As a follow up to my blog last week about re-building your credit after a bankruptcy, foreclosure, short-sale, etc., I’d like to provide some info on current mortgage underwriting requirements for buying a house after one (or more) of these events.
Each mortgage type has different requirements for how long you have to re-establish credit before you’re able to qualify for financing. Generally speaking, FHA is the most lenient. Buyers can purchase a new home as soon as 24 months after a bankruptcy and 36 months after a full-blown foreclosure. If you sold your home in a short-sale, you could potentially turn around and buy a new home right away if you were current on your mortgage at the time you sold and the rest of your credit was reasonably solid. If you were in default on your mortgage going into the short-sale, you’re back to the 36 month waiting period.
Here is a Summary Chart along with the general guidelines for the 3 main types of finacing: Conventional, FHA and VA…
Re-establish Time
Conventional
FHA
VA
Bankruptcy 7
4 years
2 years
2 years
Bankruptcy 13
2-4 years
1 to 2 years
1 to 2 years
Foreclosure
5 years
3 years
2 years
Pre-Forcl/Short Sale
2 years
0 to 3 years
1-2 years
Conventional Home Loans: (Fannie Mae and Freddie Mac)
Bankruptcy:
(Waiting period begins on the final discharge or dismissal date.)
Chapter 7 and 11 bankruptcies: 4 years from discharge date.
Ch. 13 dismissed bankruptcy: 4 years from dismissal date.
Ch. 13 discharged bankruptcy: 2 years from discharge date.
Previous bankruptcy policy applies to persons who have a prior bankruptcy in the last 7 years. A person with multiple bankruptcies requires a 5 year period to reestablish credit.
For Chapter 7 and 11 bankruptcies, the waiting period may be reduced to 2 years with documented extenuating circumstances.
Pre-foreclosure Sale(Short-Sale):
This transaction involves the sale of the property by the borrower to a third party for less than the amount owed to satisfy the delinquent mortgage. The transaction must be approved by the lender, investor, mortgage insurer, if applicable, and all lien holders.
Short sales require a 2 year period to re-establish credit after the sale is completed.
Foreclosure:
The time for reestablished credit is 5 years. There are restrictions with additional requirements for the period between 5 and 7 years. During this period a 10% down payment will be required and the minimum score requirement is 680. No investment property allowed. No second home allowed. No cash-out refinances allowed. After 7 years normal guidelines will apply.
With documented extenuating circumstances, the waiting period may be reduced to 3 years. Deed-in-lieu of foreclosure is similar to foreclosure, except the waiting period is 4 years. The same restrictions apply between 4 and 7 years as above for a foreclosure between 5 and 7 years.
FHA Home Loans: (includes Utah Housing)
Bankruptcy:
Chapter 7: minimum waiting period is 2 years from discharge date
Chapter 13: Minimum 12 months from the bankruptcy filing date with AA payment history and transaction approval from the bankruptcy trustee. Buyers can potentially close on their new home while they are still in a Chapter 13 repayment plan.
Foreclosure:
3 years from completion of the foreclosure. Approval for closing sooner is sometimes possible with verifiable extenuating circumstances and underwriting approval.
Pre-foreclosure Sale(Short-Sale):
Guidance on Borrowers current on their mortgage(s) at the time of Short Sale:
Borrowers are considered eligible (with no waiting period) for a new FHA-insured mortgage if:
• They were current on their mortgage and other installment debts at the time of the short sale of their previously owned property, and
• The proceeds from the short sale serve as payment in full.
Guidance on Borrowers in default at the time of Short Sale:
Borrowers in default on their mortgage at the time of the short sale (or pre-foreclosure sale) are not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale. Lenders may make exceptions to this rule under certain circumstances.
Veterans Administration (VA) Home Loans:
(Directly from the VA’s lending guide.)
Bankruptcy:
The fact that a bankruptcy exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan. Develop complete information on the facts and circumstances of the bankruptcy. Consider the reasons for the bankruptcy and the type of bankruptcy filing.
Bankruptcy Filed Under the Straight Liquidation and Discharge Provisions of the BK Law
You may disregard a bankruptcy discharged more than 2 years ago.
If the bankruptcy was discharged within the last 1 to 2 years, it is probably not possible to determine that the applicant or spouse is a satisfactory credit risk unless both of the following requirements are met:
the applicant or spouse has obtained consumer items on credit subsequent to the bankruptcy and has satisfactorily made the payments over a continued period, and
the bankruptcy was caused by circumstances beyond the control of the applicant or spouse such as unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the circumstances are verified. Divorce is not generally viewed as beyond the control of the borrower and/or spouse.
