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Disposition of Previous Mortgage – Don’t Let This Blow Your Transaction

Via David Krushinsky (Mortgage Professional - Phoenix, AZ - NMLS 202115):

Anyone that has successfully closed a short sale in the last few years can benefit from knowing what to expect when purchasing a home in the future.  It's very likely the borrower had to make late payments during their negotiations with the bank before their short sale closed.  These late payments may no longer be affecting their current credit score; however, the underwriter will review their entire credit history when determining their ability to repay a mortgage loan.  If late payments are reflected within their mortgage history, the underwriter will want a letter of explanation. 

I've personally seen a borrower's credit report reflect a 700+ credit rating after having a foreclosure less than 6 months prior.  Unfortunately, this person was told by a mortgage lender that they would qualify for a home loan.  Once the file was sent to an underwriter, their loan application was denied.  Even though this borrower had a great credit score, they were unable to obtain a mortgage loan because of their previous mortgage disposition or disposition of property.  The guidelines for a FHA loan require a 3 year seasoning period after a foreclosure before utilizing FHA financing to purchase a new home. 

So what is disposition of the mortgage?  Per the IRS, the disposition of a property or mortgage includes the following transactions:

• You sell property for cash or other property.
• You exchange property for other property.
• You receive money as a tenant for the cancellation of a lease.
• You receive money for granting the exclusive use of a copyright throughout its life in a particular medium.
• You transfer property to satisfy a debt.
• You abandon property.
• Your bank or other financial institution forecloses on your mortgage or repossesses your property.
• Your property is damaged, destroyed, or stolen, and you receive property or money in payment.
• Your property is condemned, or disposed of under the threat of condemnation, and you receive property or money in payment.

While underwriting a file, an underwriter looks for reasons the loan may be ineligible to finance.  If there are multiple late payments on a mortgage loan, the underwriter will probably request a letter of explanation as to why there were late payments.  A short sale transaction isn't always reported with full disclosure on the credit report.  A veteran Mortgage Loan Officer will probably notice the lates and request a reasonable explanation.  However, if you're working with someone who lacks experience that merely runs the file through Automated Underwriting and assumes the borrower qualifies - your transaction will fall apart.  The reason being once the underwriter asks about the disposition of the property and finds out it was sold for less than owed, the borrower will have to wait the required time period to purchase. 

Be careful, as this will be more common in the next few years.  Working with trusted professionals benefits everyone involved.

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Loan Mods and the Future of Education in This Country

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Lease Options: A Viable Investment Strategy in Today's Market

Via Rich Schiffer, REALTOR, e-PRO:

By Rich Schiffer, REALTOR, e-PRO

A couple of years ago, a client who was going through a divorce asked me to look for properties she could "rent to own." 

At that time, the market was just beginning to shift in our area.  Sellers were selling, and Landlords were Landlording.  Very rarely did the two types overlap.  Some agents would even categorize "rent to own" transactions in the same category as Santa Claus - something some people think exists, but is really just imaginary.

In that market, rent-to-own might have well been imaginary.  I could not find the right situation for her, and she ended up moving in with her mother.

Now, nearly 2 years later, the market has shifted.  Many properties are staying on the market much longer than in the past, and many people that would have been buyers back then, are finding themselves forced to rent for a while longer, till their credit scores meet today's tougher standards.

This is exactly the market conditions where a Lease Option makes sense - for both the tenant/buyer and the landlord/seller, creating a potential for a real WIN-WIN situation.

