Wednesday, November 25, 2009
Tuesday, November 17, 2009
I have been getting a lot of inquiries about the 90 day "flipping rule" from several people. Essentially, some lenders will not underwrite a loan on a property that has been purchased by an investor with the intention of "flipping" the property for a quick profit. These lenders require that these investors hold title for at least 90 days before they will consider the property for a loan. The 90 day rule does not apply in situations where the lending institutions that acquired the property back through the foreclosure process. Below is the actual language directly from the United States Department of Housing and Urban Development.
HUD No. 03-055
BUSH ADMINISTRATION PROVIDES HOMEBUYERS NEW PROTECTION FROM PREDATORY LENDING PRACTICE
New "Anti-Flipping" Rule Holds Lenders, Sellers and Appraisers Accountable
WASHINGTON - Housing and Urban Development Secretary Mel Martinez today announced a new initiative in the Bush Administration's efforts to crack down on predatory lending. HUD published a final rule today in the Federal Register addressing property "flipping" on mortgages insured by the Federal Housing Administration (FHA).
Property "flipping" occurs when a recently acquired property is resold for a considerable profit with an artificially inflated value.
"The Bush Administration is committed to maintaining a strong housing market in which consumers can feel confident that they are protected from unscrupulous practices," Martinez said. "This final rule represents a major step in our efforts to eliminate predatory lending practices."
Predatory lending results when home purchasers become unwitting victims of lenders, sellers and appraisers, often working together. The unsuspecting homebuyers either purchase homes with sales prices far in excess of the fair market value, or are substantially overcharged with costs associated with obtaining a mortgage.
The final rule, "FR-4615 Prohibition of Property Flipping in HUD's Single Family Mortgage Insurance Programs," (view as TEXT or view as PDF file) makes recently flipped properties ineligible for FHA mortgage insurance. It also allows FHA to better manage its insurance risk by requiring additional support for a property's value when a significant increase between sales occurs. Features include:
Sale by Owner of Record: Only the owner of record may sell a home to an individual who will obtain FHA mortgage insurance for the loan; it may not involve any sale or assignment of the sales contract, a procedure often observed when the homebuyer is determined to have been a victim of predatory practices.
Time Restrictions on Re-sales:
Re-sales occurring 90 days or less following acquisition will not be eligible for a mortgage to be insured by FHA. FHA's analysis disclosed that among the most egregious examples of predatory lending was on "flips" that occurred within a very brief time span, often within days. Thus, the "quick flips" will be eliminated.
Re-sales occurring between 91 and 180 days will be eligible provided that the lender obtains an additional appraisal from an independent appraiser based on a re-sale percentage threshold established by FHA; this threshold would be relatively high so as to not adversely affect legitimate rehabilitation efforts but still deter unscrupulous sellers, lenders, and appraisers from attempting to flip properties and defraud homebuyers. Lenders may also prove that the increased value is the result of rehabilitation of the property.
Re-sales occurring between 90 days and one year will be subject to a requirement that the lender obtain additional documentation to support the value to address circumstances or locations where HUD identifies property flipping as a problem. This authority would supersede the higher expected threshold established for the above-mentioned 90 to 180 day period and will be invoked when FHA determines that substantial abuse may be occurring in a particular locality.
Other recent actions by the Bush Administration to protect homeowners from predatory lending and promote homeownership include:
A proposed rule making lenders accountable for appraisals on mortgage insured by FHA.
A recent plan announced by HUD to expand protection of homeowners by proposing performance standards for appraisers of FHA-single family homes under its Appraiser Watch Initiative. Under Appraiser Watch, some 25,000 appraisers will be held accountable for faulty appraisals, which too often lead to default and foreclosure. FHA will monitor appraisers' default and claim rates and will levy sanctions - including removal from its list of approved appraisers - against those whose rates are excessive.
A proposal to reform the regulatory requirements of the Real Estate Settlement Procedures Act (RESPA) that would make the process of buying and refinancing a home significantly simpler, potentially less expensive and would protect consumers from unscrupulous lending practices.
The "Homebuyer Bill of Rights," which requires greater disclosure of costs associated with buying a home, allows consumers more choices in choosing providers of closing services, limits excessive settlement fees and encourages innovation and competition in the marketplace.
