California has taken a clever step towards opening doors for
homeownership. A primary intention of this bill no doubt was to flush the market of negative equity and aid struggling homeowners. It has an added benefit of streamlining continued homeownership for those who will do a short sale after January 1, 2011 by making a difficult FHA loan approval that much easier to get done.
Buying a home after a short sale has been possible through FHA for some time now. While many investors are willing to purchase and securitize these loans, few have been originated because there are two difficult hurdles in the origination cycle. The first has been proving that the payoff of the lender being sold short served as satisfaction in full. In most cases in CA, I’ve been able to do this for buyers who did a short sale paying off purchase money mortgages citing California Code of Civil Procedure 580b. Sometimes, astute short sale specialists (Realtors) would manage to get this type of document through the short sale negotiations and that has worked. In other cases, they were arduous processes of getting a letter from the previous lien holder stating that they wouldn’t pursue a deficiency judgment. This didn’t always work but some persistent buyers were able to get them with the help of a lawyer.
Thanks to the work of Senator Denise Moreno Ducheny, clearing this hurdle in CA should end up being a piece of cake. As a former legislative staffer, I can attest that even the most straight forward pieces of legislation can be very difficult to get through the legislative cycle. Her constituents should be proud.
The second hurdle in buying a home after a short sale is dealing with the FHA condition that stipulates that the buyer cannot, “take advantage of declining market conditions, and purchase, at a reduced price, a similar or superior property within a reasonable commuting distance.” This condition remains vague but penetrable. Getting past it takes considerable coordination between the Realtor and Mortgage Loan Officer. There isn’t a very graceful way of doing this other than having a well trained Mortgage Loan Officer pre-screen the list of properties that a buyer would like to have shown by their Realtor. This list must be scrubbed against this FHA guideline with the buyer’s original hardship (Letter of Explanation) in mind. If any of the properties even come close to resembling a similar or superior property within a reasonable commuting distance, an underwriter will kill the deal.
Call me naïve but I have come to believe the following:
- Very few people do short sales simply to take advantage of the market
- Most sellers in a short sale have very good personal narratives/reasons for having to do a short sale
- Most people doing a short sale greatly care about their credit and will go to great lengths to preserve it
- Most people doing a short sale want to be homeowners and not renters
- Realtors facilitating short sales will be one of the main reasons that our housing market recovers
- Getting people who have done short sales back into homeownership will be key to a healthy housing sector (whether they wait 3 years or don’t wait at all)
All of these conclusions, if subscribed to, point to an inevitable conclusion. The vast majority of persons doing a short sale are also buyers. In many cases (far more than assumed), this can be immediate. In other cases; on a 3 year track. Understanding of how the short sale process and evolving legislation interact with FHA’s requirements will be essential in this regard.
Charles Dailey - Branch Manager, Loan Officer, Certified Military Housing Specialist - iLoan - NMLS ID# 79048 - CA DOC, MN DOC & WI DFI - 612.234.7283
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