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

By
Mortgage and Lending with Dk Home Loans, LLC NMLS 1779290

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. 

Arizona Mortgage Lender DenialI'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.

Posted by

About the Author

My name is David Krushinsky and I am a Phoenix mortgage specialist that is truly passionate about my profession and the result is that nearly 100% of my business is by referral from satisfied clients, trusted financial advisors and the most experienced REALTOR®'s in the Phoenix area.
Questions? Call 480.339.1576 or Visit My Website

Comments (35)

Fred Griffin Florida Real Estate
Fred Griffin Real Estate - Tallahassee, FL
Licensed Florida Real Estate Broker

Hey David, you wrote such a great Blog; thanks for clarifying.

Slightly off topic, May I ask, do you have a Blog, or a Link that will explain what a Realtor can or cannot do when the final rule of the SAFE Act takes effect October 1? 

I hear and read conflicting info - it would be great to get a clear answer from a Pro.   Thanks!

Sep 18, 2010 04:10 AM
David Krushinsky
Dk Home Loans, LLC - Peoria, AZ
AZ MB-0949619 MLO NMLS #202115

Sorry for the delay in responding to the comments.  I was at happy hour last night (actually having drinks with my underwriter and other colleagues). :)

Rodney - You're right!  It's not like the old days when you could talk on the phone with a potential client for 20 minutes, send out a loan approval letter, and guarantee the agent the loan will close.  So many pitfalls these days to look out for.  We make mistakes, but we also learn from those mistakes.   

Lenn - Most of the underwriters I know personally are great people.  They get a bad rep for things that are not their fault or guidelines they did not create.  I'm glad you had the chance to sit down and talk with one recently.  Your knowledge is invaluable and people really respect what you say. 

Kieran - You've already got a good start, by reading and learning here on Active Rain.  If you spend 30 minutes a day for the next 6-12 months reading the information on Active Rain, you will be more knowledgeable than most LO's in the industry.

Jay - I only used the IRS definition as I felt it was all encompassing of practically any situation.  You're a knowledgable professional and I enjoy your information too. 

Sep 18, 2010 04:19 AM
David Krushinsky
Dk Home Loans, LLC - Peoria, AZ
AZ MB-0949619 MLO NMLS #202115

Hi Sheila!  I could write an entire blog post with your questions.  Actually, I think I will for you.  You should subscribe to my blog. ;)

Thank you Bill!  You have a great weekend as well.

Fred - Honestly, I'm not sure about the SAFE act and how it affects real estate professionals after Oct 1st.  I would be a bad source of information, but I'll ask some of the other reliable sources I know that may have some good information and pass it on to you. 

Sep 18, 2010 04:26 AM
Kenny Salame
All Western Mortgage Broker # 14210 - Las Vegas, NV
NMLS ID 313873

David, a great post that I liked so much that I have re-posted it. I follow your blog and believe that the consumer needs to get as much accurate information as possible. Keep up the good work.

Sep 18, 2010 05:15 AM
Gabrielle Nemes
RE/MAX Realty South - Tumwater, WA
206.300.8421, S King & Pierce County RE Advocate

It's really unfortunate that some people who were caught in a tough situation not of their own doing (such as job loss,  medical illness, job transfer, etc.) and were forced to sell short because of the current housing price decline will be penalized from purchasing again for a while. Three years is a long time to wait while interest rates go up and the housing market recovers. Were they able to buy again into something they could afford it would relieve some of the lower-end houses that are sitting on the market.

Sep 18, 2010 05:37 AM
Larry Story ALC
Total Care Realty - Greensboro, NC
Beneath it all is the Land, Covering all of NC
David, Great post very informative. It is a very good idea that The buyers understand how the underwriters work.
Sep 18, 2010 05:47 AM
John Bacon
Keller Williams Realty Portland Premiere - Portland, OR

Do you know how a short sale, where the seller signs a promissory note for the difference would be affected on applying for a new loan?  I'm just curious if that would have an impact on the 3 year rule.

Thanks..

Sep 18, 2010 06:26 AM
Barbara Le Pine
ADVANTAGE REAL ESTATE, serving Lincoln County - Newport, OR
Your agent for the Central Oregon Coast!

David, I will be discussing topic this with my associates in lending, and in real estate.

 Thanks for an informative blog!

Sep 18, 2010 07:15 AM
David Krushinsky
Dk Home Loans, LLC - Peoria, AZ
AZ MB-0949619 MLO NMLS #202115

Thanks John Le Francois!  You're also a wealth of knowledge when it comes to mortgage advice. 

