Purchasing Foreclosed Properties Can Be Very Frustrating!!!

By
Mortgage and Lending with George Souto NMLS #65149 FHA, CHFA, VA Mortgages NMLS #65149

Earlier today I read a blog by Bill Gassett titled Buying a Bank Owned Home that focused on the process of purchasing a foreclosed property.  In his blog he made a statement that I thought would go very well with this blog which I had planned on writing earlier.

In his blog he stated "Buying a foreclosed home however, is not for the timid at heart and there are many things that buyers need to be aware of going into a REO transaction." That statement is very true, and anyone who plans on purchasing a foreclosed property would do well to take it seriously.

I am in the process of doing a Connecticut Housing Finance Authority (CHFA) VA Loan for a young man that is purchasing a Bank Foreclosure.  When I was Pre-Approving him for a loan on this property, I tried to prepare him for the frustrations that he would most likely encounter along the way, and his Realtor did the same.  Neither one of us did it in a way to try to discourage him from purchasing the house, but wanted him to fully understand some of the things that tend to happen with these transaction.  Well what has been happening to-date has even surprised and frustrated us.  This transaction is proceeding more like a Short Sale than a Bank Foreclosure.

It all started before the bank even agreed to accept his offer.  The Realtor representing the bank contacted my Borrowers Realtor and proceeded to inform her that the bank would not accept his offer because it was a VA backed loan and that VA would not allow for the transfer of title within six months of the bank foreclosing on the property (flip rules).  This Realtor when on to tell her that he had to go FHA or Conventional in order for them to accept the offer.  My Borrowers Realtor contacted me right away to inform me of this, and to ask me to Pre-Qualify him for a FHA or Conventional Loan. I told her that I would be happy to do that, but that this bank and Realtor were wrong about that being a VA condition.  I also told her that even though the Borrower would qualify for a FHA or Conventional Loan, that his monthly payment would be substantially higher, because now he was going to have PMI included in the payment.

She asked me to contact the other Realtor and I did. He wanted me to give him something in writing showing him the VA rule that said that transfer of the property could occur within the first six months after foreclosure.  I told him that it would be hard to do since no such rule existed, and that instead his bank needed to show me the rule that says that transfer can not occur.  He knew that he could not produce that, so he agreed to accept a letter from me on my company letter head stating that VA did not have such a rule and that the property could be transferred.  I typed up a letter stating that, but I went one step further. I had my Underwriter e-mail one of the VA Underwriters asking the same question, and I provided him with a copy of the response stating the same thing that I was also in my letter.

OK we waisted about three days with that, but everything seemed to be back on track.  We were told that we would know if the bank would accept the offer withing two days.  Well a week later we still had not heard anything, but finally the Borrowers Realtor got a phone call saying that the bank had signed the contract, and that we would have it the next day.  The next day turned into two weeks, with several phone calls asking where it was.

We now had the contract and we should be all set, no you guessed it, we were not.  We were just coming to the end of winter and the house had been winterized.  The bank needed to de-winterize it in order for the Borrower to be able to do a Home Inspection and for us to an appraisal.  Again we were told that this would be taken care of right away, but right away seems to mean three week, because the bank just de-winterized the house yesterday.

Now anyone that is familiar with VA Loans knows that the Lender does not assign the Appraiser, the VA does, which means that the Appraiser does not respond with the same sense of urgency as the Appraisers on our list.  So this means that we will now most likely have to wait another two weeks to get the appraisal in, since VA gives their Appraisers up to ten business days to complete the appraisal.

It is a good thing that this is a CHFA/VA Loan, because the rate lock on it is good for 120 days, or we would be at risk of the rate lock expiring just as the appraisal is coming in.  We are about six weeks into this and who knows what else this bank is going to drag its feet on.

I have to give this young Borrower a lot of credit because he has been handling all this remarkably well.  Either he has unusual patience, or the Realtor and I did a better job than we though, preparing him for all of this.  It is crucial that we take the time to educate Borrowers/Buyers about what can happen when dealing with foreclosures and short sales.  If we don't then we are going to find ourselves putting in a lot of time on a deal that will end up blowing up in the middle of a transaction.

Borrowers/Buyers need to know that things like this can happen, and would be well advised to read blogs like this one and Bill's to help them understand what awaits them.  The resources for this type of information is at our finger tips here on ActiveRain.  Use these resources, they are free, and save yourself a lot of headaches by doing so.