Foreclosure:
The fact that a home loan foreclosure (or deed-in-lieu of foreclosure) exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan.
Develop complete information on the facts and circumstances of the foreclosure.
Apply the guidelines provided for bankruptcies filed under the straight liquidation and discharge provisions of the bankruptcy law. See the preceding heading entitled “Bankruptcy.”
If the foreclosure was on a VA loan, the applicant may not have full entitlement available for the new loan.
One of the most rewarding things I do as a Mortgage Consultant is help people who’ve had major financial difficulties in the past get a fresh start and buy a new home. In my career I’ve seen hundreds of mortgage applications from people who have filed bankruptcy and/or lost a home in foreclosure. Many of these people were given a second chance too early with subprime lending. For example, until 2007, it was possible for someone with a recently discharged bankruptcy to qualify immediately to buy a home with no money down. After the mortgage and banking crisis of the last few years, obviously that is no longer the case. But there is still home ownership hope for those with past credit problems.
With the economic challenges we’ve faced over the last several years, we shouldn’t be surprised that bankruptcy filings across the nation were up by 32% in 2009. And we’ve all heard about the giant waves of foreclosures and short-sales that are still rolling over the US. Millions of people need a fresh start. Odds are someone you know is one of them. Many hard-working, honest people who used to have perfect credit histories and very high credit scores are now faced with the challenge of recovering from a serious blow – not just financially, but emotionally and psychologically as well.
Before I offer some tips on how to re-build your credit history as quickly as possible, I want to suggest this mantra of encouragement to those who have fallen on hard financial and credit times:
“You are not your credit score!” (Pass it on.)
It’s funny how we use our credit scores as one more measurement of our self-worth and accomplishments. But is someone with a 780 credit score a better person than someone with a 620 score? Maybe, maybe not. Are they a better credit risk? Statistically speaking, yes. But, as the great Iron Maiden sang in one of their old and famous songs, The Prisoner: “I am not a number…I am a free man!” If you’ve had your debt slate wiped clean through bankruptcy, you are now free to improve your credit score and start re-building a solid financial life! Let’s look at the most effective way to do that:
MM Tip #1: Open a Secured Credit Card ASAP
If over-spending and over-extension of credit got you into trouble in the first place, you may have sworn you’ll never borrow money again. Or, at least, never use credit cards again. Like it or not though, our economy places a great deal of importance on credit scores. Your scores affect everything from your insurance premiums to your ability to rent an apartment or land a job. Do yourself a favor and surrender to the system on this. Be selfish. Tell yourself you’re going to do whatever it takes to build a great credit score. It will help open doors and save you a ton of money over time. Be patient and persistent. I promise it won’t take as long as you might think. Many people mistakenly assume they won’t be able to buy a house for 7 years or longer after a foreclosure or bankruptcy. Not true. It’s possible to get a home loan as soon as 2 years after a bankruptcy and 3 years after a foreclosure. Even sooner in some short-sale situations.
The first thing you should do is open a secured credit card. This type of credit card is backed by a savings account you open with the credit card company. The savings account serves as collateral to mitigate the credit risk to the company. Your own money is at stake and will be used to pay off the credit card balance should you not make payments as agreed on the card. The credit limit approved on the card is between 50% to 100% of the amount you deposit as collateral into the savings account. For example, if you deposit $500 into the savings account, you would receive a credit card with a limit of $250 to $500. Many credit card companies offer new accounts to people with a recent bankruptcy or foreclosure. You can go to www.creditcards.com and search for secured credit card offers. You should also check with your bank or credit union to see what they might offer. Keep in mind though if you had credit with them and they lost money as a result of your bankruptcy, they may not be very excited about extending credit again, even if you offer your own cash as collateral.
Be sure to read the fine print of the credit card agreements with the different offers and pick one that seems to make the most sense to you for your circumstances. Yes, the interest rates are high. But, if you use the card strictly for purchases (cash advances are a rip off) and pay off your balance in full every month you should be able to avoid paying any monthly interest. Most of these cards do have a monthly and/or annual fee. They also charge fees for several optional uses of the card. The best strategy is to use the card conservatively and responsibly. Use it to buy every day essentials like groceries and gas. Don’t use it to buy stuff you don’t need and/or can’t really afford. Pay attention to your balance and do NOT exceed your limit. In fact, it’s best if you keep your balance under 40% of your high credit limit. Your goal is to have an active credit account with a company that reports your monthly ON TIME payments to all three credit bureaus. Nothing builds credit scores faster than a clean payment history.
