There are many reasons why a short sale in California is often the better option compared to a foreclosure, strategic default, or even keeping your home, but this post will cover one big reason (soon coming) that is lurking in the FHA Reform Act bill that just passed the House of Representatives with an overwhelming majority.
This information will be especially important for homeowners in California’s Inland Empire region who are thinking about the effect of a foreclosure or stretgic default will have on their future ability to purchase a home using a government loan program.
A Strategic Default is the decision by a borrower to stop making payments on a debt despite having the financial ability to make the payments. This is most common when a borrower’s home is worth much less then what he/she owes and is expected to remain in a negative equity position for a long time.
The FHA Reform Act (H.R. 5072), besides tripling the rate of the monthly Mortgage Insurance Premium to 1.55%, is also proposing FHA put in measures to prevent strategic defaulters from benefiting from using a government subsidized FHA loan to re-purchase a home in the future. The proposal passed in a voice vote with no opposition…….(can you hear the crickets?)
The difficult part will be identifying who was a strategic defaulter and who wasn’t. If you are a stretegic defaulter who realized it may take 10-15+ years for your home to regain lost equity, and plan on using an FHA loan in the future to repurchase a home in 2-3 years, make sure you consult with a Realtor (or me) to detrmine if a hardship can be documented.
No hardship? Then you may want to consider short selling your home instead. The bill says nothing about penalizing people who choose to short sell their home.
If Congress and President Obama vote to prevent you from using a low down payment Government subsidized FHA loan to re-purchase a home 3 years after your strategic foreclosure, you will be forced to use a Conventional home loan (Fannie Mae) that requires a minimum of 10% down payment, a minimum 680 FICO score, and require you wait 5-7 years before being eligible to qualify. Plus, you will also be at the mercy of the Private Mortgage Insurance company’s additional overlay qualifying guidelines. If they won’t provide PMI, then you will need 20% down payment.
With the way Fannie Mae & Freddie Mae are going, they could soon be considered a Government subsidized loan program as well! (Actually, they are, but it’s not officially recognized that way…..yet)
If you want help or guidance on comparing if a short sale, loan modification, strategic default, or staying in your home is your best option, contact me (Brad Yzermans 951-215-6119) and I will show you a side-by-side comparison that will help you determine which option makes the most financial sense. My advice or perspective is impartial because either way you decide, I will not benefit from it…..no fees, nothing! If you want a referral of an experienced Real Estate agent who can also help in this decision process, I can recommend one in your area.
Thanks for posting good real estate info! I work Durham NC short sales myself and have also carved out a niche helping home owners avoid foreclosure. Our market is a complete mess as well, but short sales seem to be the best solution for most.