Credit After a Short Sale vs. Foreclosure

December 7, 2009

 

One of the most commonly asked questions about a short sale is how it will impact credit and the ability to purchase a home in the future. Whether you are a buyer, seller or investor, it’s imperative to educate yourself on this all important aspect of credit to become fully informed before making a final decision or in order to assist sellers in determining the right course of action for their financial future.

Here to help sort through the confusion is a quick primer on credit after a short sale vs. foreclosure. Remember, every situation is distinctive so these estimates represent the average experience of most individuals.

Note: Depending on the situation, circumstances may vary.

Average Time to Rebuild Credit to Purchase a Home

  • After a foreclosure: 5 – 7 years
  • After a foreclosure with extenuating circumstances such as, but not limited to: disability, death of a spouse, etc: 3 – 7 years
  • After a Deed in Lieu (DIL) of foreclosure: 4 – 7 years
  • After a Short Sale: 0 – 2 years

Other Alternatives

The above averages represent typical buying patterns for those using regular lenders to obtain a conventional loan or government backed loans; private investors are still viable options that enable many people to purchase another home immediately after any type of financial fiasco, including foreclosure. However, mortgage rates tend to be less favorable and requirements more stringent than ever. Just a few years ago it was quite easy to obtain a sub-prime mortgage for a relatively low rate above the preferred status, but today, much of that has changed. While it is still possible to obtain the equivalent of a sub-prime mortgage, be prepared to come up with a much larger down payment and higher overall rates.

Short Sales Win Hands Down

Sellers wishing to minimize damage to their financial future clearly come out ahead when using a short sale but it’s still possible to further decrease the downside by avoiding a 60-day late payment, working closely with the lender to achieve a quick price agreement, and setting aside as much funds as possible for a new loan. In fact, homeowners that maintain a solid payment history and work-out an agreeable short sale deal early may find it desirable to downsize to a new home by setting aside additional funds equal to 20% down. With Private Mortgage Insurance (PMI) and a reduced debt-to-income (DTI) ratio, sellers are finding it possible to take advantage of lowered property values to immediately purchase another home for a fraction of the cost (and debt burden). 

Conclusion: It’s a win-win for all involved but, only if you understand the benefits and work aggressively to seal the deal.

*This post has been adapted from Real Estate News & Commentary by Chris McLaughlin


Home Affordable Refinance FAQs

June 5, 2009

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I’m current on my mortgage. Will the Home Affordable Refinance help me?

Eligible borrowers who are current on their mortgages but have been unable to take advantage of today’s lower interest rates because their homes have decreased in value, may now have the opportunity to refinance. Through the Home Affordable Refinance Program, Fannie Mae and Freddie Mac will allow the refinancing of mortgage loans that they own or that they placed in mortgage backed securities.

How do I know if the refinance will improve the long term affordability or stability of my loan?

Your lender will give you a “Good Faith Estimate” that includes your new interest rate, mortgage payment and the amount you will pay over the life of the loan. Compare this to your current loan terms. If it is not an improvement, refinancing may not be right for you. Also consider that refinancing from an adjustable rate to a fixed rate loan or eliminating higher risk loan terms such as interest only payments or balloon payments may also provide long term stability.

I owe more than my property is worth. Do I still qualify to refinance under the Making Home Affordable Program?

Eligible loans will include those where the first mortgage will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000 or less on your first mortgage you may qualify. The current value of your property will be determined after you apply to refinance.

I have both a first and a second mortgage. Do I still qualify to refinance under Making Home Affordable?

As long as the amount due on the first mortgage is less than 105% of the value of the property, borrowers with more than one mortgage may be eligible for a Home Affordable Refinance. Your eligibility will depend, in part, on agreement by the lender that has your second mortgage remain in a second position, and on your ability to meet the new payment terms on the first mortgage.

Will refinancing lower my payments?

The objective of the Home Affordable Refinance is to provide creditworthy borrowers who have shown a commitment to paying their mortgage, the opportunity to get into a mortgage with payments that are affordable today and sustainable for the life of the loan. Borrowers whose mortgage interest rates are much higher than the current market rate should see an immediate reduction in their payments.

Borrowers who are paying interest only, or who have a low introductory rate that will increase in the future, may not see their current payment go down if they refinance to a fixed rate and payment. However, these borrowers could save a great deal over the life of the loan by avoiding future mortgage payment increases. When you submit a loan application, your lender will give you a “Good Faith Estimate” that includes your new interest rate, mortgage payment and the amount that you will pay over the life of the loan. Compare this to your current loan terms. If it is not an improvement, a refinancing may not be right for you.

What are the interest rate and other terms of this refinance offer?

The rate will be based on market rates in effect at the time of the refinance and any associated points and fees quoted by the lender. Interest rates may vary across lenders and over time as market rates adjust. The refinanced loans will have no prepayment penalties or balloon payments.

Will refinancing reduce the amount that I owe on my loan?

No. The objective of the Home Affordable Refinance is to help borrowers get into more affordable loans. Refinancing will not reduce the principal amount you owe to the first mortgage holder or any other debt you owe. However, refinancing should save you money by reducing the amount of interest that you pay over the life of the loan.

Can I get cash out to pay other debts?

No. However, borrowers whose loans are owned or securitized by Fannie Mae may be eligible to finance all closing costs and obtain a small amount of cash (2% of the mortgage amount not to exceed $2,000) through the refinance if there is sufficient equity. For borrowers whose loans are owned or securitized by Freddie Mac, transaction costs (not to exceed $2,500) such as the cost of an appraisal or title report, may be included in the refinanced amount.

I am delinquent on my mortgage. Will I qualify for a Home Affordable Refinance?

No. Borrowers who are currently delinquent or have been 30 days overdue more than once during the past 12 months will not qualify. You should contact your servicer to see if a Home Affordable Modification is an option for you.

Will I need mortgage insurance?

If your existing loan has private mortgage insurance, you will need the same amount of insurance coverage for the refinanced loan. If your existing loan does not have private mortgage insurance it will not be required as part of the Home Affordable Refinance.

How long will the Home Affordable Refinance be available?

The program expires on June 10, 2010. Your refinance transaction must be closed and funded on or before that date.


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