MM Tip #2:
Check your credit history a few months after your bankrupty or foreclosure is completed. Make sure everything is reporting accurately. Are all the accounts that were included in your bankruptcy reporting as such? Is the foreclosure reporting accurately? Ask someone who’s experienced in reading credit reports to review it with you. Take the actions necessary to make sure everything is accurate. You want your fresh start to be just that as far as your credit report goes. It’s best not to wait a couple years only to find out a bunch of old accounts are not reporting correctly.
MM Tip #3:
If you’re in the market for a car, shop around to see what dealers might be able to offer you for financing. Brace yourself because the rate will be higher than you expect! Make sure the payments are truly affordable for you. Do your homework on the price of the car and don’t overpay. Your first questions should be, “will my payment history be reported to the three credit bureaus?” If not, forget it. Credit that doesn’t show up on your report will do nothing for your scores.
MM Tip #4:
Check with your current bank or credit union for possible credit options. I’m surprised on a regular basis about how quickly some borrowers with recent negative credit are able to secure a credit card or car loan from their bank. They may say “no” but there’s only one way to find out: ask. Again, you want to be sure whatever credit you’re able to secure will result in a payment history reported to all three bureaus on a monthly basis. Note: most debit cards do NOT report a pay history since they are not an extension of credit.
MM Tip #5:
Check your progress on a quarterly or semi-annual basis. As you start to re-build your credit history, it’s important to know where you stand. Your scores WILL increase if you make your payments on time, every time, keep your credit card balances low relative to your limits and pay attention to medical bills, traffic tickets, etc. and don’t let them go to collection – ever.
MM Tip #6:
Repeat often: “I am not my credit score, but I WILL have one to brag about!”
I think we’ve become de-sensitized to the rally cries from the real estate and mortgage communities that, “Rates are going up! Act now before they do!” It feels like we’ve been crying wolf for the last several months because rates have managed to stay so low, for so long now. Well, I think the rate party is finally coming to an end.
Yesterday we saw a dramatic sell off in the Mortgage Backed Securities market which resulted in a fairly significant and rapid jump in rates. I won’t bore you with the details except to say that the Fed is – at least for now – holding firm to its commitment to stop buying MBS’s at the end of this month. Threats of inflation and a rallying stock market are also putting upward pressure on rates.
Ben Bernanke did say again today that the Fed will do what it can to keep borrowing costs low for as long as possible to allow the economy’s recovery to gain more traction. But, they will be limited in their power to do so.
Check out the chart below showing how rates have moved for the last 18 years. Notice how both the 30 yr fixed rate mortgage (red line) and the Prime interest rate (green line) as of January of this year were at their lowest point in that 18 year period. Now check out the grey line which is a pretty close representation of the Fed’s short-term rates which they’ve been holding as close to zero as possible.
So, here I am, crying wolf again! But only because I think The Wolf has shed his sheep’s cape and is creeping very close, ready to pounce and eat up those deliciously low rates.
Should you set your mortgage up on a bi-weekly mortgage plan? It depends:
When you take out a new mortgage, chances are your mail box will get flooded with offers for Bi-weekly mortgage plans. These sales pitches will preach the benefits of paying 1/2 of your mortgage payment every other week. Using data on your new mortgage that’s mined from the public records (all mortgages are recorded), some of these direct mail marketiers will try to trick you into thinking they’re somehow affiliated with your new lender.
Here’s the pitch: with 52 weeks in a year, over the course of a year you’ll end up paying an extra full monthly payment to reduce your principal balance. (26 one-half payments = 13 whole payments.) You’ll save thousands – maybe tens of thousands – over the life of the loan! That’s the bait and hook anyway. The switch is most of these programs come at a cost. The third party companies promoting bi-weeklies charge up-front set up fees of several hundred dollars and/or ongoing “transaction fees” of anywhere from $4 to $9 per transaction. These fees will slow down the interest-saving benefits you’re trying to realize by paying 1/2 your mortgage every other week.
My question is: Why pay someone to do what you can do on your own with a little effort and planning?
