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Stuck In Mortgage Limbo

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Posted On: 12/03/2014

Question: I recently applied for a home loan but my application was denied because I had a deed-in-lieu of foreclosure less than four years ago. Just how long must I wait before I can get a new mortgage?

Answer: In basic terms a deed-in-lieu of foreclosure can be seen as a situation where a borrower can no longer make payments and offers the lender the opportunity to take back title to the property. However, rather than simply mail back the keys – what is known as “jingle mail” – borrowers are likely better off participating in the government's Home Affordable Foreclosure Alternatives Program. With HAFA a borrower may receive a move-out allowance of as much as $3,000 in relocation assistance.

However, a potentially more important reason to use HAFA is this: It ends any lender claims against the borrower. As the government explains, “unlike conventional short sales, a HAFA short sale completely releases you from your mortgage debt after selling the property. This means you will no longer be responsible for the amount that falls ‘short’ of the amount you still owe. The deficiency is guaranteed to be waived by the servicer.”

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While HAFA can help with move-out cash and potential deficiency judgments three big problems remain.

First, a deed-in-lieu of foreclosure has the same impact on a credit score as a short sale or a foreclosure. According to credit score pioneer Fair Isaac, “the common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all ‘not paid as agreed’ accounts, and considered the same by your FICO score. This is not to say that these may not be better options for you from a financial perspective, just that they will be considered no better or worse for your FICO score.”

Second, the Mortgage Forgiveness Debt Relief Act expired on December 31, 2013. This law said unpaid mortgage debt was not viewed as taxable “income” by the government. Congress has failed to reinstate the legislation as of this writing, so unpaid mortgage debt – money not received by the borrower in the form of cash – may now be regarded as taxable. Speak with a tax professional for specifics.

Third, lenders are not thrilled about originating new loans for folks who previously defaulted. When the foreclosure crisis first became obvious in 2006 and 2007 lenders often talked in terms of a seven-year wait before a new loan would be considered.

Now, however, there are faster alternatives.

• If you had an adverse “economic event” that lead to financial difficulties, look into the FHA’s “Back to Work” program. In as little as a year you may be able to borrow with 3.5 percent down.

• Fannie Mae says if “extenuating circumstances” were the cause of your foreclosure, short sale or deed-in-lieu of foreclosure, you may be able to get a conventional loan in as little as 24 months. Conventional lenders can provide specific information.

• The VA has no formal wait time for borrowers who have defaulted on a mortgage. Instead, the VA says the decision is up the lender.

According to the VA: “The fact that a home loan foreclosure (or deed-in-lieu of foreclosure) exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan.”

However, a VA lender will surely want to establish that the mortgage loss was not deliberate and that the VA-qualified borrower has fully re-established credit. Speak with VA lenders for details.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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