Home Financing
Guest Author: Jeff Davis, General Counsel for RE/MAX equity group
During this recession, many homeowners are being forced to make difficult decisions when they come to realize that they can no longer afford their homes. They know they are going to have to make major changes, such as moving out and dealing with their creditors. What they may not know is how these decisions are going to affect their ability to get back on their feet. When the recession ends and we all get our financial houses in order, what will be the quickest way to get back into an actual house?
Obviously there are many things to think about, and financial and legal advisors should be consulted for help. But an accountant or lawyer may not know all the details of how these decisions will help or hinder a buyer in their next home purchase. This information is critical to those who want to deal with these difficult choices in the smartest possible way.
Creditors immediately report bad news – late payments, bankruptcies, foreclosures, etc. – to the national credit bureaus (TransUnion, Equifax & Experian). That information affects our credit scores for months, or even years. Just how long, and to what extent, is primarily determined by two companies and one federal law:
- The Fair Isaac Corporation (named after its two founders) analyzes our credit information to produce FICO scores. The range of scores, along with the percentage of people who have those scores, is 300-499 (2%), 500-549 (5%), 550-599 (8%), 600-649 (12%), 650-699 (15%), 700-749 (18%), 750-799 (27%), and 800-850 (13%), so the average score is about 700. Scores are based on (in declining order of importance) our payment history, credit capacity utilization, length of credit history, types of credit used and history of recent credit applications. The number of points deducted from a credit score for a derogatory event is calculated using secret, complex algorithms that take into account hundreds of factors. So these point deductions are not published, and the numbers in the table below are based on examples appearing at www.myfico.com.
- The Federal National Mortgage Association (“Fannie Mae”) regularly publishes its “Selling Guide: Fannie Mae Single Family.” Fannie Mae isn’t quite the government; it is a government-sponsored enterprise, but it might as well be the government because it has the gold, and therefore it makes the rules! Here’s why: Fannie Mae and its (her?) cousin, Freddie Mac, own or guarantee more than half of the mortgage loans issued in the United States. Loans that conform to the rules set by Fannie and Freddie are called “conforming loans.” Because Fannie Mae controls so much of the residential mortgage market, the law of supply and demand dictates that conforming loans are easier to obtain and bear interest at lower rates than nonconforming loans. So when Fannie Mae sets rules, they affect every potential buyer. The rules we are concerned with here state how much time a potential buyer must wait after a negative credit event before applying for a conforming loan.
- The Fair Credit Reporting Act (15 U.S.C. §1681 et seq.) sets limits on how long credit reporting agencies may report negative information. There is no law requiring negative information to appear on a credit report for a certain period of time. So if a person is able to successfully negotiate the way a creditor reports a negative event before it is reported, the credit reporting agencies will report it that way.
Here is how derogatory events affect buyers and their credit scores:
| Derogatory Event | Points Lost a | Reporting Limit | Waiting Period Requirements | Waiting Period with Extenuating Circumstancesb |
| Bankruptcy —
Chapter 7 or 11 |
130-240 | 10 years | 4 years | 2 years |
| Bankruptcy —
Chapter 13 |
130-240 | 7 years | • 2 years from discharge date
• 4 years from dismissal date |
• 2 years from discharge date
• 2 years from dismissal date |
| Multiple Bank-ruptcy Filings | 130-240 ea | 7 to 10 years | 5 years if more than one filing within the past 7 years | 3 years from the most recent discharge or dismissal date |
| Foreclosure | 85-
160 c |
7 years | 7 years | 3 years |
| Additional eligibility requirements after 3 years up to 7 years:
• 90% maximum LTV d • The purchase of second homes or investment properties and cash-out refinances (any occupancy type) are not eligible |
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| Deed-in-Lieu of Foreclosure and Short Sale | 85-
160 c, e |
7 years | • 2 years — 80% max LTV d
• 4 years — 90% max LTV d • 7 years — other LTV d |
2 years — 90% max LTV d |
| Miscellaneous f | 25-150 | 7 years | No waiting period – impact is on credit score and report only. | |
| a Ranges are shown because the point loss depends on how many points someone has to lose in the payment history factor of his or her score. A person with a high score loses more points than a person who already has a low score.
b 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 financial obligations. Examples include divorce, high medical expenses, or losing a job. Extenuating circumstances must be relevant and documented. c If a deficiency judgment or tax lien is filed in connection with a foreclosure, credit scores can drop an additional 100 points. And payments received late or not at all will have already impacted the credit score. d Lower maximum LTV ratios are sometimes applicable, depending on the transaction type (principal residence or investment), number of units, the financing type (purchase or cash-out refinance), and credit score. Required credit scores range from 620 for a single-unit-home with an LTV below 75%, up to 680-700 for multiple unit properties, high LTV loans, some second homes/investment properties, or where cash is being taken out in a refinancing. e These alternatives to foreclosure are all “not paid as agreed” accounts, and are therefore considered the same as foreclosure by FICO scores. Their advantage is in the shorter wait required to apply for a conforming loan. f Miscellaneous events are civil suits, civil judgments, records of arrest, paid tax liens, accounts placed for collection and other adverse items of information. But there is no limit on reporting periods for reports used in connection with (i) a credit transaction involving $150,000 or more, (ii) life insurance with a face amount of $150,000 or more, or (iii) employment at an annual salary of $75,000 or more. FICO scoring, federal law and Fannie Mae’s rules can be changed at any time, so all of this is, of course, subject to change. |
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Mortgage rates continue to decline: See here for more details.
