Tag Archives: foreclosures

HomeReady, Buyers Not

HomeReady, Buyers Not

Was one more nail in the mortgage industry’s coffin hammered in on December 21, 2015?

We are not, and some could argue that we may never, be fully recovered from the huge mortgage fiasco of a few years ago. Although many people have different opinions on what caused the mortgage crisis, this former loan officer and current real estate agent attributes it to several reasons. The main issues I saw were: 1) Somewhere along the line, the government promoted the opinion that homeownership is a right as an occupant of the United States, rather than a privilege and conscious choice for a person who is financially ready for the investment and maintenance that owning a property entails. 2) The government went too far in its effort to “protect” the “underserved” groups of the population by actually monitoring and fining large and small banking institutions that simply didn’t have their prescribed mix of borrowers in their portfolios. As a result, loans that shouldn’t have been made to borrowers who weren’t financially ready were pushed through to make sure the quota was covered. The sad part is, while these rules seem to care for the economic underdog, they actually hurt the people they profess to help, because those people simply aren’t prepared for the $5,000 expense of replacing the AC unit, or the $10,000 roof repair. Also, just the mortgage payments themselves proved to be unaffordable for many. In spite of this disaster, the government is back at it!

A new Fannie Mae program called “HomeReady” took effect on 12/15/2015. It reduces the income requirements, down payment requirements, and mortgage insurance requirements below those of even a current day FHA loan. You remember the FHA loans, right? They took place of the previously labeled now taboo “subprime” loans. They have a lower credit score requirement, higher debts allowed, and looser credit report rules. They are also the loans that when their buyer loses the home it is taken over by HUD. Have you seen many HUD foreclosures? We all have. So, take those standards and dip them lower to get a larger group of unsuspecting, unprepared borrowers so we can make a bigger foreclosure market and a larger financial problem for the people that are already not making it by even today’s standards.

Here are the basics of the HomeReady loan:

- Minimum 3% down payment
- NONE of the down payment has to come from the actual borrower! They can use grant money, grants, gifts, and the never allowed before CASH ON HAND. The cash on hand is such a no-no in the industry that it has caused home purchases to be delayed and even get turned down because the borrower couldn’t document where the cash came from. The reason that it is an issue is claimed to be that they need to be sure that the funds aren’t from terrorist sources OR are not that of someone other than the borrower. Yet, here on the new loan, those issues don’t seem to be a concern.
- REDUCED Mortgage Insurance coverage for loans that have less than 10% down payment! This is where you want more insurance coverage, as these buyers have less to lose if the 3% isn’t even theirs!
- Homeowner Education Requirement: A mere 4-6 hours to learn everything you need to know to become a homeowner with an online test.

Click here to see a comparison chart showing how HomeReady stacks up to Conventional loans and the MyCommunityMortgage (which has quietly passed away).

Yes, it appears that it has a higher credit score requirement than you would expect, but there are efforts in motion to allow VantageScore to be used instead of the traditional FICO scores, which will allow rental payments and utilities as sources of credit history. This change some are saying would add 100 points to everyone’s score or create credit history where there was none before. It’s arguable whether or not these payment histories of non-traditional credit sources are indicative of a borrower’s ability to pay a large regular payment like a house note. When you don’t pay your cell or electricity, they turn off those services. When you don’t pay your house note, it can take months or years to lose it to foreclosure, so the penalty of not paying is even less of an immediate concern.

What’s even more interesting is that I am not hearing any chatter on the typical mortgage and housing channels on this supposedly sweeping edict of benevolence. There are a few small articles, but not nearly the amount of attention it should be getting. Lenders, please share what you know and let us know what you’ve heard!
Hopefully, individual lenders will not be eager to jump aboard the HomeReady bandwagon. However, if the government convinces them that they will (again) be bailed out when foreclosures happen, they may very well embrace this insanity. If this occurs, many knowledgeable people in the real estate and finance industries fear that another meltdown could occur that would be far worse than what we’ve already lived through.

One loan officer we’ve spoken with said that a lender in her portfolio with this program has added additional rules called “overlays” on top of the basic guidelines, but they don’t have all of the details yet on exactly how it will work.

We are excited to help people buy their homes, and do it all the time. Yet, we feel it is irresponsible of the government to seduce buyers into an attractive, but potentially damaging financial situation which they may not be capable of sustaining. Furthermore, with these “low cost” loans being offered, the future of our industry and economy continue to be jeopardized without disclosing the true price tag to the public and unsuspecting buyers.

Potential problems with foreclosures

Buying a Foreclosed House – Part 2

Foreclosed homes can be a great deal, but they do have a multitude of potential problems.

As we discussed last time, buying a foreclosed house can be a great opportunity, but there are also potential issues with foreclosures, so caution is necessary.

First of all, the condition of foreclosed homes can vary tremendously. We’ve seen foreclosures which were spotlessly clean and move-in ready, others which were in horribly poor condition, and everything in between.

