Jeff Duneske's Blog

Once a purchase agreement is accepted by all parties, one of the biggest issues that comes up is the home appraising for the purchase price. I have been encouraging my home buyers to have the home appraised first before having a home inspection. Average appraisals cost around $350. Instead of spending a couple hundred dollars towards the home inspection and removing this contingency first, have the home appraised first to ensure that the home purchase will appraise. If the home does not appraise for the purchase price and the sellers are unwilling to adjust the sales price, this technique will save you a few hundred dollars on an inspection that would be for nothing.

For years, credit experts, including me, have told people that a foreclosure is the worst possible option for homeowners who are upside down in their mortgage and is something to avoid at all costs.

One of the alternatives to foreclosure that homeowners have is a short sale, which is when a bank or mortgage lender agrees to discount a loan balance due to an economic hardship that is usually related to the current real estate market climate and the individual borrower’s financial situation. The homeowner sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. Unfortunately, some of the characteristics of a short sale are changing in a way that can potentially hurt your credit even worse than a foreclosure, and here’s why.

It used to be that only homeowners facing a foreclosure had to worry about being sued for the deficiency amount on a foreclosure sale. It all depended on what state you were in, and whether or not the loan was a recourse or non-recourse loan.

This is one of the main reasons why short sales have become so popular during the current economic crisis. If the lender agrees to the short sale amount, then it becomes a paid settlement and there is no deficiency amount to worry about. However, lenders are becoming creative in adding language to their short sale agreements–language that is putting homeowners into a vulnerable position when it comes to their credit and finances.

Here is a recent example of the type of language being added to short sale agreements by one of our nation’s largest lenders:

“Upon the bank’s receipt of [the short sale amount] the bank will release the lien and charge off the remaining debt as a collectable balance. Our recovery department will be in contact with you to make arrangements on this balance. We will report the account to the credit bureaus as a charge off with a balance owed.”

In my opinion, this language leaves the homeowner open to inevitable lawsuits, wage garnishments, liens and judgments, which can ultimately be just as damaging as a foreclosure, and - in some instances - more damaging in the long term.

How Does a Short Sale Affect Credit vs. A Foreclosure?

To date, the short sales that I have seen reported on credit reports have appeared as “Paid Settlements” on a mortgage account. But as you read above, with lenders keeping their options open to collect on the deficiency amount, this will soon change.

Let’s take a look at the impact on your credit reports and scores of a foreclosure vs. the potential impact of a short sale under these new conditions.

Foreclosure: The credit score ramifications of a foreclosure are usually 100-150 points, in addition to the points already lost for late pays. In order to get to the point of foreclosure, the homeowner usually has incurred rolling 30, 60, 90, 120 day late payments, which can drop the credit score approximately another 100 points, meaning the total credit score drop in a foreclosure can range from 100-250 points. Whether or not a lender can file a judgment against a homeowner for the remaining amount to make up for the gap between the loan amount and what the lender can sell the house for after foreclosure varies from state to state.

A foreclosure can be reported on a credit report for 7½ years from the date of the first late pay that led to foreclosure. Many consumers and lenders believe that it is 7 years from the completion date of the foreclosure process, but that is inaccurate. A foreclosure falls under the same rules as a collection, charge-off, or other similar action. I discuss the 7-Year Reporting Period and Statute of Limitations in great detail in my book, The Big Score ^[2].

Short Sale: When it comes to short sales, on the other hand, there is very little legal structure on either a federal or state level, meaning issues surrounding deficiency amounts are not clearly spelled out the way they are in the case of a foreclosure. As you now know, some of the country’s largest lenders are taking advantage of this vagueness to pursue lawsuits, garnishments, and judgments against homeowners who opt for a short sale.

