Randy Johnson of Newport Beach, author of
and a mortgage broker since 1983, answers questions…
Q. (Soon we will) miss our mortgage payment. Is a short sale the way to go? Our mortgage company said they would rather go that route and sent us a packet to fill out. What will happen after that? I have heard that if the debt shows paid-in-full on your credit report that in a little over a year you can be considered for a home loan. Is this true? Also if our house doesn’t sell can we then do a deed-in-lieu-of-foreclosure? We have always paid all our bills on time but now we just can’t afford it … I am just wondering what the credit ramifications are between a short sale and foreclosure and also knowing what our credit will be like will give us an idea if we need to find a long-term rental or possibly a cheaper one to get us by until we could buy again.
A. First, let me express my condolences to you and your family, Kristi. This is a tough time for many people.
There will be a severe hit to your FICO score. For that reason alone, it would be good to arrange a deal on your rental house while the landlord will see good scores marred only by late mortgage payments.
The second issue will be down payment. Obviously, you will not be in a position to buy a smaller, more affordable home until you have saved cash for down payment, closing costs, and reserves. So that will be the priority item in your financial life.
The rules about buying the next home are not clear but I’m going to give you the following guidelines.
Whatever route you choose, whether short sale or foreclosure, your credit will get a major ding, perhaps 100 points, maybe more. It will be important to keep everything else in order so that your credit score rises as this event becomes history. Getting back to over 700 would be a good goal.
Next, it will likely be at least three years before you would get approved for a mortgage. In the harshest of situations you might have to wait five years. It will help if your inability to make the payments on this home’s loan is due to a job loss or medical issues as opposed to financial mismanagement. If all you did was to bite off more than you could chew, that’s somewhere in between.
You should also plan to put 20% down. Less and the private mortgage insurance (PMI) companies get involved and it is not clear what their guidelines will be then, certainly strict.
I hope that this is helpful and I hope you will let me know about your progress.
Q. “If I paid cash for a house at auction, is it possible to then later take out a first mortgage for the full amount paid? I realize a HELOC can be taken out, but what about a first mortgage?”
A. You might have a harder time getting a HELOC these days because many HELOC sources have dropped out of the business. Other sources will not let you use a HELOC to fund a purchase, so check.
As to a permanent loan, there are two issues. Many lenders will only use the actual purchase price for determining loan amount even if appraised value is higher. Others, however, will let you use the appraised value and if that is higher, you may get a larger loan, so check.
Last, this will be treated as a “cash-out refinance” and is subject to a pricing hit if you want a loan that is higher than 70% loan-to-value (LTV). Hit amount depends upon LTV and FICO score, so check!
You can see that having a close relationship with a competent, experienced lender who knows the ropes is going to be very important for you in this mission. Calling around will have you talking to people who don’t even understand the problem much less have answers.
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