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Can you buy a new home after a Short Sale?

Posted on March 29, 2013
Too many people who are contemplating the short sale process, are afraid of the repercussions for their future home ownership. There seems to be a large amount of cynicism in most online articles regarding the potential for people to buy another home after completing a short sale. Typically, these focus on casting the borrower’s financial habits in a bad light. The truth is, any good realtor and short sale negotiator will be negotiating with the borrowers’ futures in mind. Also, considering that many sources estimate the percentage of borrowers who owe more than their house is worth at over 30%, there is little sense in stigmatizing these borrowers. The reality of this situation is that only a small amount of these homeowners have bad credit. Typically, as a result of admonishments warning that they will not be allowed to purchase another home for a period somewhere between two and seven years, these homeowners let their credit go.
At the end of 2009 there were no Federal Housing Authority rules explicitly prohibiting a homeowner from purchasing another home after a short sale. Despite this, many lenders were wary and sought clarification from the United States Department of Housing and Urban Development, HUD, on whether purchasing after a short sale was alright. HUD responded on December 16, 2009 by publishing a mortgagee letter that allowed lenders to issue mortgages to homeowners who had pursued a short sale. HUD did issue one caveat saying, “Borrowers are not eligible for a new FHA mortgage if they pursued a short sale agreement on his or her principal residence simply to take advantage of declining market conditions, and purchase, at a reduced price, a similar or superior property within a reasonable commuting distance.” In short, for those who have not taken advantage of the process, and who were current on their mortgage at the time of the preceding short sale, purchasing a new home is allowed. The letter also outlined a general waiting period of 3 years for those borrowers who had sold their home at a deficiency, or who were in default. The letter does, however, allow lenders some leeway in deciding to grant exceptions to this waiting period.
After the release of this document there was some question of whether lenders would be adopting the guidelines or would add so many underwriting guidelines that it would be nearly impossible to receive a loan. This never happened. In fact, many lenders jumped at the opportunity to offer these loans and adopted the guidelines essentially as-is. This is great news for short sale participants who are looking to buy a new home.
So now that we know that you can buy a home after a short sale, the question becomes how? Check back with our blog next week to find out what steps a potential homeowner should take when considering purchasing a home after a short sale.
If you are considering selling your house for less than you owe, call my office at (206) 282-4848 to schedule a consultation to discuss the short sale of your home and the potential repercussions on your future home ownership.

Mortgage Guideline Changes

Posted on March 1, 2013

The long awaited changes to the rules on “qualified mortgages” were released earlier this year on the 10th of January. The Consumer Financial Protection Bureau has set forth these rules in order to protect borrowers from predatory lending, while simultaneously granting protection from litigation to those lenders who abide by the rules. Essentially, these new guidelines will ban the types of high risk loans that many economists say are at the root of the rapid expansion and subsequent collapse of the housing bubble. These types of predatory loans include interest-only mortgages, stated income loans, mortgages that include most types of balloon payments, and those with negative amortization causing the principal to grow over time.

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Big Banks and Mortgage Regulators Reach $19 Billion in Two Settlements Addressing Mortgage Mis-“Deeds

Posted on January 9, 2013

In the past two days there have been two huge settlements between some of the nation’s largest lenders and the government. These two separate settlements hope to address both the needs of homeowners who were subjected to foreclosure abuses, and also to help ameliorate the damage done by bad home loans sold to Fannie Mae. Both of these issues were a large part of the housing bubble that precipitated the financial crisis of 2008.

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Congress Extends Mortgage Forgiveness Debt Relief Act Through 2013

Posted on January 2, 2013

Congress’s late night passage on New Year’s Eve of the American Taxpayer Relief Act of 2012 extends an important resource for distressed homeowners, the Mortgage Forgiveness Debt Relief Act of 2007, which was set to expire at midnight on December 31, 2012. According to the National Association of Realtors, the American Taxpayer Relief Act of 2012 passed the Senate with a vote of 89-9 and then passed the House of Representatives with a vote of 257-167. With the extension of this Act through the end of 2013, the recovery of the housing market will continue to be assisted by the forgiveness of taxation on cancelled debt.