Never use a third-party to handle your mortgage payments. It’s just not a good idea. In almost all cases, they just take your 1/2 payment every other week, park YOUR money in THEIR interest-bearing account, charge you a transaction fee and then pay your lender for you just once a month anyway. Yes, they’re paying a little extra toward your principal but so what. Read below for tips on how you can take charge and do this yourself. It will take no more effort than setting up with a third party company.
Start with Your Lender:
Some major lenders offer their own bi-weekly plans that may or may not cost any money. Bank of America currently charges $4 per transaction for a bi-weekly. (They do not offer the program if you have an Adjustable Rate Mortgage though.) Wells Fargo on the other hand does not currently charge anything for their bi-weekly plan.
If you’re interested in the “equity acceleration benefits of a bi-weekly payment plan, start by checking with your lender to see what, if any, options they have internally. Most lenders’ websites provide this information. Just log on to your account, find the search field, type in “bi-weekly” and see what comes up. Call Customer Service for follow up questions.
Again, I’m adamant about not paying any fees whatsoever for the “right” to pay your mortgage off faster. If your lender does charge fees, here are a couple strategies to achieve the same results without incurring any fees:
Do it Yourself:
Strategy 1: Simply pay 1/12 of your principal and interest payment extra every month. Still make your payments once a month. By the way, as a general rule I don’t recommend paying any extra toward your mortgage until you’ve paid off all of your other consumer debt (credit cards especially but also car loans, personal loans, Home Equity loans, student loans, etc.) Why pay a loan that likely has the lowest rate of all of your debts and has interest that’s tax deductible before everything else is paid off? There are exceptions of course.
Strategy 2: If you get paid every other week and, from a cash-flow standpoint, you like the idea of paying your mortgage every time you get paid, here’s what I recommend: First, set up a separate, interest-bearing checking account or savings account (make sure it’s Free) at your bank or credit union. Second, if you’re paid through auto-deposit, ask your employer if you can split your deposit into two (or more accounts). If yes, set it up so that 1/2 of your normal monthly payment amount gets auto-deposited in to the separate account opened at your bank/cu. Third, set up a monthly auto-debit of that account to pay your mortgage payment equal to your normal payment plus 1/12 of that payment.
For example, if your minimum monthly payment is $1,400 per month, have your payroll department deposit $700 of your net pay every two weeks into your “mortgage savings or checking account”. Then simply schedule your monthly payment to be $1,517 ($1,400 + $1,400/12). When you first open your account, just be sure to deposit enough seed money to ensure there’s enough there to make that first higher payment.
This strategy allows you to avoid any set up or transaction fees AND earn a little interest on your money while it’s in the account. You’re still in control of your money and when your mortgage payments are made. And, it shouldn’t cost you anything. Automating it all takes care of the self-discipline issue.
These are just two example strategies. There are a lot of ways to accomplish your goal of paying off your mortgage faster. I’d love to hear about other cost-effective ways to do it.
A final note and reminder, whatever you do, make sure you’ve considered all the other aspects of your finances before you pay extra on your mortgage. In addition to paying off other debt first, you should have 3 – 6 months in emergency reserve savings. Also, make sure you’re investing funds for retirement too. What good does a pile of idle, zero interest bearing home-equity do you if you don’t have any money to live on?
You’ve probably heard from the mainstream media that buying a home with no money down is no longer possible. In Utah (and I’m sure other states too) that’s simply not true. Utah Housing is a public corporation created by the State of Utah to help low to moderate income families buy homes with little to no money down. Here are some details on how the program works:
In most cases, to qualify for Utah Housing’s programs, you must be a first time homebuyer, defined as “someone who has not lived in a personal residence they owned” in the last three years. In other words, if you owned and lived in a home in the past but have either sold it or converted it to a rental property at least 3 years ago, you should be eligible.
Note: If you buy a house within specific “Targeted Areas”, you do not have to be a first time homebuyer. (See UHC’s website for maps of these areas: Utah Housing’s Website.)
Utah Housing uses an FHA underwritten (Federal Housing Administration) fixed rate first mortgage combined with a small second mortgage to make it possible to buy a house with no down payment. Here’s an example:
Home Price: $210,000 (the current approximate median priced home in Salt Lake County) First Mortgage: $202,650 (96.5% of the price, this is the maximum allowed by FHA)
Second Mortgage: $7,350 (3.5% of the price). You actually have the option to borrow more than this to help cover your closing costs. The maximum amount you could borrow in this example would be $12,159, which is 6% of the first mortgage loan amount. This would give you $4,809 for closing costs. The other option to help with closing costs is to negotiate with the sellers of the house to have them pay some or all of your costs. Normally you will end up paying a higher price for the house if you go this way. I can work with you and your Real Estate Agent to figure out the most advantageous, lowest cost way to structure your transaction.