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  1. Sheri Moritz 04/22/2009 10:35 PM
Topic:
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Rainer
39,171
David Daniels
Owner of FlyersToYou, Inc. and former Top Realtor - Hemet, CA

George,

Admittedly, it's been a long while since I was in the mortgage business...but I'm curious as to why your borrower is going with a CHFA-Military program vs. just a standard VA loan?? Is the interest rate that much better??? Seems to me the CHFA option carries the risk of the Federal Recapture Tax if the property is sold within 9 years (which wouldn't be applicable on a VA loan)??

Also, is the VA Funding Fee waived when using the CHFA program (I don't think it is)??

Lastly, is the sales price on this bank-owned home in the $250,000-$400,000 range??? Yikes...that would be high even for us out here in California!! LOL!! You had mentioned that your borrower's payment would go up "substantially"...but on a $100,000 home (as an example), this would be the scenario:

$100,000 Sales Price

VA Loan
-0- downpayment
Base Loan: $100,000
VA Funding Fee: 2.15% (added to loan)
New Loan Amount: $102,150
Interest Rate: 5.5%
P&I: 580.00 per mo.

FHA Loan
3% Downpayment (approx.)= $3,000
Base Loan: $97,000
FHA UFMIP @1.75%: $1,698
New Loan Amount: $98,698
Interest Rate: 5.5%
P&I: $560+ MI: $45.24 = $605.24

That's only a $25.00 difference. On a $200,000 home, the increase would be $50.00, etc., etc.

Heck, even if your borrowers only earn $2,500/mo., the qualifying ratios would be impacted by a mere .01%!

I hope you don't mind me bringing this up. I'm really glad you got your situation worked out...but I don't want other readers here to think the sky would have fallen if things had gone the other way.

NOTE: I realize the FHA loan carries a min. downpayment requirement which the CHFA-VA loan doesn't have, but the CHFA programs usually offer downpayment assistance programs too. Plus, your borrower is probably qualifying for the new Federal tax credit of $8,000, etc., so it would still be an all-around great deal even if they had to come up with a minimal downpayment. 

I'm actually a little surprised that the lender accepted the VA deal...because there are closing costs on that loan which MUST be paid by the seller...and many banks simply won't agree to pay them. When I sold real estate, I always advised my VA buyers that sellers had to make more concessions on a VA loan than any other type of financing...and that not all sellers are willing to do so. It helped prepare the buyer for whatever course of action we had to take in order to either re-negotiate toward a successful transaction....or move on to a different property.

In any case, congratulations on getting the deal done!! Great job!

Dave 


Apr 22, 2009 04:55 AM #43
Rainmaker
42,689
Michael Barrow
Keller Williams Realty - San Diego Metro - San Diego, CA
Realtor, San Diego CA Real Estate

Good blog Russ.  Sorry you had a tough time with this one! 

I represent a lot of buyers (everything from first-time to investors) with REO properties here in San Diego, so I've dealt with most of the banks and listing agents.  For the most part they are pretty good and the process runs smoothly, but sometimes you get stuck with a dudd and it can be frustrating.  You have to know the process as a buyers agent and anticipate what's coming along to move the transaction along to closing.  The first few transactions are definitely a learning experience!

Apr 22, 2009 06:09 AM #44
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Renee most of the Realtors around here like dealing with Loan Officers that they are familiar with as well, and get nervous when it is someone they do not recognize.

Chris, it can be frustrating all the way around, and Realtors with that attitude make the situation even more difficult.

Gene for some reason the banks are not in love with VA Loans and come up with bogus reasons to not accept those offers.

Michael you definitely see the difference in how an experienced Realtor goes about these form one that is doing one for the first time.

Apr 22, 2009 07:16 AM #45
Rainmaker
178,627
DeAndrea "Dee Dee" Jones
Home Buyers Marketing II, Inc. - Manassas Park, VA
The NorthernVARealEstateLady & DMVRealEstateChick

What is even more frustrating is working with investors.  I only work with investors who agree to relist the properties with me when they are ready to sell.

Apr 22, 2009 07:22 AM #46
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
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Dave, let me try to answer your question:

1. CHFA/VA Yes the rate was much better than the VA rate the day he locked.

2. Three things have to happen in order for there to be a Recapture Tax.  He has to sell within the first 9 years, he has to make a capital gain on the sale, and his income has to be over the Recapture Tax for that year.  I have never seen anyone meet all three of those things, and have never had a CHFA borrower have to pay the Recapture Tax.