Here's the scenario:

• Agent is working with Client A that has insufficient credit to qualify for a mortgage, but has decent income and moderate savings.
• Client A applies to rent a property, but is denied by landlord because their low credit score represents an uncomfortable risk level.
• Agent is also working with Client B who wants to invest in real estate.
• Agent creates a win-win situation, by finding a property that the investor could purchase and rent to Client A
• Agent looks for properties that listed for sale which meet Client A's needs.  Client B might even attend the showing, also.
• Client A agrees to rent the property from Client B, contingent on Client B purchasing the property.
• Client B agrees to sell the property to Client A, contingent on Client A purchasing an "Option" and agreeing to a monthly option fees, in addition to the monthly rents.
• Client A and Client B negotiate terms - of the lease, and the potential re-sale down the road.
• Client B negotiates sale terms with the Seller.  If no agreement is reached, the Option money from Client A is returned.
• Client B settles on the property.  Client A settles in the property.
• After the agreed lease term, Client A has the option to purchase the property from Client B, at the pre-negotiated Price.

Here's how the numbers might work:

Purchase Price of Home:	$160,000.00
Advance Option fee from Client A:	$3,200.00	(2% of purchase price for example)
Cash From Seller	$16,000.00	(10% down-payment)
Mortgage Amount	$144,000.00	(90% LTV in this example)
Interest Rate	7.50%
Monthly Principal & Interest Payment	$1,000.00	(estimated)
Monthly Expenses	$300.00	(Taxes, Insurance)
Monthly Rent	$1400.00
Monthly Option Fee	$100.00
Pre-negotiated Resale Price	$166,400.00	(4% appreciation, in this example)

If Tenant exercises the Option, and purchases at the end of the year: 

Purchase Price of Home:	$166,400.00
Total Option fees applied:	$4,400.00
Additional Cash from Tenant/Buyer	$11,800.00	(Option + Cash = 10% down)
Mortgage Amount	$ 149,760.00	(90% LTV in this example)
Interest Rate	6.50%	(estimated, of course)
Monthly Principal & Interest Payment	$950.00	(estimated)
Monthly Expenses	$300.00	(Taxes, Insurance)
Buyers new Monthly Payment	$1250.00

The Landlord's Cash on Cash Profit:

Cash out at purchase	$16,000.00
Annualized Cashflow	$1,200.00
Equity at Resale:	$22,400.00
Gross Profit	$7,600.00
Marketing Fee paid to Agent's Broker	$1,400.00	(one month rent)
Transaction Fee Paid to Agent's Broker	$2,000.00	(broker fee, pre-negotiated)
Net Profit	$4,200.00
Return on Investment	26.25%

If the tenant does not exercise the purchase option, the Landlord pockets the $4,400 in option fees collected, making his Gross profit $5,600, with no Transaction Fee to the Broker, keeping his ROI the same.  In this case, I intentionally set it up that way, to reduce the landlord's temptation to attempt to influence the tenant's choice whether to excersize their purchase option.

So, in this situation,

• Client B stands to make over 25% on his investment.
• Client A gets a place live when other landlords turned them away, and potentially a home of their own. 
• The original seller got what they wanted (their house sold),
• The Agent's Brokerage gets paid for 2 or three transactions.
  • Initial Sale ($4,800 co-op fee, for example)
  • Rental placement ($1,400)
  • Potential Resale transaction ($2,000)

In effect, this goes beyond a WIN-WIN situation.  All four parties involved benefitted from this type of transaction, making this a WIN-WIN-WIN-WIN situation.

So...Yes, there is a Santa Claus.

There is also a Risk Clause:

Every situation will be different, and each potential property being considered for a transaction like this must be evaluated in the light of local conditions, market rents, and projected appreciation.  Not every transaction will go as projected, and investors need to know that as with any investment, there is a chance that you could lose money on a deal like this if market conditions change for the worse.  The advantage to the Lease-Option is that the added payments from the Tenant/Buyer serve as a hedge against some of that risk.

Before jumping headlong into this type of transaction, agents should be warned:  The required language of the contracts used to set up the Lease Option will vary from state to state.  You should of course consult an attorney to ensure that the specific contracts you use meet your state's requirements.

 

Rich Schiffer is a Realtor serving Investors, Tenants, and Homebuyers in Delaware County, PA.

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HOAs-Are They For You?

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My First Post to AR-Hello Everybody!