Southern California Mortgage Blog

Short Sale vs Foreclosure: Impact on Credit Scores

This is an updated version of a post that I sent out earlier in the year:

I have gotten the impression from many real estate agents that they are unaware of the effect of a Short Sale on their clients' credit report. The common belief is that a Short Sale isn't as bad as Foreclosure or Deed In Lieu of Foreclosure.

I have argued with people about this and there is a lot of information out there with claims to the contrary. It scares me because I see a lot of lawsuits in the future regarding this.

Short Sales, Deed in Lieu of Foreclosure, or full blown Foreclosure are all weighted the same in determining credit score computations. This information comes directly from MyFICO.com. MyFICO.com is operated by the Fair Issac Corporation, the inventors of credit scoring. I have not stated this without extensive research. This is "straight from the horse's mouth."

Earlier this year, FNMA announced that a record of foreclosure on a credit report will require that three years must pass prior to placing a borrower into a FNMA insured loan. At the beginning of June 2008, that time frame was extended to five years. That is five years from the sale date.

Remember, that the home owner does have redemption periods after default and because of this, the sale date is the actual date of the foreclosure.  An owner wouldn't necessarily know this without researching the actual date.

The Mortgage Bankers Association announced that one in every 200 homes with mortgages is facing foreclosure.  That is a lot of bad news to many families. This information was announced in June of 2008 and the news has become much worse as I write this in October of 2008.

The "Bail Out" bill now being reviewed again by the House of Representatives will give some "bite" to those of us who renegotiate for Loan Modifications. Loan mods are done for a home owner cannot keep up with the current terms of the mortgage. Changes can be negotiated and will keep you in your home.

I am bragging, but 18 months ago, I correctly predicted that short-refis would exist. They do now.....it is called Loan Modification or a "Loan Mod". A new FHA loan to reduce the balance on home loans and make the payments easier was announced yesterday.

I have been able to help quite a few homeowners' mortgages with awesome results! This new bill being passed will bring some order to the process and make it easier to accomplish.

If I had my home on the market because of a bad loan, but felt I needed to sell when I really wanted to stay. If I found out that my agent said a short sale wouldn't hurt me as badly as foreclosure the I would have me gunning for someone to pay.

I would rather it wouldn't be you. You the seller or You the agent who passed on information that will cause serious harm.

Thanks for reading.

Castles of Southern California by Guest Blogger

The following post was contributed by Sarah Scrafford:

California is famed as much for its long coastline, beaches and sunshine as for its celebrity homes, some of which are similar to castles because of their size and/or opulence. Celebrities are big spenders, opting at times for style over substance and size over convenience. Even though these homes are not the primary residences of many of their owners, they’re still huge buildings set in palatial estates. Here’s a list of Southern California’s better known “castles” and the celebrities who own them:

·        Oprah Winfrey: Set on a sprawling area of 42 acres in Santa Barbara, the house itself spans 23,000 square feet and comprises six bedrooms, fourteen bathrooms and ten fireplaces. The surrounding area is landscaped to perfection with the crowning glory being the manmade lake and the rare fish its home to. Oprah prides herself on being the owner of the home that has the most amount of green space in Santa Barbara.

·        Michael Jackson: Neverland Valley Ranch in Santa Barbara County has been in the news more for all the wrong reasons than the right ones. The flailing fortunes of its owner Michael Jackson and the controversial pedophilia cases that centered around this 2800 acre estate have kept Neverland in the public eye.Jackson purchased this huge space and converted it into more of an amusement park than a home – with its zoo and theme park, the estate was aptly named Neverland after the place where children never grow up in the Peter Pan books. It’s closed down now, and the exotic animals that once attracted celebrity guests from far and wide have now been sold to zoos and private investors over the world to help fund the aging pop star’s extravagant habits.

