How Does Bankruptcy, Foreclosure or a Short Sale Affect the Borrower?

The FICO® score was established by the Fair Isaac Corporation and is one of several systems which evaluate a borrower's credit worthiness by assigning a numeric value. A score of over 720-740 points is considered the desired range of eligibility for a conventional loan by many lenders. Before the current economic downturn, a score of 680 was acceptable and eligible for many conventional loan programs, but that score now does not meet many, if not most, current guidelines. The borrower should take into consideration that FICO® or other credit scores are now checked when applying for home insurance, rentals, a car loan, and employment, to name a few, an individual's credit worthiness is an important fact of life. When a borrower is considering the best course of action, they often do not realize exactly for how long and in what ways a distressed property situation will affect them.



The pie-chart shows the parts of a FICO® score found at www.myfico.com and the aspects of a credit score. While there are general estimates as to the "hits" to your score for bankruptcy, foreclosure, short sales, and late payments associated with these events, opinions differ and are not exact, in spite of what information you may find on various internet sites. Other factors in the borrower's credit history may also impact the total score.

However, certain Fannie Mae borrowing guidelines are known:

• A 10% down payment purchase of a principal residence is allowed 5-7 years after a foreclosure sale completion date (3 years for "extenuating circumstances").
• A 10% down payment purchase is allowed for a principal residence and other types of properties 4-7 years after a deed-in-lieu was executed.
• 2 years after a "pre-foreclosure" sale (may or may not be same as short sale conditions).
• 4 years after a bankruptcy discharged or dismissed.
• 2 years after a Chapter 13 bankruptcy is discharged or dismissed.

FHA may have slightly more lenient guidelines for post-event home purchases, and the borrower should check with a lender. The idea here is not to give a complete listing of guidelines--a discussion with an experienced lender would be good for that--but to let the borrower know what the timeline will be depending on his/her actions and plan accordingly. The potential tax consequences depending on circumstances of the property should be reviewed before filing for bankruptcy, for example.

The choices in some cases are not avoidable, but in all cases, a borrower should obtain more information to be prepared.

No More Paying Loan Modification Fees in Advance

Effective October 11 through January 1, 2013, no one (and that includes attorneys, real estate professionals, lenders and everyone else) may charge advance fees for arranging loan modifications for 1-4 residential units--that means your house, condo, duplex, triplex, fourplex, or other type of home.

Many borrowers have paid, and lost, anywhere from $3,000 to $8,000 without obtaining the desired loan modification. For some people, this meant losing their financial cushion to people who could not deliver. Prior to this law coming into effect, the Department of Real Estate's legal requirements for taking advance fees were complied with by a rather short list of entities and individuals statewide--it was extremely short when compared with the huge numbers of loan modification companies, groups or entities advertising their services everywhere you looked.

Fees may now be collected after promised services have been performed (but the law does not apply to loan modification fees and agreements entered into before October 11).

Making Improvements to Your Property: Where Should You Stop?

There are two types of property owners: homeowners who will move in and live in the property, and investors who never plan on living in the property.


The following points are mostly for investors who are "rehabbers", but owner occupants might find some helpful points here as well in order to gain perspective on a project.


Don't overimprove a property. It's a common mistake to think that all the money put into a property will be added to the original buying price so that the owner will obtain a 100% return on the brand new kitchen, brand new bathroom, or brand new hardwood flooring. Watch out for the following problems if you bought a property to fix and sell:

• Falling in love with your property.
• Remodeling it as if it's the home you've always dreamed about.
• Trying to make it a model home.
• Making upgrades or improvements to show how well you do them.
• Justifying an improvement because it adds to curb appeal (non-monetary return).
• Applying the same formula to every property.

Keep in mind that a buyer doesn't care how much you spent. There is a difference between doing a good rehabilitation and fixing up the house vs. injecting your personal living standards into your choices. Buyers often understand the difference, and even though they may like all the expensive hardware that came from the historic replica source, they may not see it as adding to the value of the property. You must know the needs of the your target buyer. Avoid making your project what you would buy for yourself--you must make it serve the needs of your target buyers.

