Ritchie School of Real Estate Finance - Arizona Mortgage Education: short sale

Tuesday, October 2, 2012

How Will Future Lenders View me After Foreclosure, Bankruptcy, or Short Sale?

Overcoming the circumstances that caused the previous financial issues requires knowing what to expect when reapplying for a mortgage in the future. It is important to understand the process and to be informed about the details of the process in order to become a homeowner again.

How long do I have to wait before I can get a mortgage? Most people will use an FHA mortgage because it is the more forgiving than a conventional mortgage, although conventional may allow someone who had an extreme hardship to be eligible 2 years after a short sale, but for the most part FHA is likely to be the route to owning again:

For FHA:

Foreclosure – 3 years
Deed-in-lieu of Foreclosure – 3 years
Short Sale – 3 years, in most cases
Chapter 7 Bankruptcy – 2 years
Chapter 13 Bankruptcy – 1 year
Credit Counseling Plan – 1 year

Coming out of a major financial setback can feel like an uphill climb, but it is not insurmountable. In fact, there will be a point in time and beyond when nothing from that time frame of financial difficulty will even appear on the credit report. For most items it will expire off the credit report within 7 years, the worst case scenario is 10 years when it comes to a Chapter 7 bankruptcy.

Late payments, collections, charge-offs (debt written off and sent to collection), foreclosure, defaults, chapter 13 bankruptcy, etc. will all come off the credit report after 7 years.

Chapter 7 bankruptcy falls off the credit report after 10 years.

It is critical, after a serious derogatory credit event, to be PERFECT moving forward. If you go through a foreclosure, but then for the next 12 months following you have other derogatory items reported on your credit report, this can severely lessen your likelihood of being approved for a mortgage 3 years later. In the case of a bankruptcy, you get a second chance, but even one late payment or one collection after the bankruptcy could derail the possibility of getting approved for a new mortgage.

When there has been derogatory credit in the past, it will almost always have to be fully explained in a written letter.

Lenders must document their analysis as to whether the late payments were based on a:

disregard for financial obligations
an inability to manage debt
factors beyond the control of the borrower (extenuating circumstances).

Extenuating Circumstances: nonrecurring events that are beyond the applicant’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations. These cannot be solely defined by the event itself; all circumstances must be taken into consideration.

What the underwriter is looking for is:

WHY the derogatory event occurred
WHY it was out of my control
WHY it is unlikely to happen again

Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website

Monday, October 1, 2012

How Long Will My Credit Be Impacted After Foreclosure?

CREDIT has become the adult grade card. It opens and closes doors of opportunity and survival. For someone in a mortgage crisis it is more important to focus on closure in order to move forward. Once a house is foreclosed upon or sold in a short sale the healing process begins.

The majority of the damage comes from the number of days of delinquency someone experiences. FICO put out a good study to refer to: http://bankinganalyticsblog.fico.com/2011/03/research-looks-at-how-mortgage-delinquencies-affect-scores.html

The chart in the link shows us a few things, first of all that a short sale with the debt forgiven is better than a short without the debt forgiven. A short sale without the debt forgiven is no better than a foreclosure in the chart. There is one thing where the chart falls short, it only shows 90 days of delinquency, in Arizona most homeowners would likely be at 180 days delinquency before the foreclosure would actually take place, so the credit score would be lower just based on the longer delinquency period being reported, and of course the longer the delinquency the more damage to the score. No matter what, once the final event takes place, foreclosure or short sale, the recovery period begins. The derogatory information will remain for seven years and as each year passes will have less and less adverse impact on the credit score. Generally the scores are back to the high 600 range to low 700 range in 2 - 3 years, however, every credit report is a like a stand of DNA, so recovery depends on the whole picture, not just one account.

The GOOD NEWS: nothing bad on the credit report will last forever. It may be necessary to look at bankruptcy as an option in order to weigh your options and guard against deficiency liability. While not favorable, it is an efficient means to cleaning up the problems of financial disarray in a very specific and legal manner without leaving the door open to future liability. When facing the prospect of losing your house always sit down with a bankruptcy attorney to find out your potential liability.

The other GOOD NEWS: a foreclosed homeowner today can be a home buyer again, generally at the 3 year point. In 3 years (FHA 4155 Guidelines as of 4.21.2010) no matter what my circumstances are right now YOU can buy again, that is 1,095 days, or only 26,280 hours (1/3 or more of which you will sleep through). Of course, at the 3 year mark, you will have to qualify and there cannot be any derogatory credit issues after the original foreclosure.

Patrick Ritchie
Mortgage Finance Instructor

Ritchie School of Real Estate Finance

480-203-4641 Cell
Patrick@PatrickRitchie.com

NMLS# 276438 AZ#0913109
Click Here to go to Patrick's Mortgage Website