·        Aaron Spelling: Larger than most luxury hotels, this home sits on 56,000 square feet of prime property in Los Angeles. Housing an unbelievable 123 rooms, one of which is a bowling alley, this building is now home to one person – Aaron’s widow Candy Spelling. The successful producer of television shows allegedly purchased Bing Crosby’s home and tore it down completely to build this monstrosity that looks more like Richie Rich’s home than something out of real life.

·        Will Smith: Having had to shell out more than $20 million and wait for longer than seven years to move into this house, Will and Jada Pinkett Smith and their children were forced to pack their bags and leave following a bushfire threat in 2005. Known as Calabasas Castle, this piece of property comes complete with a lake, a basketball court, a tennis court and a golf course.

·        George Lucas: Skywalker Ranch earned some sort of notoriety when the then president Ronald Reagan was denied permission to visit – that’s how much filmmaker and brain behind the Star Wars movies George Lucas values his privacy. Rumored to have cost up to $100 million, this 4700 acre estate is more of a retreat for Lucas rather than a primary home and comprises a barn for his menagerie of animals, vineyards, a fruit and vegetable garden, a manmade lake, an outdoor pool, a hilltop observatory, a theater that seats 300, multiple screening rooms, a fitness center with racquetball courts, and its own fire station. 

By-line:

This article is contributed by Sarah Scrafford, who regularly writes on the topic of luxury homes. She invites your questions, comments and freelancing job inquiries at her email address: sarah.scrafford25@gmail.com

History and the "Mortgage Crisis"

Wow! What a week, this past one, the third week of September 2008!

So much has gone on, and frankly, it is very difficult for me to understand a lot of it.

One article that I have read used the phrase, “the credit market has seized up and has made it impossible for anyone to get mortgage loans, etc. (sic).” That pretty much summed it up for me and my business.

Any time that I have a problem getting a loan for a man with 817 middle credit score and 45% down, on the purchase of a single family home in San Diego means that things have gone beyond “hinky”.

With each loan application I take, I summarize with this apology: “I’m sorry. Though I have asked you for everything that my experience tells me we will need, the times are challenging. It is very possible that things that have never had to have been documented before will be asked for before we finish. I believe that we will present a very good loan package. We can get this done if we work together. Please don’t take any additional requests personally. It is simply the need for the underwriter to cover all the bases because he or she fears their own job loss.”

I was very saddened, and then relieved, that the Treasury Dept. had taken over Fannie and Freddie because I believe that those two businesses will become much more predictable as to the standards that must be met for a “good loan”. FHA loans have always made it easier for 1^st time homebuyers to invest in the American Dream and I believe the new standards that will be set for FNMA and Freddie will do the same for all loan programs.

So many people have asked me, “How did all of this happen in the mortgage industry?” I am not qualified to answer that on anything more than my experience in real estate for 26 years and good business sense, but here is my answer:

During the boom there were many nights when I worked very late at the office to keep my loan pipeline on track. I remember thinking many times that “how will these credit scores hold up if a borrower with a 680 credit score buys a home with no money down and loses his job?” If you can’t make the payments, you can’t make the payments regardless of your credit scores.

I also knew that any market that white-hot was going to cool. Sadly, I also knew that many loan officers and real estate agents only look at the “deal” and not how the transaction will play out in their client’s lives.

Then, there is the issue of so many negative amortization loans that were funded where even the loan officer didn’t understand them well enough to explain them to their borrower. I am a proponent of neg-am loans; they definitely have their place. Many, many homeowners, me included, have been able to buy homes and keep them because of this type of loan. As long as the borrower has owned property before and understands how the loan will work, they are good loans.

The final big reason that I could see was that all of the different types of loans that were introduced went far beyond common sense. In terms of the loan programs and the underwriting and approval of those loans, many of this was simply bad business and without common sense. I am and have always been very proud to work with General Mortgage in San Diego. Their level of professionalism has always been superior.

Human nature and/or capitalism will exploit every avenue until it proves harmful and then regulation will bring it back into balance.

