Short Sales and Their Effect On USDA Rural Housing Mortgages…….
November 12, 2008
As a mortgage lender, we are constantly getting updates from Fannie Mae, Freddie Mac, FHA, VA and USDA on guideline changes.
This summer, the “buy and bail” memo was released. This policy dictates the circumstances under which a buyer can convert their current primary home to either a 2nd home or an investment property and how we, as lenders, have to count the payment of the current primary home against them or under what circumstances we can count rental income on the property if they rent it. It makes it tougher to qualify because they fear, and rightfully so in some cases that I have seen, that people may be buying a new property and then “bailing” on their primary home for a number of reasons, the main reason being that they owe more on that property than it is worth and have found that they can get a similar home, or even a larger one, with a payment that may be less than what they currently have.
Prior to these changes, if the buyer could provide a fully-executed lease agreement, we could count rental income that would be generated, or at least 75% of it as they used a 25% vacancy factor. The buyer also had to have 2 months reserves for principle and interest and taxes and insurance on a single family residence and 6 months reserves if they were moving out of a 2-4 family property (ie: a duplex).
Under the new policies, which went into effect on August 1, 2008, the following conditions are required:
- If current home is pending sale but won’t be closed before closing on the new property, we must count BOTH payments in order to qualify for the new property.
- If the buyer is going to keep the former primary home as a second home, we must count both payments AND either the buyer must have 6 months reserves (PITI) OR if we can prove they have at least 30% equity in the property (we have to get an appraisal, Automated Valuation Model, or a Broker Price Opinion to do that), we only have to show that they have 2 months reserves.
- If the buyer is going to keep the former primary home as a rental property, we can still count 75% of the rental income with a fully-executed lease, a copy of the deposit check the tenant writes them and a copy of the receipt showing the buyer deposited the funds in their account IF AND ONLY IF we can document that they have at least 30% equity in the property they are leaving, again with either an appraisal, AVM or BPO. If they don’t have the 30% equity, we can not count any of the rental income even if they have a lease, AND we have to count both payments against them to qualify them for the new property purchase AND they must have at least 6 months’ reserves of PITI for BOTH properties.
There are also limits on how long ago a person can have been 30 days late on their current mortgage payment before they are able to purchase a new primary home. Fannie Mae, Freddie Mac, VA, and FHA have guidelines that are stronger than the ones that are used for a USDA Rural Housing Loan (aka a rural development loan). I have a buyer who is military and sold his home under a short sale scenario (he was never late on his mortgage but he had received orders to move and knew that he couldn’t afford his new house, even if he rented and his old house and also knew that if he moved into military housing and his BAH (military housing pay) went away, he couldn’t afford his old house. So he sold it for less than he owed. He had a first and a second mortgage on that property and he negotiated the short sale but when it was paid off, the second mortgage holder reported him as being 30 days late.
They have contacted the second mortgage holder and they will not remove this reporting. I spoke with all of my investors (Chase, Suntrust, Amtrust, Wells Fargo, etc. etc.) to see if they would accept a VA loan on him – I had run it through automated underwriting and it gave me an “approve/ineligible” – the ineligible being for having a 30 day delinquency in the last 12 months and the approval meaning that with his credit score, amount of assets, and income, he qualified for this new purchase. Not only would they not allow a VA loan, they wouldn’t allow an FHA or conventional loan on him, either, as the first mortgage was reporting that he had facilitated a short sale. We have a copy of his orders and a letter of explanation detailing that he had to do the short sale as he had to move (Uncle Sam said so!) but that didn’t matter.
After checking everything I could, I found that we COULD close on a USDA Rural Housing Mortgage for this client, even with the short sale and the 30 day late reporting because we had compensating factors and a letter of explanation in the file.
This client had been denied at 4 other mortgage companies – he was frustrated and wary when he came to me. He is now extremely pleased that he and his family will be allowed to purchase a home and I have created a raving fan of our company!
As I have said in some of my blog entries, the USDA Rural Housing program is one that helps a lot of customers that may not think they can purchase a home to be able to not only buy a house, but buy one that allows them a low monthly payment and little or no money down at closing.
If you are in the market to purchase a primary home, or if you are a Realtor® with clients looking to purchase in Florida, Alabama, Georgia, North Carolina, South Carolina, or Tennessee, please don’t finalize your mortgage until you contact me – we may be able to save you thousands of dollars and get you a low, fixed rate mortgage that other lenders may sometimes overlook!