HUD is the nation's housing agency committed to increasing homeownership, particularly among minorities, creating affordable housing opportunities for low-income Americans, supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development as well as enforces the nation's fair housing laws. More information about HUD and its programs is available on the Internet.
If you have any questions about this or a property, please let me know and I can do the research for you.
It's November 17, 2009 and I am very Bullish on Sacramento
Friday, November 13, 2009
Good Evening Everyone:
Earlier this month, President Obama signed the extension of the tax credit for home buyers. Below is some detailed information about this tax credit and how it now includes owners looking to move up. The bulk of this information was obtained from the National Association of Home Builders.
The Worker, Homeownership, and Business Assistance Act of 2009 has extended the tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence. The tax credit now applies to sales occurring on or after January 1, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify.
For sales occurring after November 6, 2009, the Act establishes income limits of $125,000 for single taxpayers and $225,000 for married couples filing joint returns.
The income limits for sales occurring on or after January 1, 2009 and on or before November 6, 2009, are $75,000 for single taxpayers and $150,000 for married taxpayers filing joint returns.
The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.
- Who is eligible to claim the $8,000 tax credit?
First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and on or before April 30, 2010. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner. A limited exception exists for certain contract for deed purchases and installment sale purchases. See the IRS website for more detail.
However, the law also allows home sales occurring by June 30, 2010 to qualify, provided they are due to a binding sales contract in force on or before April 30, 2010.
Persons who are claimed as dependents by other taxpayers or who are under age 18 are not qualified for the tax credit program.
- What is the definition of a first-time home buyer?
The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.
For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, IRS Notice 2009-12 allows unmarried joint purchasers to allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.
- How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
- Are there any income limits for claiming the tax credit?
Yes. For sales occuring after November 6, 2009, the income limit for single taxpayers is $125,000; the limit is $225,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $125,000 for single taxpayers and $225,000 for married taxpayers filing a joint return. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
- The income limits for claiming the tax credit were raised when the tax credit was extended. Are the higher limits retroactive?
No. The new income limits are only applicable to purchases occurring after November 6, 2009.
The income limits for sales occuring on or after January 1, 2009 and on or before November 6, 2009 are $75,000 for single taxpayers and $150,000 for married couples filing jointly.
- What is “modified adjusted gross income”?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine “adjusted gross income” or AGI. AGI is total income for a year minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
To determine modified adjusted gross income (MAGI), add to AGI certain amounts of foreign-earned income. See IRS Form 5405 for more details.
- If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.
- Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $235,000. The applicable phaseout to qualify for the tax credit is $225,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.
Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $138,000. The buyer’s income exceeds $125,000 by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.
Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.
- How is this home buyer tax credit different from the tax credit that Congress enacted in early 2009?
The tax credit’s income limits were increased, the documentation requirements were tightened, and the program's deadlines were extended.
- How do I claim the tax credit? Do I need to complete a form or application? Are there documentation requirements?
You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on line 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns). No other applications are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase.
- What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence will qualify for the credit, provided the home is purchased for a price less than or equal to $800,000. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.
It is important to note that you cannot purchase a home from, among other family members, your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse’s family members. Please consult with your tax advisor for more information. Also see IRS Form 5405.
- I read that the tax credit is “refundable.” What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).
- Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and on or before April 30, 2010 (or by June 30, 2010, provided a binding sales contract was in force by April, 30, 2010).
In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.
- Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with an MRB home buyer program. Note that first-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in an MRB program.
- I live in the District of Columbia. Can I claim both the Washington, D.C. first-time home buyer credit and this new credit?
No. You can claim only one.
- I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of “nonresident alien” in IRS Publication 519.
- Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.
- I bought a home in 2008. Do I qualify for this credit? No, but if you purchased your first home between April 9, 2008 and January 1, 2009, you may qualify for a different tax credit. Please consult with your tax advisor for more information.
Tuesday, November 10, 2009
The following is an excerpt from The United States Department of Veteran Affairs. I found this to be the best description of what this day symbolizes. On November 11, we pay homage to the true American Hero!