Here are the potential credit score ramifications for how a short sale is reported:

• Paid As Agreed-Won’t hurt the score at all as long as the borrower has kept payments current.
• Unrated-May drop a few points, in addition to any points already lost due to delinquent payments which can drop credit scores an additional 100 points, depending on how many points the borrower still has to lose.
• Paid Settlement-Credit scores will drop 50-125 points in addition to any points already lost due to delinquent payments, however, if the borrower immediately implements my 10-Step Take Action Plan ^[3], their scores will start recovering immediately.
• Charge Off With A Collectable Balance-Credit scores will drop 100-150 points, in addition to any points already lost due to delinquent payment, and in this instance scores will not start recovering until the charged off balance is paid in full.
• Judgment For Deficiency Amount-If the lender files a judgment for the deficiency amount in addition to the charged off rating, credit scores can drop an additional 100+ points. Keep in mind that a judgment is a public record which has the most severe impact on credit reports and scores.

In terms of how long these items will remain on a credit report, if reported as a paid settlement or charge off, the item can be reported for 7½ years from the date of the first late pay that led to the paid settlement or charge off. If a judgment is filed to collect the deficiency amount, the judgment can remain for 10-20 years and, under certain state laws, can be renewed until paid in full.

How Long Before You Can Buy Another Home After Short Sale?

The current guidelines from Fannie Mae & Freddie Mac state that the waiting period for a Short Sale is 2 years from the date the Short Sale proceeding is completed. There is no exception for extenuating circumstances.

However, keep in mind that if a judgment is filed against you for the deficiency amount, you will not receive loan approval until that amount has been paid in full.

Click here ^[4] to read my article on how long before you can buy another home after foreclosure.

Tax Ramifications & Short Sales - The Mortgage Forgiveness Debt Relief Act Of 2007

When the lender decides to forgive all or a portion of the debt and accept less, the forgiven amount is considered as income for the borrower; leaving it open to be taxed. However, The Mortgage Forgiveness Debt Relief Act of 2007 contains amendments to remove such tax liability, allowing the borrower and lender to work together to find a solution beneficial to both parties. The new law applies to debt forgiven in 2007, 2008 or 2009. Click here ^[5] to read about this act now.

In Conclusion

Over many years in the credit business I’ve seen much devastation to credit scores, the result of economic crisis. I speak with countless individuals who have abandoned their last hope of salvaging their home ownership and now fight to save their credit.

In this instance, my view is that NO ONE should agree to the kind of language I cited above under the concept of a short sale. A short sale proves that the borrower is exhausting every effort to pay the loan. The borrower has willingly committed to taking on months of emotional and physical stress in a good-faith effort to sell the property to maintain a good relationship with that lender, by saving them thousands of dollars in foreclosure costs. Plus, banks and lenders don’t want to be property owners. But in cases where banks and lenders are not willing to negotiate, and the ramifications of a short sale are more severe than a foreclosure, short and long term, I’m having a hard time advising my clients to choose short sale as an option.

The good news is that legislation has not caught up with the short sale tidal wave–and to date–there is no law on the books relating to this mortgage option. As a result, there is a huge opportunity for the borrower to negotiate credit reporting with the lender. I’ve seen several successful negotiations.

My advice to any homeowner who is upside down in their mortgage is, first and foremost, find out what options are available. Do the research. Consult the experts. Gather as much information as possible, and weigh the pros and cons. What may seem to be the best answer right now may also have a serious impact for many years to come, so make an educated decision.

The great news is that whatever fate falls upon your credit scores right now, you can start improving your situation immediately.

Direct from my mortgage lender, it appears the $8,000 first time home buyer tax credit will be able to be used for closing costs, prepaid items such as taxes and mortgage interest and towards an additional down payment once approved for Michigan.  Borrowers will still need to come up with the initial 3.5% down payment. I will keep you updated once approved in Michigan. Please keep me in mind and let me know the first person that comes to mind that is in need of my professional help in purchasing a home this Summer.

The home appraising for the purchase price is one of the top reasons why a home sale falls apart today. The lender always will request that all mortgages are required to have an appraisal for the subject property that is being purchased and must appraise for atleast the purchase price. The issue at hand is that most appraisers view Michigan and Metro Detroit as still being a declining real estate market and are being extremely aggressive with appraisals. Lenders do not want to be stuck with a mortgage on a property that is worth less then the mortgage on it so banks will not lend a penny over the appraised value. Once an appraisal comes in low there is one of three outcomes. 1.) Adjust sales price to the appraised value 2.) Purchasers comes up with the difference with their own money 3.) The transaction is canceled.