Despite the above article’s claims that low mortgage rates haven’t helped the real estate market, we are seeing more mixed results in the Portland/Vancouver market. Some areas have seen consistent gains in home sales, pending sales, as well as price appreciation in August and September while other areas of the Portland Metro Area lag behind.
Ultimately, all real estate is local and you should consult an experienced Realtor before deciding what is true about your housing situation. You may be surprised to find that the market for your home is vastly different from the big picture reported by national news media.
Now may also be a good time to consider refinancing your home, even if you purchased a home in the last two years.
The information provided on is not intended to be legal advice; it merely conveys general information related to legal issues commonly encountered in real estate sales. If you want to know the impact of this information on your particular situation, please consult with an attorney.
Whether we are talking about loan wraps (selling to a buyer without paying off the owner’s mortgage), lease options (option agreements), lease to purchase arrangements (leases with a contractual right to purchase the property) or, perhaps, straight rental agreements, these alternatives for relieving a property owner of the burden of a mortgage when buyers are scarce carry risks.
Deeds of trust in this day and age have very restrictive “due on sale” clauses which prohibit property owners from transferring ownership or control of all or a part of the owner’s interest in a property to another. These due-on-sale restrictions likely prohibit the owner’s alternatives for mortgage relief. Therefore, any property owner considering these financing alternatives should review his or her deed of trust for due-on-sale restrictions and consult with the trust holder and/or an attorney to determine what alternatives may be available.
An owner who violates his or her due-on-sale clause may well be giving the trust deed holder (the lender) the right to accelerate the loan, i.e. the right to call the loan immediately due and payable in full. If this happens, the seller must pay the full amount of the loan within a short period of time or face foreclosure proceedings. If the lender calls the loan, where will the owner get the money to pay it? The owner probably can’t re-finance his or her loan either because he/she has transferred an interest in the property to the buyer or because in today’s tight credit market, financing is not available. The owner very likely cannot get it from the buyer because the buyer likely needed alternative financing in the first place because of an inability to get a direct loan.
My clients often assert the fact that there is no due-on-sale jail, i.e., it is better to ask for forgiveness and not permission. Although the risk of criminal prosecution exists for those who commit loan fraud, it is true that, for buyers and owners, the risk is more likely to be monetary than criminal.
In addition to the lender calling the loan, the risks of financing alternatives to property owners include:
• For lease options, lease to purchase and, straight lease arrangements, the seller will be a landlord during the lease period with all of the obligations attendant to that role, including compliance with Oregon’s Landlord-Tenant laws. The landlord may have to evict the tenant, make major repairs (to provide a habitable space) or deal with the damages inherent in the rental of property. Also, if the parties have agreed that the buyer will make all repairs during the lease period as though he or she were an owner, the seller risks that the buyer will make repairs without governmental permits, use self-help on repairs (and be incompetent) or hire incompetent help.
• For owners who are leasing/renting the family home, the owner may be giving up an exemption to capital gains tax. The owner will also have to declare rent as income. Property owners considering financing alternatives should consult with their own tax professional for advice on the tax ramifications.
• Only 7% of these transactions close. The buyer, given that he or she is likely a marginal credit risk, may (i) lose interest in buying the property, (ii) suffer a change in family circumstances; or (iii) discover that he/she will not be able to secure financing when the time comes to purchase the property. If this happens, the Landlord will still have the house with all of the additional problems inherent in selling a rental property. Also, if the buyer abandons the property, the buyer’s right to purchase the property may well remain, resulting in a cloud on the title and preventing the seller from selling the house until the purchase right expires or a court vitiates it.
The risks of financing alternatives to buyers are:
• Only 7% of these transactions close. In a static or declining market (where prices are not increasing) in which credit may remain difficult to obtain, the buyer has little, if any, incentive to lock up a purchase price on a property this way.
• Option money and/or increased rent money intended for a down payment may be nonrefundable and, even if the money is refundable, the property owner may have spent the money and have no ability to repay it.
• Loan wraps, lease to purchase and lease options are usually not recorded, allowing the property owner to further encumber the property through lines of credit or by way of judgment liens for unpaid credit card bills, child support, etc. such that the owner will be unable to convey clear title when the buyer is ready to finance his or her purchase.
• The owner may stop making mortgage payments such that the lender institutes foreclosure proceedings. In that case, the buyer will be evicted and his or her only remedy against the owner will be in court. Since the seller stopped making mortgage payments, it seems unlikely that the seller will have money available to pay the buyer even if a court says the owner must do so.