You must get to know your local (very local) market. Learn to look at your project the way an appraiser does: no more than one mile out from your property, and less than that if it's a different type of neighborhood. Learn what people in the area of your property are really looking for: what do they identify with. They buy in a certain area for a reason, so find out what they admire about their location, the style of homes in the area and why they want a 1970's house, a 1950's house or a 1920's house--there are huge differences in those groups. There were major sociological changes in the generations that served those houses, so taking a 1920's house, ripping out a formal dining room wall and adding a breakfast bar is often viewed as a major flaw by buyers who prize that era of housing. Putting in the same formula kitchen and bathroom re-do in an older area built up over time which contains diverse historic architectural styles could be the wrong decision. Buyers who like older homes want precisely that--a rehabber is probably going to serve the local market far better with modern improvements that blend with the era of the particular custom home, not the one-size-fits-all contractor approach. If you're a contractor, you will need to expand your perception of what it takes to market and sell a home.

For homeowners, take time to think out your ideas, consult with an architect if necessary. Do they work well with the original design and purpose of your particular home?. Mistakes I've seen lately include:

• Enlarging a bathroom in an original 1940's house to include the latest jacuzzi bath, window styles, 1920's(?) floor tile, and hardwood cabinetry which does not match the rest of the house, all by taking a closet of the neighboring bedroom. This now changes the number of bedrooms the house has, potentially lowering its value for many buyers.
• Converting a kitchen pantry into a second bathroom which opens directly into the kitchen. Bad floor plan.
• Removing original doorways in order to obtain more kitchen space so that the original circular traffic flow of the home is now obstructed.
• The aforementioned breakfast bars added by losing a dining room or kitchen wall.

Consult with sources about calculating the return on improvements, including cost vs value reports in Remodel Magazine. In the end, it's important to find out what original features of a property are desired by the local market, whether you're a homeowner or a rehabber, because those may be what brings the buyer when the property is on the market next time.

Long Beach CA Sales Report for October 2009

For residential 1-4 unit properties in Long Beach (that includes condos, houses, lofts, for October 2009, the median price is down 3% from one year ago: $340,000 down to $329,000 for the city.

• The number of sold properties reached a high point during the summer, but in October the total number of sales decreased by 20% from one year ago.
  It also took less time to sell a property in 2009 than in 2008.
• One of the most dramatic pictures continues to be the decrease in inventory by over 50% since one year ago--
• This has been a steady decline in inventory over the last 12 months, to just over a thousand residential properties on the market at the end of October 2009.
• The number of properties in escrow is up by 23%.
• The number of new properties listed is down by over 31% from one year ago.
• What this all adds up to is the months' supply of inventory has decreased from 7 months one year ago, to 2 months this year, meaning at the current rate of sales, all housing inventory in the category would be gone in two months, if no new listings came on the market.

For buyers, especially in the market under $400,000, this has meant fierce competition, not just in Long Beach but in the entire Southern California area, since this is the market that is in the most demand for 1st time homebuyers that make up at least 60% of home sales at this time. Buyers in this range continue to be out bid by all cash, or more cash down payment, buyers. For this group of buyer it's very important to be persistant and to be patient (although after both buyer and agent have been through many many rejected offers, it takes even more fortitude than ever).

The West Coast market should be helped out in 2010 as the temporary jumbo loan limits initiated for 2009 have been extended through 2010 . Nevada, California and Florida are the top 3 states nationwide in number of foreclosure filings, and according to RealtyTrac, and October was the third consecutive month for a drop in numbers of foreclosed properties, however, what the impact of foreclosed inventory will bring in 2010 with new scheduled loan resets remains to be seen.

For a more specific look at your neighborhood or zip code and pricing your property to sell, please call me or e-mail me to receive a local report. To find all active listing on the market, go to the MLS property tab at www.juliahuntsman.com.

How to Buy a Bank-Owned Home

Just a little humor here, but sometimes how true!