Here’s what payments would look like on the above example: (based on today’s Utah Housing rates of 4.89% on the first mortgage and 7.0% on the second mortgage)
First Mortgage: $1,093.08/month
Second Mortgage: $80.89 (Assuming you borrowed the maximum amount.)
Adding mortgage insurance, taxes and insurance estimated payments of $92.88, $114 and $40 respectively and your total house payment would be about: $1,421 per month.
There are no prepayment penalties on Utah Housing loans which means you can pay them off at any time without penalty. They do have a “re-capture” tax provision that rarely applies that you’ll want to know about; but in practice, you can pay off Utah Housing loans without having to pay any early payoff penalties.
What a lot of buyers are currently doing is using their $8,000 tax credit to pay off (or at least pay down) the second mortgage as soon as they get their fat check from the IRS! This is Utah Housing’s Equity Now program.
Qualifying for a Utah Housing Mortgage:
To qualify you must meet FHA underwriting guidelines plus meet the following Utah Housing requirements:
* Minimum 660 Qualifying Credit Score
* There are household income limitations that depend on what county you are buying a house in. For example, in Salt Lake County, households with 1-2 family members cannot make more than $67,500 per year and households with 3+ family members cannot make more than $77,500.
For more information on the Utah Housing Corporation loan programs, you can visit Utah Housing’s Website. And, as always, feel free to call me or send me a message for personalized service and recommendations.
Here’s a great video with a short, yet clear explanation of how interest rates move, how the Federal Reserve has been holding them down and why their power to do so is about to be weakened:
If you are thinking about purchasing a new home, don’t wait until you find the perfect home to get prequalified! Make sure your credit is healthy and find out how much you can qualify for before you find the home of your dreams. This helps insure that you not only choose a home in the right price range, but prevents you from falling in love with a home that you can’t afford!
Another great reason to get quaified as early in the process as possible is to insure the fastest closing possible. If there are competing offers going in on the same home, you may be at a disadvantage if you are not fully pre-approved for your mortgage. Don’t wait until the last minute!
As the Real Estate and financial markets continue to move up and down, mortgage rates can also be affected. Since mortgage rates are more closely tied to the bond markets, an up or down move in the stock market may not have the result in mortgage rates that one might expect. In fact, many times the resulting mortgage rate changes are counter-intuitive.
More importantly, rates change daily and they can change quickly. Some mortgage professionals have recently noted that their rate quotes have only had shelf lives of three to four hours before market changes have deemed them inaccurate.
How does a consumer navigate fast changing markets in order to refinance their existing loan or purchase a home with the most favorable terms possible?
Plan – Define your needs ahead of time, do not wait until the last minute. This is especially true of home purchases.
Consult – Talk to your mortgage professional on a regular basis so they can interpret recent market events to you and communicate how those events can affect you.
Execute – When you have defined your needs and have determined that now is the best time to move forward, don’t shop yourself out of a good loan! What does this mean? It is easy to get caught up in shopping for the best rate, but it is not uncommon for home owners to miss locking their loan at a great rate because they are in search of better rates that do not exist or that they do not qualify for. It is important to shop to insure you are getting the best rate possible, but set limits to the number of companies you are going to consider doing business with and be careful of having your credit report pulled needlessly and more times than necessary!
With the resurgence of FHA home loans, many home owners are wondering if they can benefit from an FHA loan. The truth is that you may or may not benefit by converting your existing loan into an FHA loan when you refinance.
Some of the factors that can determine if an FHA loan is right for you:
Loan To Value
Home Value
Size of Existing Loan
Credit Score
Amount of Cash You Want to Take Out
With the many changes that have occurred with FHA loans, it is possible that even if you didn’t qualify six months ago, there may be a loan program that is right for you.
Mike can help you determine if an FHA loan is right for you quickly, with no costs, and no obligation.
FHA Home Loans: (includes Utah Housing) 
If you are thinking about purchasing a new home, don’t wait until you find the perfect home to get prequalified! Make sure your credit is healthy and find out how much you can qualify for before you find the home of your dreams. This helps insure that you not only choose a home in the right price range, but prevents you from falling in love with a home that you can’t afford!