History of Veterans Day
World War I – known at the time as “The Great War” - officially ended when the Treaty of Versailles was signed on June 28, 1919, in the Palace of Versailles outside the town of Versailles, France. However, fighting ceased seven months earlier when an armistice, or temporary cessation of hostilities, between the Allied nations and Germany went into effect on the eleventh hour of the eleventh day of the eleventh month. For that reason, November 11, 1918, is generally regarded as the end of “the war to end all wars.”
In November 1919, President Wilson proclaimed November 11 as the first commemoration of Armistice Day with the following words: "To us in America, the reflections of Armistice Day will be filled with solemn pride in the heroism of those who died in the country’s service and with gratitude for the victory, both because of the thing from which it has freed us and because of the opportunity it has given America to show her sympathy with peace and justice in the councils of the nations…"
The original concept for the celebration was for a day observed with parades and public meetings and a brief suspension of business beginning at 11:00 a.m.
The United States Congress officially recognized the end of World War I when it passed a concurrent resolution on June 4, 1926, with these words:
Whereas the 11th of November 1918, marked the cessation of the most destructive, sanguinary, and far reaching war in human annals and the resumption by the people of the United States of peaceful relations with other nations, which we hope may never again be severed, and
Whereas it is fitting that the recurring anniversary of this date should be commemorated with thanksgiving and prayer and exercises designed to perpetuate peace through good will and mutual understanding between nations; and
Whereas the legislatures of twenty-seven of our States have already declared November 11 to be a legal holiday: Therefore be it Resolved by the Senate (the House of Representatives concurring), that the President of the United States is requested to issue a proclamation calling upon the officials to display the flag of the United States on all Government buildings on November 11 and inviting the people of the United States to observe the day in schools and churches, or other suitable places, with appropriate ceremonies of friendly relations with all other peoples.
An Act (52 Stat. 351; 5 U. S. Code, Sec. 87a) approved May 13, 1938, made the 11th of November in each year a legal holiday—a day to be dedicated to the cause of world peace and to be thereafter celebrated and known as "Armistice Day." Armistice Day was primarily a day set aside to honor veterans of World War I, but in 1954, after World War II had required the greatest mobilization of soldiers, sailors, Marines and airmen in the Nation’s history; after American forces had fought aggression in Korea, the 83rd Congress, at the urging of the veterans service organizations, amended the Act of 1938 by striking out the word "Armistice" and inserting in its place the word "Veterans." With the approval of this legislation (Public Law 380) on June 1, 1954, November 11th became a day to honor American veterans of all wars.
Later that same year, on October 8th, President Dwight D. Eisenhower issued the first "Veterans Day Proclamation" which stated: "In order to insure proper and widespread observance of this anniversary, all veterans, all veterans' organizations, and the entire citizenry will wish to join hands in the common purpose. Toward this end, I am designating the Administrator of Veterans' Affairs as Chairman of a Veterans Day National Committee, which shall include such other persons as the Chairman may select, and which will coordinate at the national level necessary planning for the observance. I am also requesting the heads of all departments and agencies of the Executive branch of the Government to assist the National Committee in every way possible."
On that same day, President Eisenhower sent a letter to the Honorable Harvey V. Higley, Administrator of Veterans' Affairs (VA), designating him as Chairman of the Veterans Day National Committee.
In 1958, the White House advised VA's General Counsel that the 1954 designation of the VA Administrator as Chairman of the Veterans Day National Committee applied to all subsequent VA Administrators. Since March 1989 when VA was elevated to a cabinet level department, the Secretary of Veterans Affairs has served as the committee's chairman.
The Uniform Holiday Bill (Public Law 90-363 (82 Stat. 250)) was signed on June 28, 1968, and was intended to ensure three-day weekends for Federal employees by celebrating four national holidays on Mondays: Washington's Birthday, Memorial Day, Veterans Day, and Columbus Day. It was thought that these extended weekends would encourage travel, recreational and cultural activities and stimulate greater industrial and commercial production. Many states did not agree with this decision and continued to celebrate the holidays on their original dates.
