Buying a Home after a Short Sale - Don't Believe the Naysayers

By
Mortgage and Lending with iLoan - NMLS ID#4474 NMLS 79048

I've written on this subject before but I want to be more thorough this time.  There have been too many articles put out lately that discourage people from contemplating a home purchase after doing a short sale.  These articles express cynicism about home sellers' financial habits and Realtors alike.  Most Realtors doing short sales know how to cover the bases for their client to make sure they're in a good position to buy a home down the road.  Further, in my area (Saint Paul, MN), nearly 39% of homeowners are upside down on their home.  Only a minority of these homeowners who would do a short sale on their home have destroyed credit.  All too often unfortunately, they are told that they won't be able to buy a new home for 2-7 years and, consequently, they let their credit go.  This assumption of a waiting period is not true and serves as harmful information to the homeowner doing a short sale.

Prior to December 16th of 2009 there was no FHA rule prohibiting homeowners who had a recent short sale from purchasing a home.  Few took advantage of this because the lending industry was wary and wanted clarification from HUD on whether this was ok or not.  On December 16th of 2009, HUD gave that clarity with Mortgagee Letter 09-52  which allows a people to buy a home after a short sale if "they were current on their mortgage and other installment debts at the time of the short sale of their previously owned property, and the proceeds from the short sale serve as payment in full."  One caveat to this; FHA will not allow the new loan if the borrower did a short sale "simply to take advantage of declining market conditions, and purchase, at a reduced price, a similar or superior property within a reasonable commuting distance."  When this rule came out, many thought that despite the fact that HUD allowed for a purchase subsequent to a short sale, no lenders would go along with it.  They were wrong.  Most lenders have adopted the rule as outlined in the mortgagee letter without additional underwriting guideline overlays.  

But this did not deter the naysayers.  They would assert that even if HUD and lender guidelines allow for it, the IRS would kill the deal.  It's true that a short sale can create a taxable event.  Because I am not a CPA or a tax lawyer, I will refer you to IRS Publication 4681 which explains in detail what the tax consequences can be after a short sale.  There are handy scenarios, examples and useful information of every kind.  So a buyer who has a tax lien can't buy a new home, right?  Wrong.

According to the FHA mortgage credit analysis handbook 4155.1 REV-5, 2-5 (B), a homebuyer with a tax lien is eligible for a FHA loan when, "the delinquent account is brought current, paid, otherwise satisfied, or a satisfactory repayment plan is made between the borrower and the Federal agency owed and is verified in writing. Tax liens may remain unpaid provided the lien holder subordinates the tax lien to the FHA-insured mortgage. If any regular payments are to be made, they must be included in the qualifying ratios."  It goes onto read, ""Since the IRS routinely takes a second lien position without the necessity of independent documentation, eligibility for FHA mortgage insurance will not be jeopardized by outstanding IRS tax liens remaining on the property unless the lender has information that the IRS has demanded a first-lien position."  That's right.  The lien can be left unpaid and it will automatically subordinate to the new FHA loan without the need of additional paperwork.

But the naysayers are not yet done.  They will say, "Oh but with a short sale and a tax lien, their credit will be obliterated.  There's just no way they'll qualify."  All a borrower needs is a 620 middle credit score.  Some lenders (I'm not one of them), will even go lower.  I'm going to address this objection with an anecdote (and really, this is not an isolated incident - sadly, it happens more common than you think.)  I recently had an applicant pull a 622 middle score.  On this credit report was a judgment and 19 collections.  That's it.  This person had defaulted on every extension of credit ever given and still pulled a 622.  Not that an IRS tax lien and short sale aren't damaging but, come on, they far from rule anything out.

My point in writing this is to serve as a reminder that in a lot of areas nearly two fifths or more of us are upside down, may want to move and are not deadbeats.  Also, I wanted to get this out there to provide the facts to dispel the myth that homeowners who do a short sale are only welcome to take a timeout from homeownership.  This is not their only choice.  They're welcome to continuing homeownership in the same way as the rest of us, . . . . Conditionally. :)

Posted by

Charles Dailey - Branch Manager, Loan Officer, Certified Military Housing Specialist - iLoan - NMLS ID# 79048 -  612.234.7283 - charles@charlesdailey.com


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Re-Bloggged 2 times:

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  2. Beyonca Clark 06/12/2010 07:49 AM
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Topic:
Lending / Financial
Location:
Minnesota
Groups:
Addicted to Active Rain
Advice for Buyers
Advice for Sellers
Short Sales Specialists
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Comments 8 New Comment

Show All Comments
Rainer
199,224
Akil Walker
Exit Bennett Realty

Charles,

 

thank you for this information. most of the properties that are listed Prince George's Co are a short sale. 

