About NW Real Estate » Home Sellers

Credit Score Triage: How to Minimize the Damage

About NW Real Estate — Mon, 11 Oct 2010 16:18:24 +0000

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 Circumstances^b
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
Foreclosure	85- 160 ^c	7 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
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. ^cIf 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. ^dLower 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. ^eThese 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. ^fMiscellaneous 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.

Creating Financing

About NW Real Estate — Tue, 25 Nov 2008 21:09:18 +0000

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.

Hard Truths for Sellers Final Part – Part 4

About NW Real Estate — Wed, 24 Oct 2007 05:30:18 +0000

Instead of guessing about the income needed for someone to buy your home, have your favorite lender print up a flyer giving 3 different ways the buyer can finance. I have done this for years and it is amazing how many times a seller has said something along the lines of: “It is amazing that someone could put $120,000 down on my house and their payment is over $3,000 per month…who can afford that?” This might help adjust your expectations to be more realistic. For lending information and assistance, go to www.equity-home.com.

If you have a question about a legal issue, you will need to consult with an attorney. Do not rely on your real estate agent for legal issues…they are licensed and educated in REAL ESTATE!

If you have a question about the tax ramifications of selling your property, you need to talk to an accountant. Do not rely on your real estate agent…they are qualified in REAL ESTATE, not accounting!

The buyer doesn’t care how much money you need. Most buyers could give one rip about what a seller ‘needs’ or ‘wants’. They are concerned only with their own needs and wants.I don’t care what price your neighbors are asking for their house: IT ISN’T SOLD! As a seller, ask your REALTOR^® for information on the amount similar properties actually SOLD for.

The average market time in your area fluctuates, and is generally 60 – 90 days. Not the two days you heard from your buddy at work.

A Terrible Market?

About NW Real Estate — Tue, 16 Oct 2007 05:38:41 +0000

In July of 2002 if new listings were to cease, it would take 4.7 months to sell all the houses at the then rate of sales. In July 2007, it would take 30 DAYS LONGER THAN THAT! Yup, it would take 5.7 months to sell all of our listings at the current rate of sales. TERRIBLE! We have almost 1/3 more homes to sell than we did five years ago!

Look at closed sales for the year to date for July 2002 at 2,337 vs. 2,624 for July of this year! THAT IS A 12% INCREASE IN SALES! THAT IS TERRIBLE! Wait A minute…a sales increase is actually a good thing.

In July of 2002 the average market time was 61 days. The average market time this past July was 52 days! THAT IS TERRIBLE!

Appreciation must be TERRIBLE! In the market we are in, prices are dropping like a rock! For example, our office does a lot of business in Hillsboro/Forest Grove, and the annual appreciation rate year to date in 2002 was 5.7%. This year, for the same time period, it dropped clear down to 10.8%. Isn’t that UP almost double? In Gresham, the appreciation rate went from 1.2% to 12.7%. What a travesty! The Regional Multiple Listing Service (RMLS) showed three areas in July of 2002 that had negative appreciation, and none in 2007.

We are in a state of emergency in this country regarding foreclosures. They are at an all time high. Well, they are at an all time high in Illinois, Michigan, California, Colorado, Arizona and Florida. In our area, foreclosures are actually down. Foreclosure rates in

Oregon are down 50% and waaaaaaaaay below the national average.

I don’t pretend to ignore the fact that the real estate market is much different today than it was a couple of years ago. Financing is more difficult. The real estate market is and always will be very cyclical in nature.

The problems in the early 1980’s were much different. High interest rates (12% to 18%) were prevalent. Unemployment was high. Today we have good employment, a bustling economy and low interest rates.

While we face a different set of problems today, they are not yet, and probably won’t become overwhelming…unless you let them, and that would be TERRIBLE!

excerpted from Portland Metropolitan Association of Realtors® September 24, 2007 newsletter article by:

Gary Taylor, Principal Broker & Branch Manager, RE/MAX equity group, inc. Sunset Corridor office

Hard Truth For Sellers – Part 3

About NW Real Estate — Thu, 27 Sep 2007 16:24:12 +0000

If you don’t have a safe deposit box, get one. Store your valuables there that you can fit. If you have valuables that won’t fit in the box such as a stamp collection, rare books, or those lovely porcelain commodes from Austria, find a place to store them securely. Perhaps at a neighbor or relative’s home, or in your PODS.

If you take any type of ‘feel good’ medication, keep only a very small amount in the bathroom and hide the rest.

Have your REALTOR^® place a lockbox on your house. You need to have it ready to be shown nearly 24/7. If a REALTOR^®with a buyer has a choice of showing a house that is easily accessible, versus one that is difficult to show, which one do you think gets shown?

Provide a Home Warranty for the buyer. You will save yourself a lot of potential headaches after the sale for a very low amount. If the furnace doesn’t work when the buyer turns it on this Fall, think of how much money you saved by including this simple warranty. Go towww.ahswarranty.com and learn more.

More next week…

Hard Truths for Sellers – Part 2

About NW Real Estate — Wed, 19 Sep 2007 05:53:00 +0000

Be honest…Is your house (at least partially) a mess? Cluttered? Landscaping overgrown? Inside need paint? Front steps, porch and door look dull? Go to www.3stepstosold.com and order the very simple and pleasant DVD to help with ideas of what needs to be done. Or, ask your real estate professional for resources for “staging” your home for sale.

Your roof, gutters and windows all need to be cleaned. The roof is a large percentage of the view of the house from the street. A neglected roof and overflowing gutters can be yelling at a potential buyer: “If you think I look bad, wait until you see the inside!”

Here is a tricky one: Animal excretion smells. I don’t care if YOU can’t smell it. Cats, dogs, birds and even Willie the Ferret create unpleasant odors to those who are not used to them. While your home is on the market, it should be a ‘Pet Free’ zone.

A garage is for cars. It is not a storage area for all the stuff you don’t currently (and probably never will) use again. Go rent a ‘POD’. It is a huge box into which you can put all your old skis, couches, snow tires, golf clubs and bicycles with flat tires. You can find information at www.pods.com. You lock the box and the PODS company hauls it away and stores it. Wish I had thought of that idea. The garage will look larger with all the stuff out. The front of the house will look better without your cars (that you could never fit in the garage) in the driveway. The buyers will now be able to get an idea of how much of THEIR ‘stuff’ they can fit into the garage.

More next week…

Hard Truths for Sellers – Part 1

About NW Real Estate — Thu, 06 Sep 2007 21:52:28 +0000

You should have a prelisting inspection. Also, repair or replace any of the larger items on the inspection report. Doesn’t it make sense for you to take care of any problems with the home before you agree with a buyer on a sales price? Costs too much? A $300 home inspection can actually make the seller money. Do you have to replace the dry rot in the deck? Bet you can get it done for less when you have time to get several contractor bids and the contractor doesn’t need to have the work finished in 6 days.

LP siding? Replace it! The buyer is just going to subtract the cost of replacing the LP siding from your price anyway. As a bonus, your house will look almost new with freshly painted siding, and perhaps smooth along the selling process.

Do you have an underground oil tank? Get it decommissioned and the soil tested now!

More next week…