Gabrielle - It's very unfortunate that home prices have declined so much and our economy is in such disarray.  I'm hopeful that we will soon recover and be better for it.  Thank you for subscribing to my blog. :)

John Bacon - Unfortunately, the promissory note has no effect on the buyers ability to qualify for a new loan, unless negotiated specifically with the lender (short sale lender) in the way they report to the credit bureaus.  Like Bill mentioned above, there are several experienced agents here on Active Rain that have published great information on short sale negotiation.  Katerina & Nestor Gasset, Bryant Tutas and many others are very skilled and have significant experience.

I'll also explain, in another blog, the impacts of a short sale and how long before you can qualify to purchase a new home.  Great question.   

Sep 18, 2010 07:50 AM
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

Hi David -- Your last statement sums up your position nicely.  There is no substitute for a high-level of competency and experience.

Sep 18, 2010 08:04 AM
Fernando Herboso - Associate Broker MD, & VA
Maxus Realty Group of Samson Properties - Clarksburg, MD
301-246-0001 Serving Maryland, DC and Northern VA

Excellent post, I can understand the value of a knowledgeable lender for our clients. .

Sep 18, 2010 08:04 AM
Ryan Case
Pacific Servicing - Temecula, CA

I cant stand when my agent shows me an offer with a DU approval! I want a full credit approval, not a DU approval!

Sep 18, 2010 08:26 AM
Elliott S. Topkins
Topkins & Bevans-etopkins@topbev.com - Boston, MA
Massachusetts Real Estate and Title Atty

I value the wisdom of a seasoned mortgage originator when dealing withthese issues. I try very hard to explain to clients the effects of a foreclsoure on their ability to purchase another home. Sometimes, they even listen

Sep 18, 2010 09:04 AM
Ellie Drury
Home Run Real Estate - West Palm Beach, FL
ABR,CRS,CDPE,ePRO

I had personal experience having had a short sale of an investment property. A year later my credit score was already back over 700. I mistakenly thought everything was 'good as new' until I decided I wanted to get a loan for an RV purchase thinking that the IRS considers it a 2nd home and I could write-off the interest, right?. Over and over I was denied with the reason being that 'I had a foreclosure on my record'. I kept telling them, 'no, it was a short sale.' The answer was always the same, that the bank looked at it the same way as a foreclosure. I had a promissory note as well.

Your blog is always so informative with new information and also information about which I need to be reminded. I am subscribing right now and also reblogging.

Thanks!

Sep 18, 2010 09:19 AM
Peggy Noel
RE/MAX Commonwealth - Chesterfield, VA
Bouchard, ABR, CDPE, SFR

David - thanks for a good post and some sge advice.

Sep 18, 2010 09:34 AM
Jack Mossman - The Nines Team at Keller Williams in Lodi
The Nines Team at Keller Williams in Lodi - Lodi, CA
The Nines Team in Lodi

David - In my opinion - here's the nugget of the post:

While underwriting a file, an underwriter looks for reasons the loan may be ineligible to finance.

Way too many of us still think that the underwriter is supposed to be finding a way to fund the deal - not let it get sidetracked.  Not their job .... that may have been more true several years ago ...  Today, more emphasis on risk assessment.  Thanks for a brilliant post ...

Sep 18, 2010 09:43 AM
Carol Pease
JP & Associates Realtors - Bastrop, TX
CRS, Broker-Associate 512-721-6320

David!

Great information.  Thank you so much for making it all crystal clear. 

Sep 18, 2010 02:20 PM
Kate Bourland
Marketing with Kate - Redding, CA
Onlilne Marketing Mobile Marketing

This is excellent information.  That said, our entire financial system needs to be revamped.  It's interesting reading the comments.  In order for Real Estate to turn around the "underwriters" have to get their heads out of that dark place.  Risk assessment is one thing but common sense has to play a role.  While banks are taking taxpayer money to cover losses on foreclosures, millions of Americans will never recover.  It saddens me that we just blindly say ok, that's how the system works.

In three years time interest rates will likely be through the roof.  If someone is through the hardship that caused the short sale and enjoys a 700 or better credit score, it's common sense that approving a loan becomes a win/win.

Sep 18, 2010 05:36 PM
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

You mention that after foreclosure, a borrower must wait for 3 years under FHA guidelines.  Do they classify a short sale as a foreclosure?  I didn't think they did.

Sep 18, 2010 06:08 PM
Renée Donohue~Home Photography
Savvy Home Pix - Allegan, MI
Western Michigan Real Estate Photographer

Great reason why everything automated STILL needs a pair of human eyeballs!

Sep 22, 2010 03:55 AM