3. The same rules for the Upfront Fee apply to both CHFA/VA and VA.

4. This was $194,000 loan P&I $1048

5. I will let the readers decide for themselves if the sky would be falling if we had to be talking about a rate lock extension at this point since the VA rate lock would have only been for 60 days, CHFA as I mentioned is 120 days.

6. His monthly payment would have been $120 more per month on the FHA Loan vs. the VA Loan.

7. I am not aware of additional closing costs to the Seller on VA Loans today.

Apr 22, 2009 07:48 AM #47
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DeAndrea, I deal with very few investors, but those that I have dealt with tend to be difficult to deal with.

Apr 22, 2009 07:50 AM #48
Anonymous
Judy Factor

George:

I am representing a VA Buyer in a very tough market here in Southern California. With a few exceptions, we currently have a choice of short-sales or foreclosures.

My Buyer doesn't have the ability to go with an FHA or conventional loan.  We have been trying to find homes which are not short-sales, but have very little choice.  I hope that we do not encounter the problems which you discussed in your blog. Hopefully, you and your Buyer will close your transaction soon.

Apr 22, 2009 09:20 AM #49
Rainmaker
1,221,147
Lyn Sims
RE/MAX Suburban - Schaumburg, IL
Schaumburg IL Area Real Estate

George, very well done and points out the 'grenades' one must move around to get the job done!  Bill's post was great in that it explained the Realtors perspective and your post the Mortgage perspective.  Once you get over the first hill, here comes the other.  Buyers just don't realize that REO'S are not for the faint of heart or people with no patience.  Be ready for plenty of stupidity and lack of knowledge all the way around!

Apr 22, 2009 10:27 AM #50
Rainer
39,171
David Daniels
Owner of FlyersToYou, Inc. and former Top Realtor - Hemet, CA

George,

1. The payment you quoted reflects an interest rate of around 5%, which is what a 30-year fixed VA loan is at now (CHFA's current rate is 4.875%). I wouldn't worry too much about the rate expiring...they seem pretty neck and neck.

2. On the Recapture Tax, I only mentioned the "risk" of potentially having to pay it. Out here in California, many borrowers DID meet all three requirements and wound up having to pay the Recapture Tax:

1. They DID sell the home within 9 years
2. They DID have a capital gain on the sale
3. They DID earn more money than the CHFA limits when they sold the home (especially upwardly mobile young buyers.)

It just may be an unnecessary risk if all other factors are virtually the same. CHFA describes the tax as follows:

The tax is limited to the lesser of one of the following:

  • 50% of the net gain on the sale of the property
  • 6.25% of the original mortgage loan amount, known as the Federally Subsidized Amount (FSA)

Typically, if you are subject to the Recapture Tax, only a percentage of the FSA is owed. For each year the home is owned, the corresponding percentage of the FSA changes. For example, if you sold your home in the third year, you could potentially owe tax on 60% of the FSA. Whether you owe a Recapture Tax or not, you must complete IRS form 8828 and file it with your federal tax return for the year the home is sold. This form instructs how to calculate the correct amount due, if any, to the IRS.


3. The VA Closing Costs to the seller compared to, let's say, a conventional loan (unless something has changed recently) are:

Escrow Fees
Lender's Junk Fees (Processing, Underwriting, Funding, etc.)
Notary Fees
Recording Fees
Etc.

$2,000 extra cost to the bank to sell to a VA buyer, $1,000 or so to sell to an FHA buyer, versus a buyer getting a conventional loan. That's why I was surprised the bank accepted the offer. I hope that doesn't somehow rear it's ugly head prior to closing. A lot of bank agents don't know what they're doing...and they'll put up a fuss at the end if it turns out their estimated net sheet to the seller was off substantially.

4. Lastly, are you sure the payment difference would be $120.00??? I only come up with fifty bucks.

$189,900 Sales Price

VA LOAN

Base Loan: $189,900
Funding Fee @ 2.15%: $4,083
Total New Loan: $193,982
P&I @ 5.00%= $1,041.34

FHA LOAN

Base Loan w/3% DP: $184,200
UFMIP @ 1.75%: $3,223.00
Total New Loan: $187,423
P&I @ 5.00%: $1,006.13
MIP @ .55%: $85.90
Total: $1,092.03

$50.00 difference (I think)

I may have done something wrong?

