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Wait Coud Be Short for Rebound Buyers

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | January 18th, 2013

If you lost your home during the housing recession -- and have not completely soured on homeownership -- your ability to qualify for another mortgage may not be as compromised as you think.

It used to be that a bankruptcy, foreclosure or other major black mark on your credit record meant you could not hope to obtain financing to buy another house for seven years. Now, for the most part, the rules say you must wait just three years. Depending on the reason you lost your house, the wait could be even shorter.

Although financial difficulties remain part of your record forever, you can qualify for a mortgage as soon as 24 months after the fact if your issues were the result of "extenuating circumstances" over which you had no control.

These are "life-changing events that made it impossible" to continue making payments, explains Matt Kovach, product development manager at Envoy Mortgage in Houston. Job loss counts as such a circumstance, as does serious illness or the death of a wage earner. But divorce isn't considered a life event, at least not by lenders. Neither is a business failure or the fact that you were simply overwhelmed by too much credit.

Even if you suffered through a life event, you won't automatically qualify for a new loan after the required waiting period expires. You also have to demonstrate that you can handle credit and afford the payments.

"You need an extremely clean credit history after a significant derogatory event," Kovach says. "Poor credit is not a good indication you've learned from your mistakes."

One of the biggest missteps made by people who have had major credit issues is to close all their accounts and trade only in cash. While the idea seems sensible, especially if you fear finding yourself in the same difficulties again, you need to redevelop a good payment history to obtain a mortgage.

"There's nothing wrong with a cash-only mentality, but it makes it more difficult to qualify," Kovach says. "It's possible to develop an alternative credit report using your rent payments, utility bills and cellphone payments. But most lenders want to see trade lines and a credit score."

Within those parameters, the length of time that rebound buyers have to wait to obtain financing depends on the mortgage they are seeking. Generally, the wait is shorter with government-backed financing.

Take mortgages insured by the Department of Veterans Affairs, for example. Since the VA's rules do not specifically address short sales, it could be possible to obtain a VA-insured loan immediately after selling your house for less than the amount you owe on it. But as noted, you first will have to re-establish credit and then keep your nose clean.

If you declared bankruptcy under Chapter 13, the minimum wait for VA financing is just 12 months, as long as the bankruptcy trustee approves. If you declared a Chapter 7 bankruptcy, the wait is usually 24 months, but it could be shorter with extenuating circumstances. It's the same two-year wait if you went through a foreclosure or handed the lender your deed in lieu of a foreclosure.

Since VA loans are only for armed forces veterans and service personnel, most people who have suffered a major financial setback look for loans with low down payments insured by the Federal Housing Administration.

The FHA has essentially the same rules as the VA regarding bankruptcies -- at least one year for Chapter 13 and two (or less) for Chapter 7. However, the wait is at least three years if you went through a short sale or foreclosure, or if you handed the keys back to your lender to avoid a foreclosure. If there were documentable extenuating circumstances, the waits could be shorter.

For conventional loans -- these days, that essentially means mortgages purchased by either Fannie Mae or Freddie Mac -- the waiting times are tiered.

For example, borrowers who suffered a life event must re-establish credit for 24 months after a short sale, a Freddie Mac spokesman says. If there are no extenuating circumstances, that kicks it up to 48 months.

Here's what Freddie Mac's guidelines say when the borrower's financial issues were due to his mismanagement: An acceptable credit reputation must be re-established for at least 84 months if he was foreclosed upon, 60 months if he filed more than one bankruptcy petition in the past seven years, 48 months after the discharge or dismissal of a Chapter 7 bankruptcy, and 48 months after conveyance of a deed in lieu of foreclosure or a short payoff related to a delinquent mortgage.

The wait also is 48 months for all other significant adverse or derogatory credit information. But it is just 24 months from the discharge date of a Chapter 13 bankruptcy.

If extenuating circumstances can be shown, and if there is evidence on the credit report that the borrower has re-established an acceptable credit reputation, he still will have to wait 36 months if he went through a foreclosure or filed more than one bankruptcy petition in the past seven years.

But the wait is just 24 months if his bankruptcy was discharged or dismissed, if he went through a short sale or deed-in-lieu, or if he suffered another significant adverse or derogatory credit event.

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Borrowers: Beware the 'Quiet Period'

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | January 11th, 2013

Public companies aren't the only ones that have to be concerned about quiet periods. So do mortgage borrowers.

In the world of finance, "quiet period" refers to the few weeks immediately before companies report their earnings when they are not allowed to say anything. In the mortgage world, it's the time after borrowers are approved for financing but before they close on their loans.

