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Four Foreclosure Financing Myths

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The word is out: it’s harder to get a mortgage, maybe impossible. Lenders are clamping down, particularly on financing for foreclosure purchases. Just about everyone says so. Since this is a “fact” why bother to buy real estate when you can't get financing?
  
Well, maybe not a fact. Maybe tales of mortgage woes are exaggerated. Or, maybe they're not true at all. To illustrate, below are four commonly believed myths about financing (particularly foreclosures) that simply aren't true.

Myth #1: Most buyers use cash, not financing
The National Association of Realtors reports that existing home sales in July were running at an annualized rate of 4.7 million per year. About 29 percent were all-cash deals, meaning some 3.3 million properties will be financed this year. That's a lot of people who somehow are using the mortgage system.

Mortgage bankers are making loans — and big profits when they do. Profits per mortgage in the second quarter reached $575, up from $346 per loan in the first quarter, according to the Mortgage Bankers Association.

Of course, if mortgage bankers don't make loans they don't collect that $575 per successful borrower, reason enough to encourage all possible applications.

How to find foreclosures with favorable financing.
  
Myth # 2: Qualifying for a home loan is tougher than ever
There's no doubt that the mortgage application process has changed in the past year. Whether it's gotten “tougher” depends on the comparison being made.

If we compare today's underwriting standards with the joyous and carefree period from 2002 through 2006 then yes, you bet loan applications have gotten tougher. However, if we compare today's process with loan requirements in the 1990s; underwriting standards for Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA)  loans; or the loan requirements typically set out by community banks, credit unions or small S&Ls then no, lender demands have been fairly consistent.

So what's happened? Why has lending gone back to the good-old-days of fat loan files and lots of verifications?
Wall Street Reform has given lenders a choice: They can originate option ARMs and allow borrowers to apply for financing with a no-doc loan application — but only if they're willing to set aside 5 percent of the loan amount in a reserve and expose themselves to the possibility of borrower lawsuits. Or, they can make loans without the reserve requirements or liability if they simply originate mortgages within the safe harbor created by the new rules.

Loans within the safe harbor are called “QRMs” or qualified residential mortgages. QRMs include FHA, VA and conventional financing — in other words, sane and safe mortgages without “gotcha” clauses.

The “new” loan standards required under Wall Street Reform are hardly outlandish. For instance:

  • The lender must show that the borrower has an ability to repay the loan based on current income.
  •  
  • The lender must verify borrower income claims with tax returns, W-2s, etc.
  •  
  • The lender must verify the borrower's employment.

None of this stuff is new to anyone who has applied for a VA or FHA loan. Or, for that matter, borrowers who have insisted on using a fully documented loan application.

Huh? Why would anyone voluntarily want to use a full-docs loan application when you could get a stated-income loan (SIL) with a lot less paperwork and hassle?

The answer is money. As Wharton professor Jack Guttentag, explains, a stated-income loan today might require an interest rate that's 4 percent higher than a fully-documented mortgage application. That's a huge additional cost over the life of the loan.

Check the latest mortgage rates in your area.

Myth # 3: The typical borrower no longer qualifies for conventional financing
DBRS, a provider of credit rating opinions for financial institutions and other large-scale entities, has produced an interesting chart that compares prime mortgage underwriting standards for 2007 and 2011.

The chart plainly shows, among other things, that credit score requirements have increased while maximum loan amounts have declined.

These are good examples to illustrate changes in the lending system — and also that such changes are often irrelevant.

For instance, the basic prime loan credit score has gone from 620 to a range of 680 to 720. But so what — the typical FHA borrower has a 699 credit score and FHA loans are not prime financing.

As to maximum loan amounts, they've dropped from $2 million in 2007 to $1 million today. This just doesn't impact a lot of people. The typical buyer paid $174,800 for an existing home in July.

Not only is financing readily available, there's a very good reason to finance and refinance today: Money is incredibly cheap.

Freddie Mac reports that loan rates for both fixed and adjustable financing have slipped to levels unseen during the past 50 years.

“When you look at the realities of the marketplace it's hard to ignore the growing myths and stories which now surround the lending process,” said James J. Saccacio, chief executive officer of RealtyTrac. “How many people have been discouraged from buying or refinancing because of lending rumors and fictions?”
  
Are opportunities in selected markets and with selected properties being missed because of inflated application worries? Arguably that's often the case because not only are interest rates low, so too are home values. For instance, the Federal Housing Finance Agency — the government body that oversees Fannie Mae and Freddie Mac — says at the end of the second quarter that home prices were 18.8 percent lower than in April 2007.

“Not only are home prices generally stalled in most markets, prices for foreclosures and short-sales are particularly depressed,” said Saccacio. “Our foreclosure sales report for the second quarter showed that foreclosed or bank-owned homes were typically priced 32 percent lower than the average sales price of homes not in foreclosure."

Which leads us to our fourth myth.

Myth # 4: Financing is not available for foreclosure properties
Financing a foreclosure purchase at the courthouse steps is famously not available in most states. Typically the winning bidder is required to pay the full amount in cash — often on the spot in the form of cashier’s checks.

But that is not true when it comes to purchases of bank-owned properties (REO) or pre-foreclosure properties (typically short sales), which together account for the vast majority of foreclosure-related sales. REO sales alone accounted for nearly 20 percent of all sales nationwide in the second quarter. Although cash offers are common when it comes to REO sales and short sales, they can also be purchased with conventional financing — and often are.

