(To determine your potential eligibility for a new mortgage, we will need to know some information about how your short sale(s) are reported on your credit report. If you don’t already have a recent copy of your credit report, you can obtain one for free by following these instructions.)

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The new mortgagee letter sets out criteria that pretty much mirror the criteria that we discussed here earlier for conforming mortgages after a short sale–basically, the short seller must not have gone into default prior to the short sale (or else at least 3 years must have passed since the short sale was concluded), and must not have agreed to a deficiency judgment or other condition that indicates that the short sale was not payment in full for the old mortgage.

The mortgagee letter does clarify, however, that for FHA financing, underwriters will also be looking at the reason for the short sale; if it was for convenience or financial gain, then the short seller is not eligible for subsequent FHA financing. The specific example given in the mortgagee letter of a short sale that disqualifies the short seller from getting subsequent FHA financing is if that seller then purchased a “similar or superior property within reasonable commuting distance”.

Note that this rule as currently worded technically prohibits a “for gain/convenience” short seller or a short seller who agreed to a deficiency judgment from ever obtaining FHA financing afterwards; underwriters that I have spoken to say that they suspect that the rule will be interpreted to mean that those cases will simply be treated as “default” short sales and have a 3 year waiting period before they are eligible for FHA financing, but that is all very uncertain at the moment.

Are you considering a short sale or loan modification? Your future plans to buy another home some day could be affected by how you structure your loan renegotiations now, so it’s important to have your lawyer, agent, and/or future lender in on the discussions to make sure that decisions you make now don’t come back to bite you a few years down the road. Contact us and we’d be glad to set up an appointment to discuss your situation, and refer you to the correct combination of agent and/or lawyer to help you with your short sale or loan modification.

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That other article spells out the requirements that a previous short sale must meet in order for a buyer to be able to qualify for a new mortgage. If a prospective buyer’s previous short sale doesn’t meet those requirements, then they are usually precluded from getting a new mortgage for 4 years, or in some cases (if truly extenuating circumstances can be shown to have caused the short sale) 2 years.

Prospective buyers in this scenario do have a very good option for buying a home, however–a lease-purchase contract. A lease-purchase contract is one that says, basically, that the buyer will actually rent the property for the first X years (usually somewhere in the 2-6 year range); at the end of that lease period, they then officially purchase the property (at the price originally negotiated), with some or all of their lease payments getting credited towards their down payment by the seller.

The advantage of a lease purchase to the buyer who has a recent short sale on their credit history is that it lets them move into the property that they want now (and lock in their ability to get that particular property at a specific price), while deferring having to get a mortgage until enough time has passed that the short sale should no longer adversely affect their ability to get a mortgage. The seller also wins, as they get a steady cash flow for the lease period, which often will enable them to meet the goals that were prompting them to sell the property. (Sellers who truly need a lump-sum payment of the equity in their house immediately, then a lease-purchase contract might not be appropriate for them, but many sellers aren’t in that situation and welcome a lease-purchase once the details of it are explained to them.)

Interested in exploring a lease-purchase purchase? Contact us and we would be glad to have one of our buyer agents help you understand how a lease-purchase works.

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A short sale is a transaction where the seller does not make enough by selling their house to pay off their mortgage(s) and doesn’t have enough cash pay the difference, and where the mortgage holder(s) agree to forgive that difference. (A short refinance (aka short payoff refi or short refi) is the parallel for a refinance, and is treated the same way.) Historically, short sales have been reported on the seller’s credit report the same way that a foreclosure would be, often making it impossible for that seller to get a mortgage to buy a new property until at least 5-7 years had elapsed.

As the number of short sales has been climbing in response to falling home prices during the recent recession, however, lenders have become more forgiving of short sales in terms of how they are treated on a credit report. More specifically, they now usually distinguish between “non-delinquent” short sales (where the seller was current on all payments but simply needed to sell the property (e.g. because of job-related moves) at a time when the market happened to be down, and where their mortgage holder forgives the excess portion of the mortgage without requiring any repayment of that excess (e.g. by filing a deficiency judgment against the seller)) and “delinquent” (or “pre-foreclosure”) short sales (where the seller had fallen significantly behind in their payments before the short sale was concluded or where the mortgage holder filed a deficiency judgment against the seller).

After a non-delinquent short sale, most lenders are requiring at least a 1 year waiting period before a new mortgage can be obtained; some lenders (including multiple of the lenders through whom we can broker loans), however, are now allowing those sellers to get new mortgages as long as they meet all of the other credit requirements for the new mortgage, without any special restrictions or waiting periods. (Note, however, that having a short sale of any sort on your credit report does negatively affect your credit score, and that lower credit score is the one that the borrower would have to use to qualify and that would be used for determining rates.)

After a delinquent short sale, on the other hand, lenders currently are usually requiring a waiting period of 4 years after the short sale before a new mortgage can be obtained; some of our lenders do allow mortgages as early as 2 years after a delinquent short sale if there are significant extenuating circumstances that caused the delinquency and the borrower can document why those circumstances are not likely to recur.

If you’ve had the misfortune of needing to have a short sale, and are interested in exploring your options for a new mortgage, contact us and we’d be glad to review your options with you.

Also, if you are considering a short sale or loan modification now, keep in mind that your future plans to buy another home some day could be affected by how you structure your loan renegotiations today, so it’s important to have your lawyer, agent, and/or future lender in on the discussions to make sure that decisions you make now don’t come back to bite you a few years down the road. Contact us and we’d be glad to set up an appointment to discuss your situation, and refer you to the correct combination of agent and/or lawyer to help you with your short sale or loan modification.

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NAR recently compiled some of their recent tips and tools for agents dealing with short sales; I’ve found the Buyer Handout on that page to be particularly useful in giving buyers an overview of the short sale process.

In my experience, though, the majority of short sales are still “fake” ones, where the listing agent either doesn’t know what they are doing or is working with an unrealistic seller or uncooperative lienholder(s), and which thus will have a very low chance of actually going to closing any time soon (if ever). I’ve put together a checklist of the questions that I recommend asking every short sale listing agent, and that I’ve found helps screen out almost all of the “fake” listings pretty efficiently.

Once you’ve found the legit short sales to look at, you also need to make sure that your clients know about the many ways that a short sale purchase is legally and logistically riskier than a traditional purchase. Having looked at literally dozens of different bank addenda used in short sale and foreclosure transactions, I’ve put together the Ethical Homes Bank-Influenced Property Disclosure, which enumerates most of the contract changes that the short sale or REO bank might require/request. You can present the disclosure to your buyer and have them sign it before they have you prepare an offer on a bank-influenced property, to confirm that they understand all of the potential pitfalls lying ahead of them; doing so serves three purposes: it reduces the amount of time that you spend on preparing short sale offers for buyers who aren’t serious about them but are hoping for an unrealistic bargain (since the disclosure makes it clear to most of them that any monetary bargain is usually offset by a corresponding increase in risk); it can help protect you as an agent from potential blame down the line if your buyer proceeds with the short sale purchase, things go awry, and they don’t remember your cautions about the potential hazards involved; and it helps make your buyers more comfortable with both you and the process when the inevitable issues with a short sale purchase do crop up.

If you’d like a copy of the Ethical Homes Short Sale Checklist or the Ethical Homes Bank-Influenced Property Disclosure, let us know and we’d be glad to send them to you.

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