 

Akil

 

 

www.akilsellshomes.com

May 30, 2010 06:33 AM
Rainmaker
301,141
Margaret C. Taylor
St Marys/Calvert/Charles MD Real Estate Agent
Century 21 New Millennium MD

Thank you for this perspective.  How many Lenders are doing this?  Margaret C.

June 01, 2010 03:53 PM
Rainmaker
120,634
Charles Dailey
iLoan - NMLS ID#4474
June 01, 2010 05:33 PM
Rainer
20,740
Beyonca Clark
Century21 New Millennium

Charles,

Right now we are overloaded with Short Sale and foreclosure properties. Most definitely real estate agents started avoiding these opportunities.  I also think it is important as far as developing the increase of home property values as well...remove them from the inventory and get people in there to maintain and invest in these homes. Boosts the market and saves communities in some cases. Definitely a win-win...

June 12, 2010 07:51 AM
Anonymous #7
Anonymous
Paul Michel

Well where to start...To make a long story shorter I purchased a home with my then fiance for about 411K, subsequently she left and I was stuck with the house and 360K mortgage, a terrible loan (pick-a-pay) and it was coming current at the sum of 3000+ a month which was not doable for me.  My bank agreed to do a short sale.  I thought I was going to be unable to purchase again for several years.  After doing some research I found this geeky guy Charles Dailey.  Just so happens Charles is licensed in California along with several other states..  Well to sum it up I had good credit to begin with, never missed a payment on my mortgage and was current for the last 12 months on all other bills.  Charles knew the rules better than the people who made them.  Every time they said no he sent them a strongly worded email stating the rules and telling them to do their homework, because it was obvious he had.  My short sale closed on 5-7-10 I stewed around for a few months, my first contact with Charles was on 9-3-10, and I closed on my new home 11-22-10.  I cant give enough thanks to Charles for the work he put in and what he did for me. 

December 31, 2010 03:13 PM
Anonymous #8
Anonymous
Linda

Hello

I have a question, if you can assist.

We proceeded with our short sale in October 2010 and was told we needed to be late on payments before they would consider our short sale.  Which we did and scared as we never had a late notice ever on our credit reports.  We decided to short sale as our property as we wer upside down, we couldnt afford our monthly fees, including increasing tax, insurance and homeowers association fees.   We were 60 days past due which now shows on our credit report.

We find that FHA wont give us a new loan if we were late on payments prior to our short sale.

I find this odd, since you cant proceed with a short sale unless you are behind on your payments. 

Can someone explain this to me.  Is there something I just dont understand.

 

Thanks!!

 

 

 

May 13, 2011 08:09 PM
Rainmaker
120,634
Charles Dailey
iLoan - NMLS ID#4474

Linda - I'm not sure who told you that you needed to be late in order to be eligible for a short sale but it is likely that may not have been truly the case.  You can qualify for a short sale without being late on your mortgage if you are "imminent danger or default."  Here's more on that topic: http://activerain.com/blogsview/1421780/short-sales-do-not-require-a-delinquent-mortgage-imminent-danger-of-default-.  Sometimes, a loan servicer will suggest that being late is required but that is rarely actually the case (some mortgage insurance companies do require it though).  Most of the time, you just have to "push back" on them and point out that you are in imminent danger of default and prove it with your hardship letter and income documentation.  You're correct that, because of the late payments, you can't get an FHA loan.  Your shortest road to institutional financing at this point would be a Fanne Mae backed loan assuming that you have "extenuating circumstances" associated with your short sale.  This would require 10% down and is better explained here: http://activerain.com/blogsview/2204601/what-are-extenuating-circumstances-.  If an extenuating circumstance can't be documented, then the shortest road would be the 3 year wait on a FHA loan.  For a comprehensive list of waiting periods after major credit events, click here.

May 14, 2011 03:44 PM
Anonymous #10
Anonymous
Linda

Thank you so much for your reply!   We were told to be late to get the short sale process going.  I guess because we had a FHA loan.

We tried for a loan mod - and was denied because, we were not late on payments.  We didnt want to be late on payments and ended up giving up the home we love because we just couldnt afford to keep up with it and the increase well, in everything! 

We want to have our own home again soon, a smaller less expensive home and upkeep.  But I guess we will have to wait.  

I believe things happen for a reason,  this is a good lesson learned and to save, save save!  :-)

Thanks again!! 

May 19, 2011 06:26 PM
Show All Comments
Rainmaker
120,634

Charles Dailey

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