Before the Mortgage Forgiveness Debt Relief Act of 2007, homeowners could be taxed on unpaid mortgage debt. For example, if you owed your lender $300,000, but received only $250,000 toward the debt, then that unpaid $50,000 was considered imputed money that the government taxed as ordinary income. Under the Mortgage Forgiveness Debt Relief Act of 2007 this unpaid debt would no longer be taxed, but the Act was scheduled to sunset on December 31, 2012.

Fortunately, during the debate on how to address the upcoming “fiscal cliff” the extension of the Mortgage Forgiveness Debt Relief Act was included in the American Taxpayer Relief Act of 2012 as Sec. 202. Without the extension of the 2007 Act, any forgiven debt would be taxable, whether it be from a short sale or foreclosure sale for sellers, or from a loan modification for owners, and would likely have caused a financial burden to underwater homeowners.

This great news means that if you are a distressed property owner we may be able to help you settle your debt without increasing your tax liability.

Be sure to keep up with our blog as we learn more and post updated articles about how the fiscal cliff, and the measures being used to prevent it, affects real estate. Call us at (206) 282-4848 to set up an appointment to consult with Lynn on your property, or visit our website at

Freddie Mac Short Sale Changes

Posted on December 26, 2012

The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, has made recent revisions to their guidelines which make the process of having a short sale more efficient. It allows the company that services your loan the ability to approve your short sale without bringing the file to the mortgage insurer for review. In addition, these revisions apply to FHA and FNMA (Fannie Mae) as well. That means that these revisions that went into effect on November 1 will apply to most Americans, including many who have a mortgage here in Washington.

The goal of these guidelines is to make it easier and more efficient for homeowners to pursue a short sale. By putting the control in the hands of the loan servicers, it allows these parties to make decisions regarding the sale of the distressed property, and makes the process much more streamlined. If you meet certain criteria these loan servicers are now able to give approval themselves, without ever having to approach the investor with the file. This is great news for any homeowner considering a short sale because it means that now one of the most cumbersome and time consuming steps has been eliminated. Now, a short sale is not only much faster, but more simple as well.

In order for the loan servicer to be able to approve your short sale you need to meet some basic criteria. For starters, are you at least 31 days delinquent on your mortgage payments? Then your loan servicer can approve your short sale without approaching the mortgage investor. If you are not 31 days delinquent, you must have undergone one of these four eligible hardships. They are:
  • A divorce or legal separation from your spouse
  • A death of the borrower or primary wage earner
  • A long-term permanent disability of the borrower or dependent family member
  • An employment transfer or job relocation (this includes permanent changes of station for service members)

That being said, borrowers that do not meet any of these four criteria, and are current on their mortgage payments still have short sale options. You may still be eligible for the loan servicer to send the file to the mortgage investor for review if the loan servicer feels that the borrower should be considered for a short sale. This “classic short sale” process is still possible; however these new guidelines allow borrowers who are qualified to streamline the process.

Based on a Broker’s Price Opinion, or BPO, Freddie Mac will offer guidance on choosing a listing price. The BPO should be done as early in the process as possible. This guidance is passed on to the borrower and their broker through the servicer of the loan, but the final decision on the listing price is up to the borrower. Bear in mind that sometimes the listing price recommended by the BPO may not meet Freddie Mac’s net proceeds requirement. In order for the transaction to be approved, the net proceeds must meet Freddie Mac’s requirements after deducting the closing costs and commissions.

There are other aspects of these new “standard short sale” guidelines that are not new. For example the timelines are still the same as with the “classic short sale.” That means that the loan servicers must acknowledge receipt of the purchase offer within three days. They must also let you, the borrower, know within five business days if there is outstanding information needed in order to evaluate the offer. Also, the loan servicer must respond to the offer with a decision within 30 days of receiving the purchase offer. If this is not possible, the loan servicer must offer weekly status updates to keep the borrower informed.

Other requirements that are a part of Freddie’s new “standard short sale” are that the home not be resold within thirty days of the short sale. Also, within ninety days the property is not allowed to be sold for more than 120% of the short sale purchase price. These guidelines are in place to prevent fraudulent home “flipping.”

Assuming all of the above criteria are met, Freddie Mac will not pursue the borrower for the deficiency. That is permanent debt relief for underwater homeowners; their lender will never pursue them to pay the deficiency.