During that period, borrowers shouldn't do anything that might damage their credit scores or change their debt-to-income (DTI) ratios. Loan officers warn borrowers to "lay low" for a few weeks and not do anything dumb. But even so, according to a recent report from Equifax, almost one in five borrowers opens at least one new "trade line" during the quiet period.

Many borrowers don't understand that opening new credit accounts can severely impair their chances of closing. After all, lives go on. Borrowers still have to use credit cards to buy gas, clothing for the kids and maybe even an occasional meal out.

Traditional underwriting guidelines and ratios take into account everyday living with existing credit lines. But they do not consider new accounts or major purchases of such big-ticket items as automobiles, furniture or even boats. Sometimes folks even try to take out other mortgages.

Lenders look at this as undisclosed debt. And since it can push credit scores and debt-to-income ratios to levels well beyond what lenders now find acceptable, most lenders monitor borrowers by pulling a new credit report immediately before closing.

Lenders have never reported their quiet time findings. But Equifax analyzed two extensive database samples -- one of 110,000 anonymous mortgage applicants, and another of 105,000 mortgage borrowers from a major residential lender. What it found was not only surprising, the credit information repository says in its white paper, but also "disturbing."

It turns out that a significant number of borrowers do stupid things. It's no wonder that in German, the word for "quiet period" is usually translated as "silly season."

Equifax found that one in every eight borrowers obtains new credit during the weeks it takes to close their home loans. While "most trade lines are not worrisome because most borrowers do not use the available credit," the company says, 20 percent of mortgage applicants who acquire new credit incur immediate installment obligations.

The analysis also revealed that the average monthly payment of a single new, undisclosed debt was $251. In one-third of the instances where one new credit account was opened, the borrower's DTI ratio increased by at least 3 percentage points, the amount that lenders consider the line in the sand.

The DTI ratios of 60 percent of the borrowers who opened two new accounts rose by 3 percentage points or more. And the ratios of nearly 80 percent of borrowers rose 3 percentage points or more when they opened three trade lines.

Say you buy a new television set. That's not unusual, but if you buy it on time, according to Equifax, your typical new monthly recurring debt would be $26, and you'd need $867 in "new" income to keep from exceeding the DTI tolerance.

If you also open a new credit account to buy furniture, your average payment might be $100, for which you'd need $3,333 in new income to absorb the new payment without setting off an alarm with the mortgage company. If you also purchase that hot new convertible you've always wanted, your payment would run $447 on average, and you'd need $14,900 more in income to keep from going beyond the DTI benchmark.

Buy those three things -- a new TV, furniture and a car -- and you'd need $19,100 in extra income to remain within acceptable underwriting rules. Not many borrowers can do that.

It's no wonder that lenders now monitor the quiet period. Investors -- the entities that purchase mortgages from primary lenders -- and banking regulators are watching, too.

For example, Fannie Mae now requires the lenders from which it buys loans to verify that borrowers have not incurred new debts and liabilities, review their DTI ratios and requalify those who obtained additional credit before closing. If the DTI ratio rises by 3 percentage points or more, lenders are required to completely re-underwrite the file.

If lenders fail to take these steps and borrowers default, lenders will be required to repurchase the loans. That's the last thing lenders want, so they are being extremely careful.

Again, most pull a last-minute credit report -- aka a "pre-close report," "compare report" or "look-back report" -- to make sure nothing has changed. As an alternative, Equifax is offering a new service -- the reason for the white paper -- that continuously monitors credit inquiries, as well as new accounts and monthly payments as they occur during the closing process.

Lenders who use the ongoing service can receive daily alerts, often in plenty of time to meet with the borrower and change the terms of the loan, gather additional documentation to satisfy underwriters or craft "another resolution."

According to Equifax, the average borrower who opens a new credit account does so 28 days before closing on his mortgage. That gives the lender and borrower four weeks to put their heads together and figure something out.

The choice is easy, says Greg Holmes of Credit Plus, a credit reporting agency that offers the Equifax tool to lenders: "Lenders can either address undisclosed debt in a timely fashion or go through a fire drill 72 hours prior to closing."

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Recognize Foreclosure Scams for What They Are

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | January 4th, 2013

If researchers at the Center for Responsible Lending are on target when they say the country is only halfway through the foreclosure crisis, many more people are going to be conned out of a great deal of money trying to save their homes.

But it doesn't have to be like that. And it won't be if Uncle Sam has his way.

The government is coming down hard on swindlers who cheat terrified owners willing to try almost anything to avoid foreclosure. Last month, for example, the Consumer Financial Protection Bureau (CFPB) took steps to shut down two alleged loan modification mills that the agency claims bilked people out of more than $10 million.

