specify the following: the nature of the relationship (explaining the ownership and financial interest) between the provider and the loan originator; and the estimated charge or range of charges generally made by such provider. This disclosure must be provided on a separate form at the time of the referral (or at the time of loan application or with the Good Faith Estimate if referred from a mortgage lender).  In most cases, you’re not required to use the referred affiliated businesses.

RESPA violations are serious, and penalties can be severe.  For example, HUD (hud.gov) lists the penalties for violations of Section 8 “… anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties. In a criminal case a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private law suit a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service.”

The real estate industry takes RESPA very seriously; the industry educates service providers about empowering consumers, as well as regulation compliance.  And although modifications of RESPA are to keep up with the real estate industry; some still claim that there are sections of RESPA that remain vague, as demonstrated by the Supreme Court opinion of Freeman v. Quicken Loans, and further clarifications (such as the RESPA Home Warranty Clarification Act of 2011).

In the past, RESPA violations were pursued vigorously by HUD; resulting in settlements as well as criminal investigations.  Today, the CFPB (consumerfinance.gov) has taken over the reins, and continues the pursuit of RESPA violations with the same if not increased vigor.  More information and guidance about RESPA can be obtained from the CFBP (consumerfinance.gov).

by Dan Krell
© 2014

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

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