The first Veterans Day under the new law was observed with much confusion on October 25, 1971. It was quite apparent that the commemoration of this day was a matter of historic and patriotic significance to a great number of our citizens, and so on September 20th, 1975, President Gerald R. Ford signed Public Law 94-97 (89 Stat. 479), which returned the annual observance of Veterans Day to its original date of November 11, beginning in 1978. This action supported the desires of the overwhelming majority of state legislatures, all major veterans service organizations and the American people.
Veterans Day continues to be observed on November 11, regardless of what day of the week on which it falls. The restoration of the observance of Veterans Day to November 11 not only preserves the historical significance of the date, but helps focus attention on the important purpose of Veterans Day: A celebration to honor America's veterans for their patriotism, love of country, and willingness to serve and sacrifice for the common good.
It's November 11, 2009 and I am very Bullish on Sacramento
Thursday, November 5, 2009
Wednesday, November 4, 2009
Good Morning All
In an effort to be proactive in dealing with the always "frustrating" short sale process, Bank of America has made a move to using Equator, formerly known as REOTrans. Below is an article on the move. I have some comments on what all lenders can do to help expedite the process, but for now:
10/22/2009 By: Carrie Bay, reporter for DS News
California-based Equator (formerly known as REOTrans) says it has launched the industry's first-ever short sale module for a large national lender.
Although Equator declined to name the lender, the San Francisco Chronicle has reported that Bank of America is the company in question. A representative from BofA recently told the paper that they were using the Equator platform to manage the short sale process. "This is the first time that short sales have been handled through an electronic platform," said Equator CEO Chris Saitta. "With our new system, everyone works together in real time, dramatically improving communication and approval timelines for our client, its borrowers, vendors, and real estate agents."
Short sales, in which a lender and borrower reach an agreement to dispose of a property threatened by foreclosure at a price that is "short" of the amount owed on the mortgage, have become more popular among lenders lately as a viable method for dealing with distressed properties. According to Equator, the number of successful short sales has increased spectacularly across the country in the wake of the foreclosure crisis.
Kevin Kieffer, a Realtor with Keller Williams Realty in Danville, California, told the Chronicle, "A year ago I wouldn't touch a short sale. It would be random prices banks wouldn't agree to, you would be tied up six months hoping to get a property sold. But now we're seeing banks up front negotiating prices and giving us criteria. They're getting creative to make things move."
Equator says the keys to a successful short sale are accessibility, responsiveness, communication, and fulfillment. By adopting its short sale platform, the company says large lenders, such as the unnamed Bank of America, can ensure troubled borrowers have 24/7 access to a portal through which they can provide the necessary information to process a short sale and receive real-time status updates electronically.
"Short sales can be a daunting, complicated, frustrating task for everyone involved," Saitta said. "This fresh approach using our sophisticated platform makes it fast and efficient for all parties involved."
Equator's short sale module also automates decisioning for the lender, handles approvals for faster turnaround, provides quick fulfillment, and assures full compliance with government programs, Saitta said.
My recommendation to all lenders out there who are dealing with a lot of short sales, is simple. Train your staff properly. The real estate agents out there who are working the short sales, are your allies. Treat them as such. A lot of the lenders I have dealt with, have employees in customer service positions who are malcontents. A poor attitude from the lender's customer service department is frustrating to the agent and is enough in some situations, to have the agent give up. Memo to the lenders: Call me and I will show you how you can implement an user friendly process to help facilitate all of your short sale files.
It's November 4, 2009, and I am very Bullish on Sacramento
Tuesday, November 3, 2009
Credit After Foreclosure, Bankruptcy, or Short Sale
Copyright© 2009, CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) Permission is granted to C.A.R. members only to reprint and use this material for non-commercial
purposes provided credit is given to the C.A.R. Legal Department. Other reproduction or use is strictly prohibited withoutthe express written permission of the C.A.R. Legal
Department. All rights reserved.
One of the concerns a consumer has after experiencing a bankruptcy, foreclosure, or short sale
(referred to as a "preforeclosure sale" by Fannie Mae) is the ability to obtain credit to purchase
another home. Fannie Mae has updated its credit guidelines. This legal article summarizes those
guidelines in Part I. In addition, since lenders use FICO scores in order to determine the
creditworthiness of a borrower, this article covers the impact of a bankruptcy, foreclosure or short
sale on FICO scores in Part II..