The bottom line is that any owner or buyer considering alternative financing arrangements should get competent legal advice to protect him or herself from the risks inherent in creative financing arrangements.
Loan programs have been cancelled, standards have tightened,and lenders have imploded. Have buyers run out of options?
Far from it! The truth is that mortgages written today are more solid than ever, safe for buyers as well as lenders. Interest rates for conforming mortgages are still at very reasonable, historically low levels.
While it’s true that many of the looser and more extravagant financing options are gone or going away, buyers still have options. Here are some of the programs available from reputable lenders:
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Traditional
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FHA
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VA
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ODVA
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Flex 100
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My Community
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Oregon Bond
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Programs for First Time Homebuyers
While there may be a lot of panic in the markets today, the cycle will run its course as it always has. Lenders who have stayed focused on professional service and results for their clients remain on solid financial ground and are available to meet the needs of buyers today.
from: Equity Home Mortgage, which was founded in 1997 through a partnership with RE/MAX equity group, inc. and Eagle Home Mortgage LLC. Eagle Home Mortgage, LLC is wholly owned by Lennar Corporation, who is currently the second largest home builder in the U.S.
We’re living through very historic times in the mortgage industry—times that people will refer back to for decades to come. And in recent weeks, there has been increasing angst and consternation over the state of the mortgage industry.
One of the larger lenders in the U.S., American Home Mortgage, was recently forced to shut down operations. But why? What is happening, what does this mean to you and where are things headed next? Let’s take a look at what is happening, so that you really understand the truth behind the headlines.
Over the past several years, many loans were made to homeowners with somewhat non-traditional or “non-conforming” situations, be it a poor credit history, inability to document income or any number of factors that do not fit within the traditional “box” for home loans. These loans are often called subprime or Alt-A, meaning that they are somewhat riskier in nature than “A” credit, prime or traditional loans. There were also many adjustable-rate loans done that were considered somewhat “exotic”—that some homebuyers were well suited for, but may have been sold to many others that did not fully understand what they were getting.
Another type of non-conforming home loan is one where the credit and income might be perfectly fine, but the loan amount is higher than $417,000, which is the current maximum loan that can be done using pools of money from mortgage giants Fannie Mae and Freddie Mac. If the loan amount is higher, it can certainly be done—this is called a jumbo loan—but the end money comes from private institutions, not from the large government-sponsored entities of Fannie Mae and Freddie Mac.
Most non-conforming loan product rates popped significantly higher, almost overnight. Here’s what happened:
The end investor for subprime or Alt-A loans will charge a premium for taking on a pool of these loans, because they know that traditionally, they might have a higher rate of default and delinquent payments within that risky pool. But lately, default and foreclosure have been on the rise, partly due to the fact that credit tightening and a soft real estate market have meant that many troubled homeowners are unable to refinance or sell in order to get out of trouble. So now, these end institutions are demanding a much higher “risk premium” for taking on these pools of loans, as they see the rates of default are climbing higher.
But since these institutions are purchasing these pools of loans sometimes months after the borrower has actually closed their purchase at a given rate, this increase to the risk premium means that instead of paying $101,000 for a $100,000 loan that will bear interest, they may only be willing to pay $95,000 for that $100,000 mortgage to account for the risk. Multiply that times thousands upon thousands of loans…and you have millions upon millions of dollars in loss for the company trying to sell the pool at a much lower price than they were expecting.
This is called a “liquidity crisis,” and is exactly what happened to American Home Mortgage—there was no mismanagement, but they simply got caught holding too many “hot potato” loans, forced to sell them at massive losses…and eventually they had to make the decision to close the doors and stop the bleeding.
Further, even when a lender is able to take some losses, they may be subject to a margin call. This means that as their losses and risk premiums increase, the value of their loan portfolio decreases. As the value decreases, the credit lines that are secured by those portfolios begin to issue margin calls as the value of the asset that they are secured on is now diminished.
This is exactly like margin calls in the stock market. If you have a loan against a stock that is losing value, you will get a margin call and need to pay down the loan, as the underlying stock is losing too much value to be considered adequate collateral any longer. So for the big lenders, as their portfolio is losing value due to increased risk premiums and losses…the margin calls start coming in, and they are required to pay down their balances. In turn, this means that they have less availability to fund their new loans, which then exacerbates the problem.
In response to seeing this situation play out in the demise of American Home Mortgage, lenders of other non-conforming loan products increased their interest rates dramatically almost overnight to be better prepared—and likely over-prepared—for increased risk premiums down the road. Even though loans above $417,000 are not presently suffering from increased delinquencies such as the subprime and Alt-A loans are, these rates popped higher as well, because they are being purchased by smaller private entities that can’t afford to take on any margin of risk.
What happens next? The major damage is probably already done and the present situation will likely settle out over the coming year. Lenders will stop pulling products off the shelf and the rates on products that have moved so significantly higher now should trend lower down the road as delinquency rates stabilize.
