Utah was once the foreclosure capital of the US (world?). I remember. I was one of very few people who knew about doing loan modifications and short sales about 12 years ago. In that time I have worked with hundreds, perhaps thousands that have all experienced having bad credit because of a foreclosure, bankruptcy or late payments preceding a loan modification.

Now coming full circle, I am seeing many of these people come back and ask about getting a home loan and buying a home after foreclosure. When they ask “Can I buy a home again?” I have great news for them. The answer is!!!

Maybe.

I know. That was kind of messed up. Get your hopes up like that and then jump right into reality. But thats what people want; They want answers that are real not fluff.

So today I am going to spell out what your options are so that whether you are now several years past your “troubles” or are just about to enter them, you will fully understand what your options are.

Understand what it takes to get a loan today

Loan guidelines can change. Sometimes daily; So its important that you stay up to date on them. My suggestion would be to form a relationship with a lender that is an expert on credit. This way you can periodically communicate with them about whats going on in lending and make sure that you are doing what you can to stay qualified.

When we meet with a prospect the first thing we do is lay out a detailed “Map to success”. We look at what their credit score is now and review all the factors that contribute to it. We discuss what needs to be done with each item and discuss a time-frame for accomplishing these things.

A typical client may need anywhere from 30 days to 12 months to fix any credit related issues.

The most common issues you may deal with if you have had a foreclosure or bankruptcy are:

  1. FHA requires a minimum of 3 years since a Foreclosure, Bankruptcy or the last 120 day late (considered the same as a foreclosure to underwriters)
  2. You cannot have any derogatory credit in the last 12 months. (No late pays etc.)
  3. Credit score must be a minimum of 620. (there is a “hit” or penalty to the rate below 660…this is a Lender thing, not FHA)
  4. Make sure all of the debts included in a Bankruptcy are being reported to the credit bureaus as “Included in Bankruptcy”. Items often report inaccurately and can impact your scores or an underwriting decision as it could cause it too look like you were late or had a derogatory report (see #2)
  5. FHA allows you to have up to $4,000 in Medical Collections however all other Collections and Judgments must be satisfied.
  6. To have a good credit score after Bankruptcy or Foreclosure the most important thing you can do after you have “stopped the bleeding” is establish 3 revolving lines of credit (read: Credit Cards) and keep the balances below 30% of the available credit limit (10% is optimal). DO NOT use Store credit for this strategy. One of the best methods is to obtain an overdraft protection line of credit on a checking account. They report just as if they were a credit card and help re-establish credit scores.

Look for opportunities to own now

We have a lot of clients who own their home now and do not qualify for a loan.

This is possible by finding a home where the seller is willing to finance the property for them. Often called Seller Financing or a Contract for Deed, this method can allow you all the same rights and benefits of buying a home with a traditional mortgage without having to be fully qualified at the time of purchase.

This is sometimes confusing, so often what I do is have people imagine something smaller than a home. Think of a car. Lets say I have a car that I want to sell and someone comes along and says they want my car but they cannot get a loan right now.

Lets also assume I own the car outright, so there is no loan still owed against it.

I have the option to sell it to them and they would make payments to me rather than a bank or credit union. The terms of the agreement are completely negotiable between me and my buyer.

This gives you some big benefits:

  1. You own it legally. This means any interest paid is likely tax deductible (I am not a CPA, please consult one before signing any agreements)
  2. When the time comes to get a Mortgage you can now refinance rather than get a loan for a purchase. Refinances typically have less closing costs so you save money!
  3. Money spent on the property benefits you not a landlord.

This might seem a little backwards, but owning a house first and then working on your credit as you work towards refinancing can be a great way to go. This is a great strategy that is a legitimate way to have your cake and eat it too.

Summary

If you know ahead of time what you are aiming for you can make sure you hit your target. Get with a lender that is an expert with Credit, its worth knowing ahead of time what you need to do to be ready for the day when your credit is back on track.