Anyway...thank you for posting this blog. It definitely helps other agents understand the roadblocks and/or pitfalls they can run into when preparing offers on bank-owned properties. I hope your appraisal comes out okay (if the bank doesn't agree to make any repairs, if any, can your borrower make them??) I can't remember.

I'll keep my fingers crossed that there aren't any. Here's to a smooth transaction all the way around!

Dave

Apr 22, 2009 12:07 PM #51
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
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Judy, VA is a great loan product, it is a shame that it is not used more often and that their are still many out there that try to discredit this loan product.

Lyn I have been through my share of short sales and foreclosures that is why I take the time to try to prepare the Borrower for what may await them.

Apr 22, 2009 01:25 PM #52
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
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Dave, the CHFA/VA rate has been the same for the last month 4.875, their is good for a week, and is subject to change every Thursday, but it has not changed in well over a month. As oppose to the FHA rate which can change daily. That week our FHA rate was running high at 5.625. So the $120 is correct, and he did not have to come up with a $6,790 downpayment (FHA is now 3.5% downpaymen).  By the way I said the loan size was $194,000, I meant to say the sales price was $194,000.

I can't speak for other lenders but when a rate lock expires with us, the new rate will be the worst case rate during the rate period, that is why it is so bad to have a rate expire, it does not go to what the rate is at that time, it is worst case.

Just like Real Estate is all about local markets, so are incomes.  This borrowers income would have to increase by 25% by the second year in order for him to be over the income limits in that year, and the income limit for the Recapture Tax increases every year .  I am not an account, but my account tells me that if the profit on a house is use to purchase another house there is no capital gains.  Again all three things have to happen for the Recapture Tax to apply.  We have been doing CHFA Loans since they came out in Connecticut, and we can't remember that last time that the Recapture Tax applied to one of our borrowers, and we would know that because we service all our CHFA Loans, we do not sell them off.

Thank you for the well wishes on the loan closing, and nothing else going wrong.

 

Apr 22, 2009 02:00 PM #53
Rainer
39,171
David Daniels
Owner of FlyersToYou, Inc. and former Top Realtor - Hemet, CA

George,

Ohhhhh...all of it makes sense to me now. The interest rate differential when locked in accounts for the payment difference. Also, I'd forgotten that FHA changed their downpayment requirements toward the end of last year to 3-1/2%. You're right, that does make a fairly sizable difference in downpayment.

I also think you're right as far as lock expirations. I don't think ANYONE allows it to go to market rate. Whatever your lock is...becomes the "floor" as far as your lowest rate possible....and it sounds like your borrower is lucky to have been locked in at 4.875%!!

The only thing I'd be concerned with is still that darn Recapture Tax. I went to IRS' site to try and gather more information, and came up with this (from their site):

Recapturing (Paying Back) a Federal Mortgage Subsidy

If you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. You recapture the benefit by increasing your federal income tax for the year of the sale. You may have to pay this recapture tax even if you can exclude your gain from income under the rules discussed earlier; that exclusion does not affect the recapture tax.

I guess this is when it would help to be an accountant, which I certainly am NOT! I did read, however, that CHFA's annual income adjustment runs 5% on average...so it seems possible that a borrower COULD indeed, run into the criteria for the Recapture Tax to kick in. Maybe that's what happened to the borrowers here in California??? They sold before nine years, DID turn a profit, and their incomes exceeded tha CHFA allowed income, even with the 5% annual adjustment.

Question (for my own purposes):

If the rates are down on a standard VA loan when you're ready to order docs, can you simply switch someone from a CHFA-Military Loan to a normal VA?? That may not be a bad idea if there's no penalty to do so?? That way, you'd completely eliminate the risk for any sort of recapture down the line?

Sorry...I'm just thinking out loud now. But it would be good to know perhaps.

Okay...well...I better get back to work. :)

Dave

Apr 22, 2009 05:08 PM #54
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
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Dave, that is OK I do some of my best thinking, thinking out loud.  Again I don't know if all Lenders do this, but with my company, I can't just take someone from one loan program to another unless WE were unable to approve the original loan.  So in my case I can't look at things just before a loan closes and switch them into another program just because I want to.