"The homebuyer’s downpayment required for eligibility for FHA insurance may not consist of any funds (including funds derived from a sale of the homebuyer tax credit) provided by the mortgagee, the seller, or any other person or entity that financially benefits from the transaction (or by any third party or entity that is reimbursed, directly or indirectly, by the financially benefiting person or entity). Accordingly, the proceeds of the sale of the tax credit to FHA approved mortgagees, the seller, or any other person or entity that financially benefits from the transaction (or any third party or entity that is reimbursed, directly or indirectly, by the financing benefiting person or entity), may not be used to meet the 3.5% minimum downpayment, but may be used as additional downpayment, buying down of interest rate, or other closing costs.”

For the last ten years of selling real estate I have always noticed that one of the best times to sell a home is between Memorial Day to Labor Day. I consider it to be one of the best times for selling because of the long days and it staying light outside till well after 9 PM allowing the most amount of showings throughout the day. Another reason is the weather is good and you do not have the factors of ice, snow freezing weather keeping buyers away. The final factor that helps is most families tend to relocate once school is out and you will tend to have the most amount of buyers during this time. If your considering selling this year, the time is now!

In April of 2008 the State of Michigan passed a law requiring loan officer registration within the state. This new registration law took effect on April 1 of this year. The link below will provide you with a search tool for identifying registered loan officers in the State of Michigan.

As is often the case with legislation, new federal mandates require Michigans law to conform to changing national regulation. The Federal law, commonly referred to as the S.A.F.E. Act of 2008, requires that states institute their own programs in order to license these loan officers.

Legislation has been introduced as of April 22, 2009 in the Michigan Legislature with the goal of meeting the S.A.F.E. Act's July 31, 2009 deadline to set up a registration process. It is required that states allow access to the list of licensed loan officers online.

View the List of Licensed Loan Officers

Any home owner who wants to appeal their individual cities Board of Reviews decision may appeal to the Michigan Tax Tribunal on or before July 31, 2009. For more information visit www.michigan.gov/taxtrib and for the petition for visit http://www.michigan.gov/documents/PropPetFillable_93020_7.pdf

Legislation is on the move under the Capitol Dome to provide homeowner relief by way of a tax credit. Senate Bill 346, provides a tax credit for all homebuyers purchasing a home as their principle residence. If passed, the tax credit would be available to Michigan homebuyers from January 1, 2009 to January 1, 2011. The homebuyers would then be able to use the credit against their income tax, equal to 10 percent of the purchase price, or $10,000, whichever is less. If the credit exceeds that threshold, it is refundable.

These days, many home buyers who aspire to become homeowners are taking a “wait-and-see” approach, trying to buy at the “bottom” of the market. The problem with trying to time the market is that you can’t time the market. Conditions in many markets today are very favorable for home buyers; housing affordability has improved, and mortgage rates are once again near historic lows and first time home buyers may be eligible for a tax credit up to $8,000.

I'll lease your home in 29 days or I'll lease it for FREE!

I work with dozens of renters looking to lease on a daily basis. If I am unable to bring a lease application for your home in 29 days or less, my commission will be reduced to zero at the closing. The only commission that would be owed would be to the other agent involved or if I procure the renter myself. At that point, only a half months rent would be owed for the commission. When I lease your home within 29 days or less, one months rent is the commission due. To get your home listed on the MLS (Multiple Listing Service), Realtor.com and distributed to over 75 websites there is $100 retainer collected at time of listing. This is fully credited once the property has been leased out.

Below is the process once we have an applicant for your home.

1.) Applicant submits a completed, signed application with accurate information and pays the non-refundable $20.00 application fee. Applicants must bring ID and proof of income when turning in application.

2. Applicant submits all verifying information/documents needed such as pay stubs or other proof of income, present/previous landlord names and phone numbers, credit report no older then 30 days and any other documents that may be required.

3. Applicant has full required move in amount in certified funds, (i.e. Cashiers Check or Money Order). Typically first month's rent and security deposit.

4. Applicant's back ground is verified at Michigan Department of Corrections.

5. Applicant's back ground is verified at Michigan State Police public sex offender list.

Based on satisfactory information supplied, the owner will approve the applicant for the rental.