If you would like to own a home but have had some credit issues we are a local Mortgage Bank located in Utah. We have branches from Salt Lake City,  Layton, and Riverdale Utah. We specialize in working with people that have had credit problems but want to get back on track. Whether you are just about to file Bankruptcy or think it might be time to buy again, call us and we will discuss all your questions and show you all the options available. We are Utah Mortgage Team and our address is 101 N Fort Lane #104 Layton, UT 84041.

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It’s inevitable that whenever I mention to a borrower that they might want to consider an FHA 5/1 ARM when either refinancing or even when they are getting their home loan for a purchase, that the question will be raised

“Are they safe?”

Of course this question is rooted in the housing slump and all the news reports about Option ARM’s.

If you look a bit closer you will see that the difference between the ARM’s at the heart of the housing mess and an FHA 5/1 ARM are substantial.

Convention and Interest Only ARM’s

My first encounter with conventional and Interest Only ARM’s was when I was building my first home back in 2004. A friend of mine was building homes and he offered to help me, and a friend build our homes. He said that he had some great contacts for getting mortgages done fast, and since I can’t do my own loan I of course said I would be open to meeting his contact. It was also a nice surprise that they also did Home Loans in Layton where our office is.

I remember having a discussion with my wife’s Uncle whom I hold in high regard with respect to life in general, but especially with financial matters. I told him that I was being offered a loan that started out at 1%!

I had never heard of such a thing, and frankly I had to really think for a while before I felt like I could really get my head around why ANYONE would ever offer such a loan.

The overall theme of the discussion could probably be summarized as “I just don’t get it”.

Musing about Wall Street, where he worked for a good 15-20 years of his Career and about all the different ways that housing was really picking up steam, I still recall at one time one or both of us asking rhetorically “it can’t go on forever like this…can it?”

Two years later, I was still asking the same question and wondering if my understanding of sound fundamental economics might need to be adjusted in the face of some new development. Perhaps housing really could defy economic history and just go up.

Of course we all know what happened within just one more year. Looking back, I made a sound decision in not accepting that ARM, and of all the reasons that it didn’t make sense to me there were a couple that stood out from the crowd.

Here are the factors that separate FHA 5/1 ARM’s from those that caused so much trouble for the housing market.

Prepayment Penalties

Penalties that cost thousands of dollars would cause borrowers to wait until their loan had already become an adjustable rate before they could refinance. New, higher payments often shocked borrowers and led to problems paying either their house or their other bills on time. Late payments made refinancing difficult or impossible. FHA 5/1 ARM’s never have any pre-payment penalties.

Volatile Index

Most ARM’s were based on the LIBOR. I won’t bore you with the details, so I will just say that FHA 5/1 ARM’s are based on the US 1 Year Treasury Bill and not the LIBOR which gives the FHA ARM less volatility.

Caps

With the I/O (interest only) ARM’s of the housing boom rates could often jump up very quickly. Increasing as much as 2 and 3 percent right from the beginning. Alternatively FHA 5/1 ARM’s are capped at 1 percent increase per year based upon the start rate for that year. So if you are starting at say 3.75% on an FHA ARM, after the 5th year passes your rate could not be more than 4.75%. This of course goes on with each successive year after that.

It’s worth noting that the bad ARM’s also had what I call a Parachute. Meaning they rose fast but if rates dropped these loans dropped down slower than they went up. FHA 5/1 ARM’s follow the rates and hold to the 1% cap, meaning they cannot go up or down more than 1% per year. However that also means that if it started at 4.75% and went up to 5.75% in year 7 but then rates went down to 3.75% you could drop down below the 4.75% start rate for the year. Nice!

Streamline option

This in my opinion is one of the strongest benefits of the FHA loan. Put simply, an FHA streamline refinance is like a regular refinance except the lender does not really verify income. They will verify value, employment and credit. The reason it stands out as a benefit is if for some reason you needed to refinance rather than sell, you can do so with less difficulty than a traditional refinance. You can move from an ARM to a Fixed rate loan and vice versa with an FHA loan, even before the 5 year fixed period ended if you wished.

Over all, my general advice to people goes like this. Will you be in the home longer than 7 years? If so, its not likely that an FHA 5/1 ARM makes a lot of sense.

