Foreclosure, Short Sales, REO Information – Lesli Fritts & the Fritts Team

In today’s Real Estate market, there are many questions concerning short sales, REO’s, Foreclosure and deed in lieu properties. I hope the following information will be helpful in answering questions you may have.

FAQ's:

Buyer Question - "We are looking to buy a home, and we have seen many “short sales” advertised. What is a “short sale” and how does it impact us?"

Answer: “Short Sale” means that the current owner/seller owes more in loans than what their house is currently valued at. They may have more than one mortgage on the home, constituting the large dollar amount owed versus the home value. This situation, of being “upside down” on the home obviously inhibits the chance of selling their property. If the home owner/seller is not in the position to bring cash to the closing table to pay their lender in full of what is owed, then their only hope for selling their home would be for their lender/lenders who currently hold the mortgages on the property, to agree to accepting a “shortage” on the amount owed to them, thus constituting the term “Short Sale.”

In order for an owner/ seller to be accepted into their lender’s “Short Sale” program, they must meet the qualifying guidelines such as – a financial hardship, inability to pay the lender the full amount owed, proving the property is valued less than what is owed by an analysis of the property, and further scrutiny of the situation.

Many times, there is enough equity to pay the first mortgage holder, but not the second or third. (Junior Lien Holders) The seller must then negotiate with these lenders, as well. There could possibly be other liens, such as home owner association dues, back property taxes, etc, owed on the property.

These homes selling as “Short Sales” may, or may not be in default on their mortgage payments. However, many times the owner/sellers have elected to not continue to pay on a property that is no longer worth the amount owed on it, and the property is heading towards a full foreclosure process.

As you can see, the whole situation can become very complicated. As a buyer, fulfilling your due diligence of performing an inspection (many of these homes are “as is” sales) having the appraisal completed, and processing your loan, are not the only steps to closing. Purchasing a “Short Sale” home is contingent upon the owner/seller jumping through all the hoops their current lender is requiring for a preapproval for the “short sale” process. Waiting for these approval many times takes several months, with pricing and terms possibly changing throughout the time period prior to closing.

Congress has taken a strong stand on the short sale process, and have urged the lending institutions to move more quickly on the process. Our hope for the New Year is that lenders, many who are short staffed, will become much more efficient and timely in getting these short sales approved.

Many buyers think that they are getting a great buy on a “Short Sale.” However, I would urge buyers who do not want to be kept waiting on not knowing on the finality of their home purchase, to also look at homes in the same area, that are not a “short sale” situation, and deal with a seller who has some equity, whose home is in great condition, will negotiate in good faith, complete inspection item requests, and be able to close smoothly, with a clear title, in a 30 to 60 day time frame.

Buyer Question - "What does it mean when they say the home is in the Foreclosure process?"

Answer: Foreclosures – A home is in the “foreclosure” process, when the seller defaults on their mortgage payment. There may be more than one lender owed money on the property, and one or more lien holders may be foreclosing.

A “foreclosure” may not necessarily be a short sale, but the owner/seller may not be able to make the payments any longer, or has elected to no longer make them.

As a buyer, if you are looking at foreclosures, your transaction will be contingent upon the seller being able to stop the foreclosure process, and their current lenders approval of the sale. Once again, this can be a lengthy process for both the buyer and the seller.

For more information see the time frames and requirements for foreclosures in the State of Colorado HERE

Buyer Question - "What is a REO home?"

Bank Owned Properties – the term “Bank Owned” or “REO Property” means the home has gone through the full foreclosure process, and is now fully owned by the bank. These are the easiest of transactions for a buyer to purchase out of the three options. The previous owner/seller and his loan issues are totally out of the picture, and you are dealing with only one entity, the bank. During the foreclosure process, the junior lien holders lose their ability to make any claims to the property, and the title is cleared. However, if you are purchasing a bank owned, make sure you receive a title commitment, and review it thoroughly with your lender and Realtor. The banks generally like to sell these homes in a timely fashion, and many times they sell quickly for a good price.

Seller Question – "Someone has advised us to do a “Deed in Lieu” just what is a “Deed in Lieu” and how will it affect us?"

Answer: “Deed in Lieu” is an agreement between you as the homeowner, and your lender, that you are willing turning the property back over to the bank, not to proceed with a short sale or foreclosure, and willingly leave the property in good condition. This may be a good option for many sellers that know they are upside down on their home, and do not want to deal with the process, time and heart ache of a short sale or foreclosure. However, if you have more than one mortgage on the property, and other liens, this process may not be for you. Please see the following information from HUD regarding a “Deed in Lieu.”

Seller Question - "We are having to sell our home as a short sale, or, we have lost our home to foreclosure. We are concerned if we will ever be able to purchase a home again. Are there requirements out yet as to when, or how?"

Answer: I am so sorry to hear that you have been placed in that position. However, do not feel alone – 1,000’s and 1,000’s of homeowners across the country are in the same situation as you – and the government realizes it. Please see the chart below on current requirements for when you may consider purchasing a new home.

