Current Fannie Mae guidelines require a 2 year waiting period after a borrower has had a short sale to be eligible for new financing with a 20% down payment. The loan must be submitted through Fannie Mae’s automated underwriting system, Desktop Underwriter (DU), to insure the short sale on their credit report will be approved.
There are three different results DU will report a loan file as:
A) Approved/Eligible-this means the buyer is approved
B) Refer/Eligible-this means the buyer’s file must be manually approved by an underwriter
C) Refer with Caution- this is a loan denial
There are 3 main credit bureaus that collect and report the information-Experian, Equifax and TransUnion. Each of the bureaus makes their own decision on what internal codes are to be used in reporting a short sale. The code most commonly used is an I-5, “Installment with Severe Delinquency”. Unfortunately the code I-9 is sometimes reported which represents a “Foreclosure”.
If two of the bureaus report an I-5 and one of the bureaus report the short sale as an I-9, Desktop Underwriter reads the report as a foreclosure and will issue a Refer with Caution because the waiting period after a foreclosure with FNMA is 7 years.
Experian refuses to change the code from I-9 to I-5 if they are the bureau reporting the short sale as a foreclosure. Their reasoning is the definition of a short sale is a pre-foreclosure which is deemed a type of foreclosure.
The remedy would be a manual underwrite because the buyer’s documentation would prove the home sold and the bank settled for less than full. However, most investors require a DU Approve/Eligible in order for them to purchase the loan so most lenders do not offer a manual underwrite on Fannie Mae loans.
One solution has been waiting for the 3 year time period to elapse and finance with FHA. The waiting period after a foreclosure is 3 years with FHA. The down side is the mortgage insurance requirement even if the borrower has 20% down payment. That can be a very expensive option for the buyer.
The takeaway from this is to know it is more than just meeting the timeframe after a short sale for the buyer to be eligible for new financing. The buyer needs to be fully approved by having their loan file entered in Fannie Mae’s automated underwriting system and have the final decision be Approved/Eligible before entering escrow.
Wednesday, July 31, 2013
Wednesday, July 3, 2013
Mello-Roos Explained
In 1978 California voters passed Proposition 13 which limited property taxes to about 1% of assessed value. This was great for homeowners but didn't resolve the issue of local communities needing access to tax revenues to support schools and infrastructure in newer communities. In 1982 as an end-run around Proposition 13, state legislators came up with the Community Facilities Act or more commonly referred to as Mello-Roos (named after the bill's sponsors). Mello-Roos is a special assessment on real property and is commonly found in the newer developments of Orange County, CA. Mello-Roos tax assessments help fund schools, new roads, and infrastructure such as water bonds, bridge bonds, etc. It is an assessment based upon either square footage of the lot or the building and runs usually from 15 to 30 years. Since the assessment is based upon bonds that are floated, the re-financing of these bonds can extend the initial time period of the assessment.
As a Realtor, many people specifically state that they do not want to pay Mello-Roos taxes, so you need to steer clear of areas such as Talega, Coto de Caza, Ladera Ranch, Newport Coast, and most of Aliso Viejo. Although there are newer developments such as the Reserve in San Clemente that do not have Mello-Roos taxes specifically because the developer paid off the bonds and wrapped those fees into the actual price of the homes. In Talega, the initial development had two Mello-Roos bonds while the "newer" part has an additional bond to cover the cost of the bridges. While in the age-restricted senior community, they only pay one bond (water), since to pay for a school bond would not be fair to retired homeowners.
Everyone plugged along using the Mello-Roos tax assessment as a write-off on their income tax returns along with all the other "special" assessments that show up on property tax bills. That is until NOW! Effective in the 2013 tax year, ALL special assessments can no longer be written off as a tax deduction on income tax returns. This is causing many homeowners additional grief since there are so few tax write-offs to begin with. Many homeowners in Mello-Roos tax districts are re-evaluating the cost of these assessments.
One idea that I am attempting to apply is paying off the Mello-Roos assessment at the close of escrow in selling a home. Once the assessment is paid off, the home remains free and clear of Mello-Roos for the remainder of it's life. Many homeowners are not even aware that this is an option, and it really needs to be used more frequently as a market differentiation strategy. So in essence you can buy in Talega without the burden of Mello-Roos taxes (if you happen to negotiate with a seller that is open to this strategy).
With tighter lending, eliminating the Mello-Roos cost could allow you to afford more house and who wouldn't rather have more house than more taxes?
As a Realtor, many people specifically state that they do not want to pay Mello-Roos taxes, so you need to steer clear of areas such as Talega, Coto de Caza, Ladera Ranch, Newport Coast, and most of Aliso Viejo. Although there are newer developments such as the Reserve in San Clemente that do not have Mello-Roos taxes specifically because the developer paid off the bonds and wrapped those fees into the actual price of the homes. In Talega, the initial development had two Mello-Roos bonds while the "newer" part has an additional bond to cover the cost of the bridges. While in the age-restricted senior community, they only pay one bond (water), since to pay for a school bond would not be fair to retired homeowners.
Everyone plugged along using the Mello-Roos tax assessment as a write-off on their income tax returns along with all the other "special" assessments that show up on property tax bills. That is until NOW! Effective in the 2013 tax year, ALL special assessments can no longer be written off as a tax deduction on income tax returns. This is causing many homeowners additional grief since there are so few tax write-offs to begin with. Many homeowners in Mello-Roos tax districts are re-evaluating the cost of these assessments.
One idea that I am attempting to apply is paying off the Mello-Roos assessment at the close of escrow in selling a home. Once the assessment is paid off, the home remains free and clear of Mello-Roos for the remainder of it's life. Many homeowners are not even aware that this is an option, and it really needs to be used more frequently as a market differentiation strategy. So in essence you can buy in Talega without the burden of Mello-Roos taxes (if you happen to negotiate with a seller that is open to this strategy).
With tighter lending, eliminating the Mello-Roos cost could allow you to afford more house and who wouldn't rather have more house than more taxes?
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