On the other hand, if you will likely be selling within 5-7 years then it might make a lot of sense financially. One client recently dropped from 6.25% all the way down to 4%. Considering thats over a $2,000 per year difference you can see that the savings add up, and if you know what your plans are within that 5-7 year time frame, its worth running the numbers to see if an FHA 5/1 ARM can save you money.

We are local Mortgage Bankers located in Layton Utah, and we like helping people understand their home loans. We write this blog and other articles to share information and answer questions. If you want to get a home loan and live in Northern Utah, give us a call, shoot an email or drop by!

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Pitfalls to Avoid in Utah Short Sales

by Utah Mortgage Expert on June 14, 2010

You’re a Utah realtor, and you thought that in today’s real estate climate, handling Utah short sales was the way to go. You took a few classes and thought you were ready to go. “How hard could it be?” you asked yourself. “Hey, I’m already trained to sell homes; short sales aren’t exactly rocket science!”

Well, you’re right, short sales aren’t exactly rocket science, but if you are unaware or unprepared, there are several big pitfalls that could bite you and your client for some real money.

Here are some short sale pitfalls to look out for:

Pitfall 1 – Money in the bank is not safe

One of the first things you may want to recommend to your client is that they immediately close out any accounts they may have at any bank that services or holds their mortgage and second mortgage. The reason is that many banks have a clause in their bank account agreement documents that allows them to take funds from one account to pay for another account. This clause is in the fine print of most bank’s account agreements that hardly anybody ever reads.

So if your client has a checking account and their mortgage with Bank X and they are late on their mortgage payment with Bank X, then Bank X may sweep their checking account to get money for the mortgage payment. Banks have even gone so far as to extend overdraft protection on a checking account to cover the mortgage payment. And depending on the bank documents this all may be done without notification. Huh, not the kind of situation I want my money in.

Pitfall 2 – Don’t forget about the cash contribution

This little pitfall can come in several places and cost you any further referrals from your client. If you don’t pay attention cash contributions could bite you and your client hard when it comes time for settlement.

Pitfall 2a – Second mortgage holders are tending to want to be paid something now when there is a short sale involved. Your home seller’s goal when they sell their house should always be to have nothing to worry about after the short sale is final. For second mortgage holders – in many cases – they want to be paid some percentage of their balance say: 5-10% to have them satisfy their lien position. Make sure you prep your home seller for this increasing possibility.

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Utah Mortgage Loans – Knowing the mortgage rules takes the stress out of buying a home

May 18, 2010

New laws from regulators, disclosure requirements, new guidelines for appraisers, risk based pricing, credit score, secondary approval layering, property type, HOA and Condo insurance requirements, Title and property flipping rules are just a few of the daily changes that can quickly derail a borrower’s home loan financing.

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Credit and Divorce…

May 10, 2010

Going through a divorce often causes a person to take a good look around and “take inventory” of their life, but often forget the implications of the divorce and credit.
Many married couples or life partners apply for credit cards, auto loans, and mortgages jointly. One aspect of understanding how to build credit, means knowing how divorce can [...]

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Lending Strategy Lets You Get a Mortgage With bad credit

May 7, 2010

Buying a home with bad credit is more common than you might think.

EVEN if you filed Bankruptcy, or had a Foreclosure YESTERDAY.

This technique is decades old, but so few people know how to do it that even many Realtors don’t know how to make this happen.

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Real Property Attorneys in Utah

May 3, 2010

Transactions in real estate can be very complicated. When a buyer and seller sit down at the closing table, essentially all of the heavy lifting has already been done by the realtor, financing parties, and the real estate lawyers who prepared all the documents the buyer is about to sign. Before closing day, [...]

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How to get a good credit score

March 30, 2010

How to get a great credit score

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Minimum Credit Score for FHA likely to increase

March 30, 2010

Lenders and FHA are increasing minimum credit score requirements

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When Buying a New Car is NOT a Good Idea

February 24, 2010

When Buying a New Car is NOT a Good Idea
Whether you’ve received a raise or have saved enough money to actually make a large purchase – it’s likely that you’re going to be affected by something that most individuals are affected with in the same situation – the desire to spend it. You might [...]

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