Earlier in 2012, the Federal Trade Commission put a stop to an operation that convinced desperate owners it could find defects in their loan documents that would make foreclosure unenforceable. For two or three grand, the outfit said, it would scour loan papers, find the improprieties and stop foreclosure proceedings in their tracks. Yeah, right!

Unfortunately, scam artists like these are always one step ahead of the authorities. And wherever there's easy money to be made, they come swarming. These sharks can read; they follow the news, and ever since the popular press began reporting about the foreclosure crisis, they've focused on the housing market.

People in imminent danger of losing the roofs over their heads will believe any yarn that sounds even remotely feasible. It's human nature: If you want to believe there is a magic bullet, you will. And the crooks' claims that they can save people's homes are just plausible enough to seem legitimate.

Although the government is attempting to save trusting owners from the charlatans, it is also up to homeowners to recognize the schemes for what they are.

"People need to perform some level of due diligence on anyone who claims they can help save their home," says Scott Gizer, a partner who specializes in real estate at Early Sullivan Wright Gizer & McRae, a Los Angeles law firm.

Here is some advice for spotting outfits that are not on the up-and-up:

-- Be suspicious of official-looking logos and letterheads. They may look legit, but upon closer inspection, they are phony. And so are the pitches.

Both scams that the Consumer Financial Protection Bureau acted against in December used deceptive language and marks in mailings that were designed to mislead consumers into thinking the services were sponsored by or associated with government agencies or programs.

One defendant claimed that, for a fee, it could help people get benefits from a program offering government-sponsored relief. But in truth, you don't have to pay anything to get relief; you just have to qualify. To find out if you qualify, you can check the official government websites. The rules are usually easy to find and straightforward.

Another telltale sign of a scam is what appears to be a government entity offering aid outside its area of responsibility. For example, the IRS has no jurisdiction over a state tax lien, nor does a state have any authority to release a federal tax lien.

-- Beware of lawyers. Not all lawyers, of course. But the legitimate firms don't make mass mailings. Even a personalized letter could be a come-on from an attorney who has sifted through public foreclosure notices. Be leery of lawyers who make bold promises or try to pressure you into hiring them.

Before doing anything, get the name and license number of each attorney who will be helping you, then check him out with the local bar, your town or state consumer affairs office, even the Better Business Bureau.

Lawyers who can help must be licensed in the state where you live or where your house is located. They cannot require you to pay anything in advance unless they provide real legal services and comply with state ethics requirements. And they must place your money in a client trust account.

Gizer, the California lawyer, also suggests researching the company or person on the Internet to see if there are any comments, positive or negative, about them. If there is nothing on the Web, he adds, "be wary, as most legitimate people will have some level of advertising."

-- Watch out for false promises. "Stop foreclosure now." "Over 90 percent of our customers get results." "We have special relationships with banks." "Money-back guarantee."

It's not always easy to tell the difference between the scams and the legitimate services. But one thing is certain: If it sounds too good to be true, it is. So avoid any person or business that promises to halt the foreclosure process, no matter the circumstances. No one can guarantee that.

-- If someone tells you to stop making your mortgage payments, the scheme is bogus. Not making a payment not only damages your credit score but also limits your options. And run, don't walk, to the nearest exit if you are told to make your payments to someone other than your lender.

-- Avoid anyone who suggests that you surrender the title to your house as part of a deal that allows you to stay on as a renter and buy it back later. Don't fall for the supposed "wisdom" behind this tactic -- it won't save your credit and/or allow you to obtain better financing later.

Often, moreover, the terms are so onerous that it is impossible to buy back the house. Or the rat raises the rent so high over time that you can't afford it and lose the house anyway. Or he takes your rent but never pays the mortgage, and you not only lose your house but also are still on the hook for the unpaid balance on your loan.

Also avoid anyone who wants to be paid only by cashier's check or wire transfer or who pressures you into signing anything you haven't read thoroughly or don't understand.

Here's where to look for legitimate help:

-- Find free counseling agencies through the Department of Housing and Urban Development (www.hud.gov) or the Homeownership Preservation Foundation (www.995hope.com or 888-995-HOPE). Help also is available from the Consumer Financial Protection Bureau (www.cfpb.gov). Call 855-411-2372.

-- Report a scam to the Financial Fraud Enforcement Task Force (www.stopfraud.gov), the CFPB (www.cfpb.gov), the Lawyers' Committee for Civil Rights Under Law (www.preventloanscams.org) or your state attorney general's office (find links at the National Organization of Bar Counsel's website, www.nobc.org).

-- File a complaint with the Federal Trade Commission (www.ftc.gov).

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