Tuesday, March 23, 2010

You Have a Foreclosure or Short Sale.... When Can You Buy a Home Again?

A common tale...

Alex and Christina purchased a home in Phoenix back in May of 2006 for $725,000. Last year they requested a loan modification from their lender to whom they owed slightly over $680,000 (in a first & second mortgage). Their request for a modification was denied by the lender. Around the same time, a home similar to theirs on the same block sold for $410,000. Uh oh!

So Alex and Christina listed their home with a real estate agent to do a short sale. They had some offers, but the lender did not approve any of them. You see, since the lender is accepting less than what they are owed in a short sale, they must approved the offer. Alex and Christina became frustrated witht the process and walked away. The home was eventually foreclosed by the lender and sold for $374,000.

Prior to this event, Alex and Christina had perfect credit. Their scores were in the high 700 range. Today they are probably in the low 500's. Question: When can Alex and Christina qualify for a home loan again?

Their scores will rise as time passes and they continue to have other good credit. To qualify for an FHA loan with most lenders, they scores will have to rise to at least 620. In addition there are rules about how much time must pass after a foreclosure, deed in lieu of foreclosure, and short sale. There are different guidelines that lenders follow depending on whether the event was due to extenuating circumstances (e.g. income loss, illness, or death in family), or financial mismanagement (most everything else).


Foreclosures occur when the homeowner defaults and the lender reposses the property. This is the case in the example above with Alex and Christina. Their foreclosure was not a result of extenuating circumstances; like many others they got in over their heads. Therefore they will have to wait 5 years before they can qualify for another home loan with most conventional lenders. If the foreclosure had been the result of extenuating circumstances, then their wait time is reduced to 3 years.

Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is when the homeowner accepts the fact that they will lose the home and willingly grants the property to the lender without having to go through the foreclosure process. The foreclosure process can be expensive and time consumer for lenders, especially in judicial foreclosure states. If Alex and Christina had done a deed in lieu of foreclosure, then they would have to wait 4 years before qualifying for a mortgage again. If the event was due to extenuating circumstances, that time is reduced to 2 years.

Short Sale

How long would it be if Alex and Christina had followed through with the short sale? Well, that appears to have the shortest "period of waiting." Regardless of the reason for the short sale, in only 2 years they could potentially qualify for a home loan again. That sounds much better than the 5 year wait they will have after their foreclosure.

So if someone is facing a foreclosure or short sale, and they want to buy a home again as soon as possible, then a short sale may be advantageous. If you or someone you know may be interested in more information about a short sale, go to http://emodifymyloan.com/shortsaledetails/.

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Friday, March 5, 2010

Wake Up Home Buyers!

"It's now or never...," Elvis Presley sang. That line also applies to purchasing a home. At risk of sounding like a cheesy salesman, I can honestly say that it has never been a better time to purchase a new home.

Okay, that probably did sound cheesy. I make fun of car commercials that consistently tell us that "Now is the best time to buy a -insert car brand here-!" In fact, even real estate professionals were saying a few years ago, at the peak of the market, that it was the best time to buy. For a moment forget the cheesiness, and past mistakes of real estate & mortgage professionals. I will make my case as to why potential homebuyers are foolish (yes I said "foolish") not to purchase a home now.

I must give credit to Barry Habib, Chairman of Mortgage Success Source, whom I had the opportunity to spend some time with this week when he made a trip to Phoenix. He made this case by telling the story through the eyes of Rip Van Winkle. I took his idea and made some changes of my own.

The classic Washington Irving story of Rip Van Winkle starts before the American Revolution in a village in colonial New York. Forgoing the details, Rip falls asleep for 20 years and awakens after the Revolution. For our purposes we will revise the story a bit. Before he fell asleep Rip put some money away for a down payment on a house. And instead of colonial New York, our story takes place in suburban Phoenix.

Rip Van Winkle wakes up today after a multi-decade slumber. He takes his money that he had set aside before his prolonged nap and immediately begins shopping for a home. He does some research and discovers that home prices have dropped around 50% in four years. He is astonished. "You mean that if I woke up just four years ago, I would be paying double for a house?" he asked his Realtor. "I can't believe how lucky I am."

Rip researched further and realized that he could get an $8,000 federal tax credit if he has a contract prior to April 30 and closes by June 30. "Unbelievable!" Rip exclaims. "If I had slept in for just a few more months, I would have missed out on this opportunity. Thank goodness I woke up when I did. This seems to good to be true!" Then he thought for a moment.

"There has to be a catch," he thought to himself. "Interest rates must be high. They are probably going to stick it to me on my home loan." So he asked his loan officer about it, and he was again astonished to learn that rates were near historic loans. " Do you mean to tell me that along with a 50% discount from home prices four years ago, and an $8,000 tax credit, I can get an interest rate on a 30 year fixed mortgage that is within .25% of all-time lows? I can't believe how lucky I am to have woken up when I did!"

Rip was indeed lucky to wake up at the right time in history. Don't miss your opportunity.