About Short Sales

A home buyer should know that there are 2 stages to mortgage loan approval. We have heard of preapproval. When the buyer submits the loan application to his loan officer for preapproval, Stage 1 begins.

When pre-approval is requested, it will be a preliminary home mortgage approval indicating that the mortgage will likely be approved for a certain down payment and purchase price.

This preliminary approval will not matter once the application goes to review for the actual mortgage loan. Stage 1 ends when the “underwriter”, not the loan officer becomes involved.

Stage 2 of the process occurs when a mortgage underwriter is reviewing credit, income, assets, job history and probable other things. It is the job of the underwriter to insure that the buyer can meet the lending institution’s criteria for loans.

This procedure should be a formality if the Stage 1 loan officer did an appropriate job. Usually this stage moves along as anticipated. However, sometimes the buyer changes his loan “risk” without intending to do this, but affecting the mortgage approval. The buyer doesn’t mean to decrease his loan probability, it “happens.”

During the mortgage approval process, the buyer must not do anything that will increase his loan risk during the time between Stages 1 &2. Risk needs to remain consistent. The following are 6 things of the “Honey Don’t” list for this interim period:

1. Don’t quit your job, change careers, or accept a “commission only” position. 2. Don ‘t miss a payment to a creditor 3. Don ‘t buy a new car or increase any vehicle payments 4. Don’t accept cash gifts without talking to your loan officer(there are gift rules) 5. Don ‘t open a new credit card no matter how great a deal 6. Don’t transfer large amounts of cash in/out of bank accounts

There’s other items, too, but this a good start. Now, avoiding these mistakes may not be practical for everyone. Therefore, if you know you’re going to violate a “rule”, check with your loan officer first. There are a lot of “gotchas” in mortgage lending and it helps to have professional guidance for your individual questions.

Fannie Mae was a semi-independent company that carried out its last act as such several weeks ago. This year Fannie Mae has carried out 22 updates.

The new guidelines first set a limit on the number of properties that can be owned by one person. Formerly, one person could own 10 properties. Now, mortgage requests for a loan for second homes or investment properties will be denied if the mortgagee already
finances more than a total of 4 properties.

This limit can be avoided if the properties have the loans in the name of a corporation, and the property owner is the single owner of the corporation. If the properties are held in such a manner, Fannie Mae won’t count them as part of limited properties.

Investors, therefore, should consider moving their properties into a corporate structure to avoid triggering Fannie Mae’s 4-property limit. Investors often take this step for liability and taxation reasons, but it’s now a good idea for mortgage approval reasons, too.

Secondly, some of the guidelines do not have such a loophole. All investment property mortgages will be assessed with new loan-to-value based loan fees by Fannie Mae.

Loan-to-value less than 75 percent : 1.75% loan fee
Loan-to-value 75.01-80.00 percent : 3.00% loan fee
Loan-to-value 80.01-90.00 percent : 3.75% loan fee

These fees, along with other risk fees assessed by Fannie Mae are mandated to be paid by the buyer. The other risk fees are a minimum of % for investors.

Since its Fannie/Freddie takeover, government officials have not addressed whether mortgage guidelines will be rolled back to “a looser time”. If they are, it would be a big deal for real estate investors because, as many are finding out, low rates don’t matter much if you can’t qualify for them.

In summary, if you are considering one or several investment properties, it may be more advantageous, and less expensive, to buy over the near term . Definitely consider placing the properties you do own into a corporation.

When a seller and buyer agree to a purchase agreement for a home sale, the buyer is requested to place some small amount of money into a trust account.
Such a front end deposit is referred to as “earnest money.”

A sales contract’s earnest money requirement will vary from contract to contract. It can be as high as 10 percent of the purchase price and could be as low as $500; earnest money is a negotiable item between buyers and sellers.

Factors influencing amounts of earnest money:

Market conditions: Stronger markets often call for more earnest money
Buyer economics: First-time buyers often give less earnest money
Seller psychology: Skeptical sellers often ask for more earnest money

No matter how large or how small, however, earnest money is supposed to give the seller a sign of good faith that the buyer wants to purchase the home.

If it should happen that, during the process, the buyer violates the terms of the purchase
agreement or backs out of the deal, the earnest money can be kept by the seller. This does not
occur much because, when the purchase agreement s are written , there are “escapes” for the
buyer, called “contingencies” written into the original agreement.

Some of the usual contingencies may be that the buyer must have financing by a certain date;
the seller must give the buyer a clean title, and, prior to completion of the sale, the home needs
to pass a home inspection.

In the case that any of the contingencies are not met, the purchase agreement will be void and the buyer will have earnest money returned to him.

When the contingencies are met, the earnest money is applied to the amount that the buyer will be responsible to provide at settlement. For example, if the buyer
owes $55,000 at closing, the amount will be $55,000 less the earnest money.

You will want to make sure your earnest money is saved. Speak to your real estate agent/attorney before signing any purchase agreement. They can help you understand
the variations in earnest money among states, cities, and towns.