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.

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

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/.

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.

Refinance Without the Typical Refinance Rules

The following article is the contents of an answer that I gave to another blog contributor today.

I would love to hear any comments from other professionals who are helping homeowners to keep their homes by way of a Loan Modification.

A "modification" is the end result of negotiating with the current lender or investor for a home loan that isn't working well for the homeowner.

Those homeowners who are facing foreclosure do have an option that is finally getting some attention from the public and the lenders themselves. That option typically means that the current lender may bring the interest rate down, fix an adjustable interest rate, reduce the amount of the loan, or allow the homeowner to add one to four house payments to the back end of their loans.

Many owners cannot refinance their adjusting ARM loan. They have made their payments on time and have good jobs. However, they've had a few late payments because the house payment soared upward by $600. This homeowner is a great scenario for looking into a load modification. The lender will typically want to avoid foreclosure, so a modification to the original loan is in everyone's best interest. This is just an everyday scenario, there are many others.

I like to recommend that an owner check out loan modification first. If that clearly will not work out, then consider a short sale. If a short sale will not work out, then letting the house go to foreclosure may be the only option available to the owner.

There is a method for dealing with staying in a home during the foreclosure process. That would take another long post.

Back to our original topic:

Hi SoCalGal:

It's great to hear from you. I hope that you will share your experiences in this area with me. I am always interested in knowing what others are working on.

On Sat, Jun 21, 2008 at 8:24 PM, (e-mail address not provided) wrote:

SoCalGal has posted a response to your message titled
Re: Do I tell the bank I want to go in foreclosure???? in Foreclosure Discussion.

The posted reply can be found at the following URL:

http://www.all-foreclosure.com/forums/foreclosures/messages/7710.html

If the reply pertains to an ongoing discussion, it is
requested you go to the above URL to post any response.

The posted reply reads as follows:

Dated  : June 21, 2008 at 20:24:41

Subject: Re: Do I tell the bank I want to go in foreclosure????

Mary, can you tell us under what circumstances the lenders are reducing loan balances?

My response:

Hi SoCalGal:

Thanks for writing!

To answer your question: Any loan balances being reduced are usually due to the property being at the highest risk of foreclosure and what that foreclosure will do to/for the investor. Where it is on the lenders' books is another factor. The number of requests for a reduction will also give the investor the current "climate" of the market.

An example:

A million dollar home that has lost 30% of its' value: a borrower who made the fixed period payments on time, who wants to remain in the home, and who has steady income.

Those factors would make it easier for a lender to write down part of the mortgage loan amount to avoid the average foreclosure costs and to avoid the loss of income on the note for a period of six to 18 months.

Any file submitted to the investor/representative of investor must "stand on it's own". The negotiator for the modification must present a clear picture of where we are today, what the cost of a "No" answer will have on the investor, and what the Borrower can live with.

This is an example of a scenario that did work for a balance reduction. A write down between 5 to 25% of the note with a borrower who is capable of performing NOW keeps a foreclosure off the lender's default list and makes the lender look better to the investor. I am not going to disclose the exact amount of the write down, but it was more than 5% of the mortgage balance. (Your mileage may vary)

This is NOT standard operating procedure. Having said that.......one could act "as if it was" when approaching the lender and being willing to wait for an answer without caving in. In my humble opinion, that is the hardest part for the property owner, which is why a representative for the owner is the best idea. A good one will pay for himself with good negotiating skills and presentation of the borrowers information which will ultimately "pay" or save the owner on his loan.

Our processing unit has been successful in the above scenario. Please remember that this is not a typical case and that each scenario for each homeowner should be reviewed by a professional with a history of mortgage and real estate expertise. This person must also represent a company history of good performance and service.

There are many Loan Modification "experts" popping up to help people with their homes. No license is required. Please check them out before you sign any contract or pay any fee. Don't give your property up to ANYONE without the advice of an attorney that has been referred to you by a trusted source. Remember, that if the homeowner has been advised by their lender with a Notice of Default, that it is a felony to accept a fee from the owner until an agreement has been obtained for a loan modification or forbearance.

Standard Disclosure: Please seek individual, professional advice in your personal situation. This article is not intended to advise or counsel any particular person. It is to be used as notice of current events. The above article is authored by Mary Supinger and is protected by copyright laws. Credit Fitness is a registered trademark of www.CreditFitness.net.

Short Sale vs. Foreclosure: The True Impact On Credit

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. Thanks for reading.

An Excellent Credit Trick To Boost Your Credit Scores

A quick way to add points to a credit score are 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 80 points on your scores, pay those credit card bills right away for at least six months prior to taking out your home loan. This plan will also save you from sneaky changes made by your credit card companies.

Making this a habit will keep you from a problem that many are experiencing now; that is universal default.  Universal default may be a term on your contract with the credit card company. This provision allows them to increase your interest rate charges based on a late payment from any account that you hold or one late payment to them!

As always, remember that taking care of your credit report as a regular habit will keep your scores at their highest all the time! Credit Fitness® can help you to that end. Check it out at www.CreditFitness.net.

Timing Is Everything

Any American male can tell you that, in romance, timing is everything!

Flowers delivered two days after her birthday will not be given the same response as on the day of her birthday. There could be hell to pay unless a really good excuse is offered.

When you do something is critically important to your credit scores.

Much of the time, in my business as a mortgage loan officer, I see clients coming in and want to improve their credit scores in one week. Unless a person has a lot of credit debt and money to pay it off right away, this is usually not possible.

Credit scores take a while to show off the grooming you have done, or not done, to them.

Giving yourself a full six months to get ready for your “close-up” will pay off big when you plan to borrow money to buy a car or a house. You may need even more time if you are looking to add over 60 points to your scores.

Many of the “rules” that are taught about credit are written so that you will avoid problems on your way to buying a house or a car. It is said, “Don’t pay off collections”, “avoid inquiries”, and “no closing of accounts”.

A few inquiries for home mortgages will not hurt you because the most modern scoring model expects you to shop for a mortgage. The time frame for this happening on a home loan is 45 days. Be aware that if you submit a loan scenario to Lending Tree you could get as many as 300 inquires of your credit by all the lenders who will make you an offer on your loan. Even 40 inquiries will completely tank your scores

This is also true for auto loans. That time frame for this is 14 days. If you like to test drive cars and they pull your credit once a month for 6 months, you could be doing yourself damage.

Collections can be paid off and the item completely deleted from your report if you negotiate successfully for that prior to making payment. I advise that you avoid paying off any collection without negotiating for a complete deletion.

If they absolutely will not delete, you can pay them off safely after your escrow closes. Most loan underwriters will allow this to happen at the closing of the transaction for real estate.

If you aren’t planning to borrow for a car or a mortgage for the next six months to two years, then do the things that will protect your credit in the future. Close accounts that you must close to protect yourself, pay off collections, open new accounts, and charge your credit cards up past 30% of their limits.

Your credit score is only a number. It’s an important number when you want to borrow money; just don’t lie awake at night worrying about it after the escrow has closed. It’s okay for it to go down at certain times in order to protect or improve your long term credit profile. My book, Credit Repair & Credit Scores: Step-By-Step Guide For Dramatic Improvement contains many recommendations for getting the best results in your credit profile.