In the coming years, I believe that the standard of education for the client and the loan officer and real estate agent will improve. It has to! The price is too high to fail and I am not just talking about money. Our clients trust us with their financial lives which directly affects their quality of life.

The need to prepare the clients’ credit report, carefully consider the loan program being offered, and understand the entire process and teach that will be the professional’s duty to obtain the best results for the client.

I challenge anyone, still in the business, to bring the level of their education up on an ongoing basis. I promise, it will be expected.

Mary Supinger

Copyright 2008 All rights reserved

Fannie Mae & Freddie Mac Taken Over By the Feds

The Federal Government took over control of FNMA and Freddie Mac this morning.(09/07/2008) As I was reading about it last night and again this afternoon, my thoughts go to how this will affect home buyers and sellers, as well as the economy in general.

The bad news is that it will have a huge and prolonged effect. Credit will become even tighter and qualifying for any type of loan will become more difficult.

As I  take a perfect borrowers' credit report these days, I tell them upfront that I will be apologizing to them until the loan is closed. I will be apologizing because even though I have asked them for everything but the proverbial kitchen sink, the loan process will still be met with things not ever asked for before.

Prior to using credit scoring for loan approvals, we had to document and re-document the source of a home buyer's funds, income, job security, bank records, and every other aspect of getting a loan approval. My experience with that enabled me to ask the borrower for all the needed information up-front. Asking for this information up-front is much less stressful for the home buyer and agents, and of course, me.

In the past year, we have entered a completely different mood in the mortgage business. The news today will make the mood even more serious.

I tell all of my loan clients that it comes down to this: the person who is going to sign off on your loan approval wants to cover every possible thing because they don't want to lose their job.

This is the temper and mood of the mortgage industry in a nutshell.

The good news about the take-over is that more people who are having trouble will get help sooner. There will be more consistency in how mortgages that aren't working are modified so that people can keep their homes. This will keep values up and keeping values up is good for every single American.

I will write more in the coming days. I am very good at helping people improve their credit scores so that the cost of credit can be greatly improved.

Please check me out at http://www.creditfitness.net/calc.html

Buying Foreclosure and REO Properties

Everyone hears about the problems in real estate; that there are many homes on the market and many more being lost to foreclosure every day.

In California, this is much more prevalent than in other parts of the country. California has a higher rate of foreclosure than average and values have declined in many neighborhoods. According to Realty Trac, a California based company that tracks the Nation’s real estate transactions, one in every 171 households in the California were either in foreclosure, received a Notice of Default, or had been warned of pending action. This is a 121% increase in foreclosure activity over the same period in July of 2007.

Fortunately, there is always an upside to any downside. The upside to this problem is that home values have worked their way down to becoming more affordable to more buyers.

In the years between 2002 and 2005, we experienced a hot seller’s market. This began to cool in 2006 and to become a buyer’s market. 2007 and 2008 have brought a record number of foreclosures in California. The reasons for this are many, but it is mostly agreed that lenders were using some loan programs that made it too easy for people to buy real estate.

The market has now corrected itself and buying real estate has gone back to the buyer needing more down payment and proof of income.

Because the values have dropped and there are more foreclosure properties available, many first time home buyers are seeking out these types of properties. In addition, 150,000 to 180,000 homes have been sold to Canadians flocking here to take advantage of our buyers’ market.

There is a lot of inventory on the market and the majority of it is either pre-foreclosure, auction sales, or REO properties. In the mix are also homeowner’s who are not distressed, but need to make a move for one reason or another.

There are three types of distressed sale properties:

Short Sale: This property will have a seller who is likely still living in the property but is having trouble making their payments. The value of the property has declined to the point that the property is up-side down. The seller owes more than the property is worth and will need to negotiate with the current lender to take a loss on the property in order for the new buyer to close the escrow.