Veteran real estate investor, author and trainer Andy Heller believes Fannie Mae and Freddie Mac may have gone a bit too far in restricting investor loans in the past few years, but that doesn’t mean financing is an insurmountable obstacle for investors.

“Many people tend to focus on obstacles when they invest, and one of the biggest obstacles they focus on today is financing. There will always be obstacles and as a seasoned investor I will take today hands down over three or four years ago,” said the 20-year investing veteran, explaining that a few years ago investors were scrapping for meager discounts of 5 to 10 percent because of intense competition from other buyers and investors, driven largely by loose lending standards.

“Without a doubt I would prefer challenging financing conditions and bigger discounts because the discount is your security blanket and your profit.”

Heller said financing options are still available for all different types of investors: newbies with little cash or credit, average investors with some cash and credit, and seasoned investors looking to expand their portfolio beyond the 10-property limit set by Fannie Mae.

“Investors today will need to be a good bit more creative than three years ago.  But it is certainly worth it if the end result is significantly greater discounts,” he said.

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Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com. Daren Blomquist is Director of Marketing Communications at RealtyTrac.


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Comments

Chris: I don't think what you're asking about short-selling to yourself is possible. In essence what you're trying to do is a get a loan modification that involves a reduction in the principal balance of your original loan. Lender are granting principal balances reductions on a select basis so it would be worth checking with your lender to see if they are willing to do that (if you haven't already). Posted: December 11, 2011 by: darenb
Is it possible to short sale your home to yourself if your home is in pre-forclosure and you qualify for a mortgage? Posted: December 7, 2011 by: chris
The C-Corp that I manage owns two investment properties without any liens or encumbrances that have been appraised for $300K. I will be settling on a Line of Credit equal to 50% of their appraised value. Looking to convert the LOC to a long term mortgage within three months of settlement of a third property. Any suggestions? Posted: December 7, 2011 by:
Kathy: you are welcome to re-post the article on your website and Facebook page (just use the Like button above for Facebook). You can use the orange RSS button above to put the RSS feed on your site. If you re-post in a different way than the above, we just ask that you provide attribution and a link back to RealtyTrac. Posted: December 7, 2011 by: darenb
If Lender Smith does cannot verify your income then speak with other lenders. If the income is there and can be verified then there should be a lender out there who wants your business. Try a community bank or credit union. Posted: December 7, 2011 by: Peter G. Miller
You can get financing for an owner-occupied property if you now own two rental units. >>>Fannie Mae’s current policy limits the number of one- to four-unit financed properties in which the borrower may have an individual or joint ownership interest to four financed properties when the mortgage being delivered to Fannie Mae is secured by an investment property or second home. The limitation on the number of mortgages currently being financed applies to the total number of properties financed, not just the number of mortgages sold to Fannie Mae. Fannie Mae is modifying this policy to allow investor and second home borrowers to own five to ten financed properties if they meet certain eligibility and underwriting and delivery requirements as outlined in this Announcement. See: https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2009/0902.pdf Posted: December 7, 2011 by: Peter G. Miller
MichelleGordon: I had not heard of that. What area of the country is this in? Posted: December 7, 2011 by: darenb
LegionKC: thanks for sharing your real-world experience. On the other hand, I've talked to quite a few people who have been able to successfully obtain financing for a purchase or refinancing, and I myself recently did refinancing. The constant requests for documentation did get a bit tiring, but in a weird sense it was comforting to know the lenders are not repeating the mistakes of the real estate boom. That your loan was denied seems strange, but there are many resources to shop around for other financing options, including on RealtyTrac at http://www.realtytrac.com/finance/ Posted: December 7, 2011 by: darenb
May I add how frustrating it is - that buyers MUST be pre-approved by BOA to buy a BOA owned home. I have had many buyers turn down looking at them due to this fact. And others that have followed the rules have been hit up by the lender for their business - even after we tell them we are just doing this to be able to put a bid on a home. In a few cases when the BOA lender knew that we were just getting pre-approved by them to be able to put an offer on the home, they took over a week to get the job done, this does not work if many are bidding on the home, this should not be allowed! Posted: December 7, 2011 by: MichelleGordon
May I repost this on my website and Facebook page? Kathy Kessel, RealtyTrac subscriber/member Broker, Prudential Town and Country Real Estate and Boston Metrowest Real Estate KKESSEL7@comcast.net 617-538-3510 Posted: December 7, 2011 by:
so if i am looking to buy my third home (first home and second home are no both rental properties turning a profit), and i want financing, where would i go to find financing that isn't so restricted by Fannie Mae's and Freddie Mac's rules? are ALL banks following their guidelines or are there mortgage banks out there that will loan above the 80% threshold (aka 80-100% loan on a foreclosure that is still only 65% of the value on the property, and a profit turner)? Posted: December 7, 2011 by:
"•The lender must show that the borrower has an ability to repay the loan based on current income" - BOA recently denied a loan after pre-approval stating my income could not be verified despite the fact that I've been on this job 34 years.??? " •The lender must verify the borrower's employment" - See above note: My documentation was impeccable. Posted: December 7, 2011 by: LegionKC

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