It is very important to understand that even a missing light fixture or switch plate, or a leaking faucet, is enough to cause a house to fail appraisal for most loans! FHA, Rural Development (RD) and VA loans all require appraisers to evaluate the condition of a house and make sure it meets minimum standards. They consider even small items like these to violate those standards, making financing very difficult or even impossible. There are renovation loans available, but they are few and hard to get. Conventional loans are much more tolerant of property condition, but not everybody qualifies for a conventional loan.

One of the problems with foreclosures is that when they do need repair, most lenders will not make any, nor will they allow anyone else to do so! Every once in a great while a lender will agree to do some repairs in order to get the house sold, but this is very rare. The owners of some foreclosures, such as HUD, are absolutely inflexible about not allowing any repairs. They would rather sit on the house and drop the price by thousands of dollars until it sells for cash, rather than spend a couple of hundred for a simple repair. It makes no sense, but that’s how it works, and is why so many foreclosures take a long time to sell.

Besides repairs, there can be other problematic issues with foreclosures. When a house goes through foreclosure, previous liens are canceled, and go away, with one exception: An IRS tax lien. The law gives IRS the ability to take possession of a house up to 120 days AFTER it is sold at sheriff sale, regardless of who owns it! We have encountered this situation before, and cautioned our clients about the IRS lien. They wisely did not buy the house.

Also, it has been our experience that lenders don’t do thorough title work when taking ownership of a property after the sheriff sale. We have seen foreclosures where title problems came up, one of which was severe enough to put a stop to a sale!

These are just a couple of examples of the issues which foreclosures can bring with them. We have dealt with these and many others, and also have gone out of our way to learn about more complexities of buying foreclosed properties. In addition, Danielle’s many years as a loan officer give us a deep understanding of the lender side. All this together means we bring far more to your corner than any other agent.

People have come to us after wasting weeks with other agents looking at foreclosures which were NOT even eligible for the type of loan they had! Such ill-informed house searching not only wastes your valuable time, but can also cost you money. You could spend hundreds of dollars on inspections, appraisal, etc. only to learn too late that you cannot finance the home! We examine things in great detail and well in advance, to prevent these sorts of nasty and expensive surprises.

A foreclosed house can indeed be a great deal. However, it is important to have us looking out for you, so the many pitfalls of foreclosures can be avoided.

Foreclosed house with notices on windows

Buying a Foreclosed House – Part 1

Foreclosed houses are those on which the former owner defaulted on their loan, and now belong to the lender which held the mortgage. To take ownership, a lender has to go through a long formal process known as foreclosure.

You may have noticed houses sitting vacant, with paper notices on their front doors or windows, such as the house pictured here. These are usually homes which are on their way toward foreclosure, though they are not available for sale yet. People use the term “foreclosure” often to mean such houses. However, prior to completing the foreclosure process, these are almost always tied up in a huge mess of legal and financial problems. A house in pre-foreclosure would have to be sold as a “short sale”, which is something completely different, and a nightmare we cover in another discussion.

To acquire title to a house whose owner has fallen behind on their payments, the lender must go through the foreclosure process. The sheriff serves a notice of seizure, which is when the paper notices are affixed to the house. An appraisal may be done by the lender. After a length of time which can vary widely, the property is scheduled for auction at sheriff sale. Prior to the sheriff sale, the sheriff must publicly advertise the property a prescribed number of times. If the owner does not come forth and pay off everything they owe, the property is then sold at the sheriff sale on the scheduled date.

While anyone can bid at a sheriff sale, the terms typically require at least a 10% payment on the spot with the balance due in 30 days. Also, no inspections other than maybe an exterior viewing are allowed prior to the sale. In addition, contrary to popular belief, homes are not simply sold there for pennies on the dollar. Keep in mind that the lender wants their money back! Lenders send a representative to each sheriff sale, with instructions to bid up to a certain amount, roughly the amount they are owed. If someone outbids them, then that person buys the house, and the lender gets paid; otherwise the lender is the high bidder and gets the house. Only then does it belong to them, and they put it up for sale as a foreclosure, usually listing it with a real estate firm.

If a lender was not owed very much on a house, then it could indeed be quite a bargain when it finally lists as a foreclosure. Maybe the former owner only financed a small amount, or paid the mortgage for many years, leaving a small balance. However, this is often not the case, so the pricing of foreclosures can differ greatly.

Always remember that there is no “magic” or “secret” way to find out about foreclosures. We see websites and other advertisements claiming that you can buy foreclosures for ridiculously low amounts. These are scams, and usually consist of stuff like: “Buy our investor kit for only $69.95 and you too can learn how to find foreclosures for dirt cheap!” This is utter nonsense.

Until a house has been completely through the foreclosure process, it is not for sale. Once foreclosed, it will show up on the market just like any other house. We keep a close watch for these, but more importantly, also have a deep understanding of the potential problems which can arise with foreclosed homes. Our knowledge, experience, and attention to detail helps our clients avoid such issues.

In part 2, we’ll look at some of those potential problems.