Bankruptcy/Foreclosure/Short Sale/Deed-In-Lieu Seasoning Requirements

	Conventional	FHA	VA
Bankruptcy	· All bankruptcy except Chapter 13 – 4 year time period from discharge or dismissal. Exception for extenuating circumstances is 2 years from discharge or dismissal. · Chapter 13 Bankruptcy – 2 years from discharge date or 4 years from dismissal date. Exception for extenuating circumstances is 2 years from dismissal. · If borrower has had multiple bankruptcy filings in the last 7 years, there is a 5 year time period from the most recent dismissal or discharge date. If the most recent bankruptcy was due to extenuating circumstances, there is a 3 year time period from the most recent dismissal or discharge date.	A Chapter 7 (liquidation) does not disqualify a borrower from obtaining an FHA-insured mortgage, if at least two years have elapsed since the date of the discharge of the bankruptcy. During this time, the borrower must · have reestablished good credit, or · chosen not to incur new credit obligations An elapsed period of less than two years, but not less than 12 months may be acceptable for an FHA-insured mortgage, if the borrower · can show that the bankruptcy was caused by extenuating circumstances beyond his/her control, and · has since exhibited a documented ability to manage his/her financial affairs in a responsible manner. Note: The lender must document that the borrower's current situation indicates that the events that led to the bankruptcy are not likely to recur. A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage, provided that the lender documents that · one year of the payout period under the bankruptcy has elapsed, and · the borrower's payment performance has been satisfactory and all required payments have been made on time. The borrower must receive written permission from the court to enter into the mortgage transaction. Total Scorecard Accept Recommendation: Lender documentation must show two years from the discharge date of a Chapter 13 bankruptcy or the loan must be referred to an underwriter.	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. If the bankruptcy was caused by failure of the business of a self-employed applicant, it may be possible to determine that the applicant is a satisfactory credit risk if · the applicant obtained a permanent position after the business failed, · there is no derogatory credit information prior to self-employment, · there is no derogatory credit information subsequent to the bankruptcy, and · failure of the business was not due to the applicant’s misconduct. If a borrower or spouse has been discharged in bankruptcy within the past 12 months, it will not generally be possible to determine that the borrower or spouse is a satisfactory credit risk. Chapter 13: This type of filing indicates an effort to pay creditors. Regular payments are made to a court-appointed trustee over a 2 to 3 year period or, in some cases, up to 5 years, to pay off scaled down or entire debts. If the applicant has finished making all payments satisfactorily, the lender may conclude that the applicant has reestablished satisfactory credit. If the applicant has satisfactorily made at least 12 months worth of the payments and the Trustee or the Bankruptcy Judge approves of the new credit, the lender may give favorable consideration.

Foreclosure	· 5 year time period from completion date. Additional requirements after 5 years and up to 7 years include: o Purchase of a primary residence permitted with minimum 10% down payment and minimum 680 FICO o Purchase of 2^nd home or NOO not permitted o Cash out refinance for all occupancies not permitted; rate/term refinances are eligible · Exception for extenuating circumstances is 3 years from completion date. Additional requirements after 3 years and up to 7 years include: o Purchase of a primary residence permitted with minimum 10% down payment o Purchase of 2^nd home or NOO not permitted o Cash out refinance for all occupancies not permitted; rate/term refinances are eligible	A borrower is generally not eligible for a new FHA-insured mortgage if during the previous three years his/her previous principal residence or other real property was foreclosed *Exception: The lender may grant an exception to the three-year requirement if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the borrower, such as a serious illness or death of a wage earner, and the borrower has re-established good credit since the foreclosure. Divorce is not* considered an extenuating circumstance. However, the situation in which a borrower whose loan was current at the time of a divorce in which the ex-spouse received the property and the loan was later foreclosed qualifies as an exception. *Note*: The inability to sell the property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.	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 Bankruptcy. If the foreclosure was on a VA loan, the applicant may not have full entitlement available for the new loan. Ensure that the applicant’s Certificate of Eligibility reflects sufficient entitlement to meet any secondary marketing requirements of the lender.

Short Sale	· 2 year time period from completion date. There are no additional requirements or exceptions to the 2 year period due to extenuating circumstances	Same as foreclosure guideline	2 year time period

Deed-In-Lieu	· 4 year time period from date executed. Additional requirements after 4 years and up to 7 years include: o Purchase of a primary, 2^nd home or NOO residence permitted with the greater of 10% minimum down payment or the minimum down payment required for the transaction o Refinances permitted subject to eligibility guidelines · Exception for extenuating circumstances is 2 years from completion date. Additional requirements after 2 years and up to 7 years include: o Purchase of a primary, 2^nd home or NOO residence permitted with the greater of 10% minimum down payment or the minimum down payment required for the transaction o Refinances permitted subject to eligibility guidelines	A borrower is generally not eligible for a new FHA-insured mortgage when, during the previous three years he/she has given a deed-in-lieu of foreclosure. *Exception: The lender may grant an exception to the three-year requirement if the deed-in-lieu was the result of documented extenuating circumstances that were beyond the control of the borrower, such as a serious illness or death of a wage earner, and the borrower has re-established good credit since. Divorce is not* considered an extenuating circumstance. However, the situation in which a borrower whose loan was current at the time of a divorce in which the ex-spouse received the property and the deed-in-lieu was later qualifies as an exception. *Note*: The inability to sell the property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.	Same as foreclosure guideline

Rev. 11/24/09