I. Fannie Mae Credit Guidelines
Q 1. How long is the time period after a foreclosure before a consumer can be eligible to
obtain credit to purchase a home?
A Five years from the date the foreclosure sale was completed.
Additional requirements that apply after 5 years and up to 7 years following the completion date are
. The purchase of a principal residence is permitted with a minimum 10 percent down payment
and minimum representataive credit score of 680.
. Purchase of a second home or investment property is not permitted.
. Limited cash-out refinances are permitted for all occupancy types pursuant to the eligibility
requirements in effect at that time.
. Cash-out refinances are not permitted for any occupancy type.
(Source: FNMA Announcement 08-16, 6-25-08 )
Q 2. Why do the additional requirements for foreclosures in Question 1 only apply from 5 to 7 years following the foreclosure completion date?
A According to Fannie Mae policy in Part X, Section 103 of the Selling Guide, Fannie Mae requires
only a 7-year history to be reviewed for all credit and public record information. The 7-year
Home Page > Legal > All Legal Q&As > 2009 Legal Q&As > Credit After Foreclosure, Bankruptcy, or Short Sale
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timeframe also aligns with the information provided by the borrower on the loan application relative to
disclosure of a past foreclosure action. (Source: FNMA Selling Guide, 4-1-09. )
Q 3. Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the foreclosure?
A Yes. Three years from the date the foreclosure sale was completed. The same additional
requirements apply as listed in Question 1 except the minimum credit score of 680 is not required.
(Source: FNMA Announcement 08-16, 6-25-08. )
Q 4. What are"extenuating circumstances" ?
A Fannie Mae describes "extenuating circumstances" as follows:
Extenuating circumstances are nonrecurring events that are beyond the borrower's control that
result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in
If a borrower claims that derogatory information is the result of extenuating circumstances, the
lender must substantiate the borrower's claim. Examples of documentation that can be used to
support extenuating circumstances include documents that confirm the event (such as a copy of
a divorce decree, medical bills, notice of job layoff, job severance papers, etc.) and documents
that illustrate factors that contributed to the borrower's inability to resolve the problems that
resulted from the event (such as a copy of insurance papers or claim settlements, listing
agreements, lease agreements, tax returns (covering the periods prior to, during, and after a
loss of employment), etc.).
The lender must obtain a letter from the borrower explaining the relevance of the
documentation. The letter must support the claims of extenuating circumstances, confirm the
nature of the event that led to the bankruptcy or foreclosure-related action, and illustrate the
borrower had no reasonable options other than to default on their financial obligations.
(Source: FNMA Selling Guide, 4-1-09 at 391. )
Q 5. How long is the time period after a deed-in-lieu of foreclosure before a consumer can be eligible to obtain credit to purchase a property?
A Four years from the date the deed-in-lieu was executed.
Additional requirements that apply after 4 years and up to 7 years following the completion date are
. Borrower may purchase a property secured by a principal residence, second home, or
investment property with the greater of 10 percent minimum down payment ro the minimum
down payment required for the transaction.
. Limited-cash-out and cash-out refinance transactions secured by a principal residence,
second home, or investment property are permitted pursuant to the eligibility requirements in
effect at that time.
(Source: FNMA Announcement 08-16, 6-25-08. )
Q 6. Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the deed-in-lieu of foreclosure?
A Yes. Two years from the date the deed-in-lieu was executed. The same additional requirements
apply as listed in Question 4 after 2 years up to 7 years. (Source: FNMA Announcement 08-16, 6-25-08. )
See Question 4 for the definition of "extenuating circumstances."
Q 7. How long is the time period after a "preforeclosure sale" before a consumer can be
eligible to obtain credit to purchase a property?
A Two years from the completion date. No exceptions are permitted to the 2-year period due to
extenuating circumstances. (Source: FNMA Announcement 08-16, 6-25-08. )
Q 8. What is a "preforeclosure sale" mentioned in Question 6 and is that the same as a short sale?
A "A preforeclosure sale involves the sale of the property by the borrower to a third party for less
than the amount owed to satify the delinquent mortgage, as agreed to by the lender, investor, and
mortgage insurer" (Source: FNMA Announcement 08-16, 6-25-08 ).