Because this new Freddie Mac “standard short sale” is so similar to the government HAFA program, they will be phasing out their participation in HAFA at the end of the year. Similar to HAFA, the “standard short sale” program from Freddie Mac will allow up to $3,000 dollars in relocation assistance for the borrower upon completion of the transaction. It is important to understand that this is TOTAL relocation costs. For example, if your new employer offers you $1,500 then Freddie will only allow an additional $1,500. Also similar to HAFA, second lien-holders may receive up to $6,000 dollars from the lender; they may not receive anything from the borrower.

With the expiration of HAFA on December 31, many lenders are looking to make changes. Bank of America has already begun to transition in preparation of the expiration of the Home Affordable Foreclosure Alternative.. Beginning on December 14, 2012 Bank of America stopped issuing out short sale agreements to borrowers.  If you already have a fully executed short sale agreement it may be accepted if it is received and uploaded by the close of the year. If you are not in these two categories, you loan may be considered for the Bank of America Cooperative Short Sale Program, or a traditional short sale. It is also Bank of America’s approach to quickly and amicably settling borrowers’ short sales. The Cooperative Short Sale is appealing for those who qualify, because the program allows homeowners relocation assistance.

All of this adds up to good news for Washington property owners who are underwater on their home. As the process becomes smoother it is possible for more borrowers than ever to get approval sooner.

 Be sure to come back and read our blog regularly for more updates on this and other topics. If you are a Washington homeowner, and would like to learn more about short selling your home, please call our office at (206)282-4848 or visit our website at: .

The Mortgage Debt Relief Act: What Does It Mean?

Posted on December 18, 2012
Recently, we have heard a lot about the "fiscal cliff" set to happen at the end of 2012 unless Congress acts to mitigate it. One of the most uncertain aspects of this "cliff" is the scheduled end of the Mortgage Debt Relief Act, which could have significant consequences for distressed property owners. 
Under regular federal law, any mortgage debt that is forgiven  is taxed as regular income whether it is from a short sale, foreclosure, loan modifications, or something else. 
As an example: If a homeowner has a mortgage loan for $500,000, but they get lender approval for a short sale at $300,000, the forgiven amount of $200,000 is considered money earned by the homeowner, and is taxed at normal federal income tax rates.
In 2007, Congress passed the Mortgage debt Relief Act, which excuses the taxes owed on this forgiven debt. By doing so the burden on underwater homeowners is reduced.
This temporary bill is set to expire at the end of December 2012, and it is unclear whether Congress will renew and extend this tax relief. So, what does this mean for you? 
Well, if the Mortgage Debt Relief Act is extended, homeowners who are attempting to complete a short sale or loan modification, or who are waiting for a foreclosure, may still be eligible to have their forgiven debt written off. 
On the other hand, if the Mortgage Debt Relief Act expires at the end of 2012, homeowners whose short sales, loan modifications, or foreclosures are completed in 2013 or later will be responsible for income taxes on the forgiven debt. This "phantom income" is taxed as ordinary income. This includes properties that went into contract during 2012!
Of course, we are all waiting and watching Congress to see what they will do regarding the Mortgage Debt Relief Act. Come back and visit my blog regularly and watch for updates over the next few weeks as we find out more!  

More Blog Entries
Bye Bye HAFA.... - Posted on November 1, 2012
Get Paid for (Short) Selling Your Home? Really? - Posted on June 13, 2012
Lynn is going to be on the radio! - Posted on May 11, 2012
Help may be on the way... - Posted on April 9, 2012
Short Sale or Foreclosure? Now, Please! - Posted on March 10, 2012
Federal Mortgage Settlement = Good news/Bad news - Posted on February 16, 2012
Foreclosure Mediation - New alternative for homeowners in distress! - Posted on August 23, 2011
Help is on the Way! - Posted on April 18, 2011
King County Bar Association (Reprinted): Bar Bulletin, Volume 29, Issue 7, March 2011 - Posted on April 12, 2011
New FTC MARS RULE - Posted on January 24, 2011
MERRY XMAS FROM FREDDIE MAC! - Posted on December 7, 2010
LISTING AGENTS: BEWARE?? - Posted on November 16, 2010
CAN WE STOP THE FORECLOSURE CRISIS - PART 2? - Posted on October 21, 2010
CAN WE STOP THE FORECLOSURE CRISIS? - Posted on October 15, 2010
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