We’re halfway through 2018 and by now, what some would describe as the “peak” of the real estate recession is almost a decade in the rear-view mirror. Still, statistics show that short sales continued to increase in number until about 2012. Those transactions now have nearly six years of “seasoning,” or time that has elapsed since the short sale was final. Fortunately, and in many cases, this interim has allowed potential home buyers enough time to restore their creditworthiness and to reconsider entering the housing market. Can they do it? What about if they require a jumbo mortgage?
What is a Short Sale?
A short sale is a loss mitigation tactic on the part of a mortgage servicer to allow the home to be sold for less than the balance of the loan itself. Simply, let’s say the owner has a mortgage for $500K but in a time of distress, the home can be sold for a price of only $400K. For this homeowner to sell the home, he/she needs permission from the lienholder(s), in our example the mortgage lender, to complete the sale. Because the bank must accept less than is owed to them, they will report that the debt was settled for less than agreed and this will create a derogatory credit event for the seller, negatively impacting the borrower’s FICO score. However, the intent of the short sale is to allow both parties to move on and do so under the philosophy that it’s best to not let the perfect be the enemy of the good. It was generally agreed during the worst parts of the housing crisis that short sales were a far better solution than foreclosures, bankruptcies or simply walking away.
What Happens After a Short Sale?
With a short sale history, conforming loan guidelines state that a buyer re-entering the market must wait four years before obtaining a new mortgage. If using an FHA loan program, that waiting period is cut in half. In the case of jumbo mortgages, however, the waiting period will be established by the actual investor — the entity that provides the loan. Because of this, the institution/investor can set its own rules about the seasoning required. They can also set rules about how a short sale is qualified. Was it due to financial mismanagement? Strategically done to avoid consequences of the market falling further? Or, was it done due to a legitimate hardship on the part of the borrower? Each of these might be viewed differently by any investor and the waiting period might change commensurately.
Sorting Out Second Chances
At Guaranteed Rate, one of our strongest suits is that we have multiple jumbo investors available for most scenarios. We will see our strongest-priced jumbo investors re-enter the market for the buyer with a short sale at the 4-year mark — identical to conforming. But below you’ll find some of the other tiers of available as the loan-to-value (LTV) increases or decreases, the loan amount goes up in size, and the FICO score factors into the picture:
5% Down Payment
We require a two-year seasoning period and will go to a loan amount of $1.5MM (purchase price of $1.58MM). For this program, we’ll need a 720 FICO and 9 months of reserves.
10% Down Payment
We require a four-year seasoning period and will go to a loan amount of $3MM (purchase price of $3.34MM). We’ll need a 740 FICO and 24 months of reserves. If the buyer has not owned any other property in the last three years, we consider this borrower a “first-time homebuyer” (FTHB) and the loan amount is reduced to $1.5MM (purchase price of $1.67MM). We also have a program that will permit a $1MM max loan amount ($1.12MM purchase price) with 12 months of reserves and a 760 FICO score.
15% Down Payment
We require a four-year seasoning period and will go to a loan amount of $3MM (purchase price of $3.34MM). We’ll need a 700 FICO and 18 months of reserves. If the buyer can document that the short sale was due to extenuating circumstances (death of a borrower, loss of job due to layoff, etc.) then it is possible to reduce the waiting period to 24 months.
20% Down Payment
All of the investors above are in, plus several others with varying FICO and reserve requirements, even down to a 661 credit score with a maximum loan amount of $1.5MM (purchase price of $1.875MM).
The jumbo mortgage market is inherently more complex than conforming or FHA and because of this, your jumbo lender needs to have the options and expertise that will accommodate the demands of getting a new home loan post-short sale. Successfully purchasing a home with a history of a short sale is indeed possible. We understand the requirements, restrictions and tips of the trade that facilitate many of the best second chance options in existence. Maybe more importantly, my experience as a loan advisor covers a time period before, during and after the real estate recession. I reserve no judgment for what happened in that very different market. Instead of looking back and telling buyers what they can’t do, I see it as my responsibility to look forward and help them do what they can to realize the benefits of ownership again.
In da club,
Vice President of Mortgage Lending
Cell/Text: 415-367-5959 Fax: 415-366-1590
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.
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