Disposition of Previous Mortgage – Don’t Let This Blow Your Transaction
This is excellent information for consumers and professionals. Over the next few years we are going to see the fallout of all these short sales and foreclosures. It may take time for a borrower to recover their buying power but that doesn't change the actions that may distressed homeowners must take today. This information is more fuel to the need to take action today if a homeowner is in distress, putting it off will also put off recovery.
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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