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Don't be derogatory - Short Sales, Foreclosures, and Bankruptcies

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Posted 06-22-2013 at 09:40 AM by Roy Sanborn



Don't be derogatory - Short Sales, Foreclosures, and Bankruptcies



May was a great month for residential home sales in our Lakes Region communities with 99 transactions at an average price of $303,580 and a median price point of $192,500. That just edges out last May’s total of 97 sales at an average price of $251,717. That’s pretty darn good, but I wanted to break that elusive 100-sales-in-a-month mark! Couldn’t one other person have bought a home!?! As usual, the majority of the sales are still below that $200,000 price point as buyers take advantage of the bargains currently available in the Lakes Region…



Unfortunately, we are still seeing a number of homes going to foreclosure or being sold as short sales. In the towns listed in this report, there were 72 bank owned homes sold plus nine other properties sold through the short sale process through the first five months of the year (at least according to the MLS). That represents about 23% of all the sales. In typical government fashion, Freddie Mac and Fannie Mae have come up with a term for foreclosures, short sales, and bankruptcies; they call them “Derogatory Events”. Now, I think I would have called it something different instead. The definition of derogatory includes; degrading, demeaning, disparaging, slighting, and uncomplimentary. After all, aren’t we supposed to be a kinder, gentler, and politically correct nation now? As any school child (used) to know, if you said something derogatory to someone you could end up standing in the corner instead of going out to recess.

Well, it’s kind of the same thing with Fannie and Freddie backed loans if you’ve done something “derogatory” such as a short sale. Except you stand in the corner a lot longer when it comes to getting financing for a property again. I am not sure that all home owners understand this. Some may think that a short sale doesn’t affect their ability to get a loan down the road, but it does. Fannie and Freddie have guides and matrixes explaining the rules and time lines that apply to borrowers that have had a “derogatory event” or “financial mismanagement” problem. They might even have drones but that’s another issue entirely…

For example, to get financing from Freddie you will have to wait 4 years to get another loan and the loan to value ratio would be a maximum of 90%. Fannie can provide financing at 80% Loan to Value after 2 years or 90% Loan to Value mortgage after 4 years. This is, of course, dependant on your credit scores. The majority of conventional loans do follow Freddie Mac or Fannie Mae guidelines, but some lenders may have stricter requirements and their own credit overlay, so Freddie and Fannie's "wait-times" are the minimum. And, should you want to buy a vacation home or income property you’ll have to wait seven long years so don’t think you’re going to run out and start a real estate empire anytime soon.



So, what if there are “extenuating circumstances?” Well, you won’t have to stand in the corner quite so long if something bad happens that was well beyond your control; like the loss of a primary income earner or a long term uninsured disability. But even that has to be very well documented. I think they ask for your dearly departed to be brought into their office and propped up in the corner. Extenuating circumstances does not include a decline in market conditions and the fact that your home lost a third of its value. Something like, “It’s not my fault. My dog ate my homework” just doesn’t cut it either. Should you be able to convince them of circumstances extraordinaire, both Freddie and Fannie can reduce your time in the corner to 2 years with a maximum of a 90% LTV mortgage.

Now apparently the FHA criteria are a lot more lenient and say that you may be eligible for a new loan after just one year. Remember the key word in that sentence is “may” and while the FHA rules “may” allow it many lenders that write the FHA backed loans could be a little more than reluctant to write such a loan.

I am not saying that a home owner in distress should avoid a short sale. He just needs to be aware of what happens after. The consequences for a short sale are certainly less than a seven year waiting period resulting from a foreclosure under the Freddie Mac guidelines. That’s more like a very, very long detention. My best tip for you is to behave yourself, don’t be derogatory, and stay in school…

Thanks to Jennifer McCall at Merrimack Mortgage in Meredith for schooling me on this issue…

And, oh yes, she says they change the rules all the time so check with your lender if you are currently still in the corner.

Data was compiled using the Northern New England Real Estate MLS System as of 6/19/13.

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