Although the terms preforeclosure sale and short sale have been used interchangeably, there is a significant difference for purposes of obtaining credit. For Fannie Mae purposes, a preforeclosure assumes that the borrower has been delinquent in paying his or her mortgage and the lender agrees to accept a lesser amount to avoid the time and expense of a foreclousre action. A short-sale, however, can also refer to situations in which the lender of the mortgage agrees to a payoff of a lesser amount than is actually owed, even on a current mortgage, to faciiate the sale of teh property to a third party. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )
Q 9. Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the preforeclosure (short) sale?
A No. There are no exceptions to the 2-year time period. (Source: FNMA Announcement 08-16, 6-25-08. )
Q 10. If a borrower sold his or her property as a short sale but was never delinquent on that mortgage and is now attempting to purchase a new primary residence, will Fannie Mae purchase the loan?
A The loan will be eligible for delivery to Fannie Mae provided that the borrower's previous
mortgage history complies with Fannie Mae's excessive prior mortgage delinquency policy--that is the borrower does not have one or more 60-, 90-, 120-, or 150-day delinquencies reported within the 12 months prior to the credit report date--and the borrower has not entered into any agreement with the short sale lender to repay any amounts assoicated with the short sale, including a deficiency judgment. (Source: FNMA Announcement 08-16 Q&A, 8-13-08 ; FNMA Selling Guide, Part X, Chapter 3, Section 302.09. .)
Q 11. Are preforeclosure (short) sales and deed-in-lieu of foreclosure actions identified on a credit report?
A Preforeclosure sales may be reported as "paid in full" with a "settled for less than owed" remarks code, and the mortgage tradeline would indicate any recent delinquency. A deed-in-lieu may be reported by a remarks code indicating a deed-in-lieu. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )
Q 12. How long is the time period after a bankruptcy (all except Chapter 13) before a
consumer can be eligible to obtain credit to purchase a property?
A Four years from the discharge or dismissal date of the bankruptcy action (Source: FNMA
Announcement 08-16, 6-25-08 ).
Q 13. How long is the time period after a Chapter 13 bankruptcy before a consumer can be
eligible to obtain credit to purchase a property?
A Two years from the discharge date and four years from the dismissal date (Source: FNMA
Announcement 08-16, 6-25-08 ).
Q 14. Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the bankruptcy (all actions)?
A Yes. Two years from the discharge or dismissal; however, no exceptions are permitted to the 2- year time period after a Chapter 13 discharge (Source: FNMA Announcement 08-16, 6-25-0).
See Question 4 for the definition of "extenuating circumstances."
Q 15. How long is the time period after multiple bankruptcy filings before a consumer can be eligible to obtain credit to purchase a property?
A Five years from the most recent dismissal or discharge date for borrowers with more than one
bankrutcy filing within the past 7 years (Source: FNMA Announcement 08-16, 6-25-08 ).
Q 16. Does a shorter time period apply if the borrower has "extenuating circumstances" that led to the multiple bankruptcies?
A Yes. Three years from the most recent discharge or dismissal date. The most recent
bankruptcy filing must have been the result of extenuating circumstances. (Source: FNMA
Announcement 08-16, 6-25-08. )
See Question 4 for the definition of "extenuating circumstances."
Q 17. What is the difference between a Chapter 13 bankruptcy and a Chapter 7 bankruptcy?
A Chapter 13 permits a borrower with a regular income to propose a plan to repay some or all of his or her obligations over a period of up to five years. A borrower who files a Chapter 7 is permitted to retain exempt assets and receive a discharge of the borrower's debts. Chapter 7 is a relatively quick liquidation process that is generally completed within 120 days. Chapter 7 cases are rarely dismissed. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )
Q 18. What is the difference between a Chapter 13 dismissal and a Chapter 13 discharge?
A A borrower who files a Chapter 13 can dismiss the case at any time (voluntary dismissal) or the case may be dismissed by the court based on the borrower's failure to comply with the requirements of the Bankruptcy Code or to make the required payments. If the borrower who files a Chapter 13 case makes all of the payments required by the plan, the borrower receives a discharge at the end of the plan. A borrower who doesn't make all the payment required by the plan may still receive a discharge if the court finds, among other things, that the borrower made a certain amount of the payments and the borrower's failure to make all of the payments was due to circumstances beyond the borrower's control. (Source: FNMA Announcement 08-16 Q&A, 8-13-08. )
Q 19. What are the requirements to re-establish a credit history?