The advantage of a short sale property is that the seller will provide you with disclosure reports regarding the condition of the property. The new buyer can ask for repairs to be made to the property.

The disadvantage of a short sale is that they take a very long time to close. As a loan officer, my clients have to wait as long as five months for the lender to agree to terms the buyer is requesting. During that time, the property may have lost thousands of dollars in value. Buyers notice this and will tend to make offers on more than one property.

Auction Sale: Many of us have seen commercials and even, infomercials regarding buying properties at auctions.

While it is possible to get some bargains, I don’t recommend it for anyone who is inexperienced at this. You will need to have all cash, payable within four days of the auction closing.

Usually, you will not be able to even see inside the property. You purchase the property as-is. There is no warranty or statement from the seller as to the condition of the property.

This is a huge drawback because many times there are significant problems that will need to be corrected. Your bargain could become a huge expense if all of the rooms have been stripped and you find that you need to add a new kitchen and bathrooms.

The most experienced, buyers are usually attracted to these properties because they are able to handle a heavy duty fixer. Repairing walls, plumbing, electrical, and other heavy duty work isn’t uncommon for them and a buyer like this can make a lot of profit on an auction home.

REO Sale: Properties that the lender has had to purchase back because no one bid on them at auction are called REO properties. REO stands for real estate owned.

An REO property can be found on the MLS and most real estate agents can show you these properties. You will be able to look at the property and see the floor plan and other features the property has to offer. There is no disclosure from the seller as to the condition, but you would be allowed to have your own inspector look at the property when you have made an offer.

Many of these properties are in great condition. There are a great variety of homes available. The bargain in this property is that anyone can buy their next home and know what they are getting when they buy the property. You will usually pay less than what a seller-occupied, non distressed property would cost. This makes REO listings a great idea to look into, if the properties come up in your price range and needs list.

Those who are investing in real estate or are looking for their next homes will benefit from looking at REO and foreclosure properties.

In all cases, the seller is very motivated to sell. A buyer can get very attractive terms when they negotiate well. I recommend to my clients that they ask the seller to pay some or all of their closing costs. I work with the agent to present this to the seller in a way where we get to the bottom line benefit to the seller.

Once everyone wins, then the purchase is truly a great value.

For more information contact the author, Mary Supinger, at 619.701.4321

copyright August 2008 ALL RIGHTS RESERVED

Danger Zone: Paying Off Collection Accounts

Paying Off Collection Accounts

If you have a collection listed on your credit report and you are getting ready to refinance or buy a home, then you definitely need this advice:

It is very important to know that the possibility of any collections on the credit" is discussed before running the credit report." If I were to run your credit through General Mortgage, the report would be marked and categorized as a mortgage report. A recent mortgage inquiry on your credit can make it next to impossible to negotiate the pay-off of a collection account for anything less than what the collection agency demands.

Let's say the balance on the ambulance bill that went unpaid by your insurance now shows up on your credit report. If you took that ambulance ride two years ago and paid the bill today, you would have tanked your credit scores by making that collection brand new again.

If no mortgage inquiry has been made and we had ordered the free annual credit reports and discovered the collection, then I could negotiate for you in"paying off the collection. This is much harder to get it completely removed that it was two years ago.

That negotiation might include paying less than the collection agency wants for the bill and would always include the collection agency removing the account from ever being reported again. I have successfully done this many times for my mortgage clients. It is especially important because a newer collection can take up to 80 points off of your credit scores.

There is more on this subject in my book on credit and credit scores." You can check it out at www.CreditFitness.net.

Closing Credit Accounts

Unfortunately, there is always advice going around that may not be the best in your personal situation. Or advice that is out of date.  In most cases, it is not a good idea to close any credit card accounts. A big portion of your credit scores are based on your credit history. When you close a credit card account, you cut yourself off from that history.