The explanation that has been given me for this is that when we lock in a rate, we hedge the money, and their is a cost to doing that.  We will eat that cost if we are not able to approve the loan, but they will not switch and eat the cost just because I want to do that just before closing.  What the cost is I don't know because I don't have anything to do with the Secondary Marketing Department, they set the rate each day, and I work off of those rates (I don't work off of a yield spread).

By the way this is a very unusual time right now for CHFA.  Right now their rate is close to our other fixed rate loans, but normally the difference between their rate and the others is anywhere between .5% and 1%.

Apr 23, 2009 12:51 AM #55
Rainmaker
325,572
Esko Kiuru
Bethesda, MD

George,

These foreclosure transactions can be a nightmare. Participants, from buyer to mortgage pro to real estate agent etc. do need a thick skin to survive.

Apr 23, 2009 06:02 AM #56
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Esko, you should know, you have a lot of these out there in Vegas.  Your skin must be like a rock by now my friend ....... LOL

Apr 23, 2009 06:54 AM #57
Rainmaker
246,206
Mott Kornicki
• Waterway Realty, Realtors® • Broker • South East Florida • - Miami Beach, FL
Waterway Realtors, Notary Public

George~

There are numerous REO's, Short-Sales and Foreclosures in our market- Miami, Florida. Some of these "asking" prices are creating an artificial "frenzy". Buyers are thinking that they could actually wind up owning a Million Dollar property for less than $300K. The facts are far different that what is portrayed. Around these parts; the bank owned real estate gets numerous offers the first day it hits the market!

Apr 23, 2009 09:29 AM #58
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
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Mott, the market for these properties seem to different in a lot of areas of the country, what does seem to remain fairly consistent is that they are becoming harder and harder transactions to close.

Apr 23, 2009 12:09 PM #59
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Karen Crowson
Coldwell Banker Residential Brokerage - Rancho Bernardo, CA
Your Agent for Change

Some of the buyers I meet have the notion that they can do better purchasing a short sale than a foreclosure.  If it's for an investor and they don't have an emotional attachment to the property, I suggest we look for those with the status of BOMK (an active listing, indicating back on market).  Usually, they have been in contract and the buyer has walked for a number of reasons.  But that means that the bank is much further down the path of approval.  I put an offer in on Friday for one of these and according to the listing agent will hear back within a few days. A short sale that is closer to that bank approval status may make good sense.  A

As far as REO's there does seem to be a gap in the buyer's mind about offer price vs. list price.  Some just don't seem to understand that after a number of BPO's, the banks know the market value and that low-ball offers are just a waste of time.  Along with comps, I provide a calculation showing list vs. sold price, also taking buyer credits into account.  When there is a variance of -5 to +3% with multiple offers, it's mystifying to me why there is a perception that 15-25% below asking will actually have any positive outcome.

George, I'll be watching your post.  I just met with a first time buyer this week who will be using a VA loan.  I think we'll have better luck with a seller occupied property, than one where the bank is involved.  A real seller is more likely to entertain an offer with a VA loan, if they are getting multiple offers on their property.  Would appreciate your thoughts.  Nice post!

Apr 27, 2009 09:09 AM #60
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
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Karen these days Banks or anyone else is being foolish if they do not accept VA or FHA Insured Loans they are much easier to get an approval on than Conventional Loans that the Buyer does not have 20% down.  MI Companies are being much stricter on ratios, and if the area is considered a declining market, they will need at least 10% down or they will not be able to get MI in most cases.

Apr 27, 2009 11:51 AM #61
Anonymous
Frustration

I am in the middle of an REO / lazy listing agent headache. I offered a CASH deal. The deal was approved and the REO Asset Manager signed the contact within a couple of days. They set a closing date of less than 3 weeks. They gave me 7 days to inspect the property. The listing agent refuses to communicate with my agent. When the listing agent "accidently" answered the phone, he said he can't get the OK to get the property de winterized. I am supposed to close in Mid July. I don't understand this. How can a bank OK a deal, we sign a contract, hand it to an REO Asset Manager who OK's it and sets a quick closing date, and then we hit a brick wall. BAM! Can't de winterize to get the inspection done. SOMEONE PLEASE TELL ME WHAT TO DO. WHO is responsible for this fiasco? Who is the idiot here? The listing agent? The Bank? The REO Asset Manager?

Jul 06, 2009 06:30 AM #62
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