A After a bankruptcy or foreclosure-related action, a credit history must meet the following
rquirements to be considered re-established:
. It must meet the requirements for elapsed time (as discussed in this article.
. It must reflect that all accounts are current as of the date of the mortgage application.
. it must include a minimum of four credit references. At least one of the references must be a
traditional credit reference, and one of the references must be housing-related.
A housing-related reference must cover the period following the bankruptcy discharge or
dismissal, foreclosure, or deed-in-lieu, and can be in the form of mortgage payments or
If rental payments wre not reported to the crdit repositories, the lender must obtain copies
of bank statements, money orders, or cnacled checks for the most recent 12-mnth period
as a supplement to the rent verification.
. It must reflect three of the four credit references, including rental housing references, as
active in the 24 months preceding the date of the mortgage application.
. It must include no more than two installment or revolving debt payments 30 days past due in
the last 24 months.
. It must include no installment or revolving debt payments 60 or more days past due since the
discharge or dismissal of the bankruptcy or the completion of the foreclosure-related action.
. It must include no housing debt payments past due since the discharge or dismissal of the
bankruptcy or the completion of the foreclosure-related action.
. It must include no new public records since the discharge or dismissal of the bankruptcy or
the completion of the foreclousre-related action. Public records include bankruptcies,
foreclousres, deeds-in-lieu, preforeclosure sales, unpaid jdugments or collections,
garnishments, liens, etc.
(Source: FNMA Selling Guide, 4-1-09 at 392. )
II. Bankruptcy, Foreclosure, and Short Sale and the Impact on a FICO® Score
Q 20. What is a FICO® Score?
A A FICO® score is a number representing the creditworthiness of a person or the likelihood that
person will pay his or her debts. The three credit reporting agencies, Equifax, Experian, and
TransUnion, collect data about consumers in order to compile credit reports. The credit agencies use FICO® software to generate FICO® scores, which are then sold to lenders. Actually FICO® is just one of the several credit scoring systems available. The Fair Isaac Corporation (known as FICO®) created the first credit scoring system in 1958. Others are NextGen, VantageScore, and the CE Score. They all evaluate the creditworthiness of a borrower. However, FICO appears to be the most -used credit scoring system. A FICO® score is between 300 and 850. The higher the better the credit. Each consumer has three credit scores at any given time for any given scoring model because the three credit agencies have their own databases, gather reports from different creditors, and receive information from creditors at different times.
Q 21. What factors go into determining a FICO® score?
A Credit scores are designed to measure the risk of default by taking into account various factors in a person's financial history. Although the exact formulas for calculating credit scores are closely guarded secrets, FICO® has disclosed the following components and the approximate weighted contribution of each:
35% — Payment History – Late payments on bills, such as a mortgage, credit card or
automobile loan, can cause a consumer’s FICO® score to drop. Paying bills as agreed over
time will improve a consumer’s FICO® score.
30% — Credit Utilization - The ratio of current revolving debt (such as credit card balances) to
the total available revolving credit (credit limits). Consumers can improve their FICO® scores by
paying off debt and lowering their utilization ratio. The closing of existing revolving accounts will
typically adversely affect this ratio and therefore have a negative impact on their FICO® score.
15% — Length of Credit History – As consumer’s credit history ages, assuming they pay their
bills, it can have a positive impact on their FICO® score.
10% — Types of Credit Used (installment, revolving, consumer finance) – Consumers can
benefit by having a history of managing different types of credit.
10% — Recent search for credit and/or amount of credit obtained recently - Multiple credit
inquiries for a consumer seeking to open new credit, such as credit cards, retail store accounts,
and personal loans, can hurt an individual’s score. Applying for lots of new credit in a short
period of time is also viewed as risky and can cause a drop in an individual’s score. However,
individuals shopping for a mortgage or auto loan over a short period will likely not experience a
decrease in their scores as a result of these types of inquiries.