The credit scoring models look at it as though you believe that you can’t handle having all those accounts open. The urge to ‘Charge! Charge! Charge!’ is more than you can handle so you must close the accounts. While this works for me as far as keeping cookies in the house, it doesn’t work for your credit cards.

Unless you are closing that account to keep a mean and vengeful “ex” from charging up the accounts again; hang on to those credit cards!

I want you to become devoted to those charge cards! Grow old with them! If they are more than five to seven years old, they may not contain a clause called Universal Default. This paragraph will switch you to the very highest rate on your credit card if you are late on any account.

A common thread with those consumers with credit scores over 800 is that they all have credit card accounts that are over 25 years old. Wisely using those old-time credit card accounts over the years will build your credit score significantly.

Easier Money: Save Money By A Bump In Your Scores

Credit Trick

A quick way to add points to a credit score is to pay the credit card bills the DAY THEY ARRIVE in the mail.

Creditors rate slow pays, 30, 60, and 90 days lates, along with those who have to pay a late fee because they waited until the last minute. Those who faithfully pay right away have better scores.

So, if you are looking to add 15 to 60 points on your scores, pay those credit card bills right away for at least four months prior to taking out your home loan.

As always, remember that taking care of your credit report as a regular habit will keep your scores at their highest all the time! Check out my book, Credit Reports and Credit Scores: Step By Step Instruction For Dramatic Improvement at http://www.creditfitness.net/.

An Alternative When You Cannot Refinance

I have gotten the impression from the many real estate agents are unaware that the effect of a Short Sale on their clients credit report isn't as bad as Foreclosure or Deed In Lieu of Foreclosure.

I have actually seen a lot to the contrary in advertising. It scares me because I see a lot of lawsuits in the future regarding this.

Short Sales, Deed in Lieu of Foreclosure, or full blown Foreclosure are all weighted the same in determining credit score computations. This information comes directly from MyFICO.com.

Earlier this year, FNMA announced that a record of foreclosure on a credit report will require that 3 years must pass prior to placing a borrower into a FNMA insured loan. At the beginning of June, that time frame was extended to five years. That is five years from the sale date. Remember, that the home owner does have redemption periods after default and because of this, the sale date is the actual date of the foreclosure.  An owner wouldn't necessarily know this without researching the actual date.

The Mortgage Bankers Association announced that one in every 200 homes with mortgages is facing foreclosure.  That is a lot of bad news to many families.

A year ago I correctly predicted that short-refis would exist. They do now.....it is called Loan Modification and I can help you with that.

Finding out that my agent said a short sale wouldn't hurt me as badly would have me gunning for someone to pay. I would rather it wouldn't be you.

Please call me at 619-701-4321 to see if I can help you to stay in your home. We can help in most states or know good, ethical professionals if we don't work in yours.

Thanks for reading.

Free Annual Credit Reports

You are entitled to a copy of your credit report each year.

You can order the reports on line, but be very careful that you use this exact address:

https://www.annualcreditreport.com/cra/index.jsp The are sites that are similar and can cause you to give your private information to identity thieves.

I prefer and advise that you write a letter or call each of the three main credit repositories.

They are:

Equifax Credit Information Services 

PO Box 740241 Atlanta, GA 30375  By phone: 1-800-216-1035,

http://www.econsumer.equifax.com/equifax.app/Welcome

TransUnion Corporation

PO Box 390 Springfield, PA 19064-0390 By phone: 1-800-888-4213

http://www.transunion.com/CreditReport/

Experian

ATTN: NCAC

PO Box 949 Allen,  TX 75002 By phone: 1-888-397-3742

http://www.experian.com/consumer/index.html

I prefer to have the written reports mailed to my clients because they are easier to read.

It is important to get your reports every year to review what is on each one. 72% of credit reports contain errors and of that 72%, twenty-five percent of those will cause a borrower to be declined on a loan.

Obtaining your annual credit reports is essential to protect your credit profile from identity theft. Check out www.CreditFitness.net for more information.