Q 22. How does a mortgage modification affect my FICO® score?
A FICO® credit scores are calculated from the information in consumer credit reports. Whether a
loan modification affects the borrower's FICO® score depends on whether and how the lender
chooses to report the event to the credit bureau, as well as on the person's overall credit profile. If a lender indicates to a credit bureau that the consumer has not made payments on a mortgage as originally agreed, that information on the consumer's credit report could cause the consumer's
FICO® score to decrease or it could have little to no impact on the score.
Q 23. How does a bankruptcy affect my FICO® score?
A A bankruptcy is considered a very negative event regardless of the type. A bankruptcy is factored into your FICO® score until it is removed from your credit report. As long as the bankruptcy is listed on your credit report, it will be factored into your score. If you are considering bankruptcy as an alternative to foreclosure, keep in mind that it may have a greater impact on your FICO® score. Typically, you can expect bankruptcies to remain on your credit report, from the date filed, as follows:
(1) Chapter 11 and Chapter 7 bankruptcies up to 10 years.
(2) Completed Chapter 13 bankruptcies up to 7 years.
These time periods refer to the public record item associated with filing for bankruptcy. All of the
individual accounts included in the bankruptcy should be removed from your credit report after 7
years. (Source: http://www.myfico.com/crediteducation/Questions/Bankruptcy-Types.aspx)
If you plan to file a bankruptcy, here are some things you should do to make sure your creditors are accurately reporting the bankruptcy filing:
(1) Check your credit report to ensure that accounts that were not part of the bankruptcy filing
are not being reported with a bankruptcy status.
(2) Make sure your bankruptcy is removed as soon as it is eligible to be "purged" from
your credit report.
After a bankruptcy has been filed, the sooner you begin re-establishing credit in good standing, the sooner you can expect your FICO® score to rebound. A good practice is to obtain a secured credit card and continually make all of your payments on time. As time passes and the impact of the bankruptcy lessens, you might apply for a traditional credit card and also continually make all of your payments on time.
Q 24. How does a short sale, deed-in-lieu-of foreclosure. or a foreclosure affect my FICO®
A The alternatives to foreclosure, such as a deed-in-lieu of foreclosure or a short sale, aren’t any
better as far as a FICO® score is concerned. The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all "not paid as agreed" accounts, and considered the same by your FICO® score. This is not to say that these may not be better options for you from a financial or tax perspective, just that they will be considered no better or worse for your FICO® score. If you are considering bankruptcy as an alternative to foreclosure, that may have a greater impact on your FICO® score. While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO® score.
Q 25. What won't affect my FICO® score?
A The following information is not considered by the FICO® scoring formula:
. Your race, color, religion, national origin, sex, or marital status
. Your age
. Your salary, occupation, title, employer, date employed, or employment history
. Where you live
. Any interest rate being charged on a particular credit card or other account
. Certain types of inquiries (such as promotional, account review, insurance or employmentrelated
. Credit counseling
. Any information not found in your credit report
. Any information that is not proven to be predictive of future credit performance
Q 26. Where can I get more information?
A This article is just one of the many legal publications and services offered by C.A.R. to its
members. For a complete listing of C.A.R.'s legal products and services, please visit C.A.R. Online at www.car.org.
Readers who require specific advice should consult an attorney. C.A.R. members requiring legal
assistance may contact C.A.R.'s Member Legal Hotline at 213.739.8282, Monday through Friday, 9:00 A.M. to 6:00 P.M., and Saturday, 10:00 A.M. to 2:00 P.M. C.A.R. members who are brokerowners, office managers or Designated REALTORS® may contact the Member Legal Hotline at 213.739.8350 to receive expedited service. Members may also fax or e-mail inquiries to the Member Legal Hotline at 213.480.7724 or email@example.com. Written correspondence should be addressed to:
CALIFORNIA ASSOCIATION OF REALTORS®
Member Legal Services
525 South VirgilAvenue
Los Angeles, California 90020
The information contained herein is believed accurate as of October 13, 2009. It is intended to provide general answers to general questions and is not intended as a substitute for
individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an
It is November 2, 2009 and I am very Bullish on Sacramento!