Helping Borrowers with Extenuating Circumstances Through the Mortgage Process
By Pam Marron April 1, 2015
Explaining a past short sale is a harder task than most think, and it re-opens a period of time that many who have had the experience don’t want to go through again. Loan originators should not be surprised when past short sellers show anger, reluctance and may even opt out of re-purchasing a home upon learning what they must do.
Part of the problem is that guidelines, especially those surrounding explanation of extenuating circumstance, are vague. And detail needed is not always easily accessible. Quietly, more than one lender has told me that documentation received is not enough to prove extenuating circumstances, which results in a new mortgage denial for those who may be eligible to re-enter the housing market. Though lenders offer the FHA “Back to Work” program, a low percentage of these loans have been approved.
Extracting and clearly defining the detail of extenuating circumstances to show how past sellers ended up with a short sale or foreclosure falls upon loan originators. So, what is the extra work and detail needed for these loans?
At HousingCrisisStories.com, there are 3 worksheets for the borrower and loan originator to prepare a case for an underwriter.
- Borrower Makes Case: extensive list of questions for the borrower to detail. Items needed are included on this list.
- LO: Economic Event Worksheet: loan originator uses “Borrower Makes Case” and provided documentation to complete.
- LO: Reduced Income and Increased Debt Table: made to show percentage of reduced income for FHA Back to Work and increased expenses needed for Fannie Mae, Freddie Mac and USDA(medical). Also, lower table shows how “Un-anticipated Additional Debt” can be substantial, showing the REAL hardship.
- Be attentive to your borrowers’ entire story. Question needed details.
- Be prepared to document income 1 year prior to the event and over multiple years. Many affected saw trouble coming and tried to prepare. However, the process of going through a short sale or foreclosure with a lender is often drawn out and some take years. During this time, assets are depleted, income fluctuates and credit becomes worse.
- Do not be surprised when the borrower is reluctant to detail this timeframe. Many try to forget, and having to dig up paperwork or discuss the event again can be highly emotional.
- Loan originators must go the extra mile to prove all remedies tried. WHY? Even when jobs were lost or incomes reduced, when rental income did not cover the mortgage payment on an underwater property, when divorce or a death occurred, a great majority of these homeowners whittled away at savings and retirement funds trying to stay afloat. For many, there is often a final problem after the economic event where there was no choice left but to sell the home.
- It is very common to see an alarmingly high BACK debt to income (DTI) ratio (Reduced Income and Increased Debt Table) even when the mortgage payment is made. This worksheet is intended to show that reduction in income is not always the primary reason to sell.
- On short sales, retrieve the HUD-1, the final lender short sale approval letter on 1st and 2nd mortgages and proof of the wire sent from the closing of the property. Why? It is common for the date of payoff on a credit report to be a different date than the actual closing date.
- Borrowers that had a deficiency payment may have a “Satisfaction of Mortgage” that shows a release of lien/mortgage but “does not constitute a satisfaction of debt”, so check documents received. Retrieve the letter to the borrower stating when the deficiency is satisfied the 1099 that often states “forgiveness of debt”. (Documents noted above can be retrieved from the title company noted on the HUD-1 or listing agent.)
- Preferably, run file through Fannie Mae’s automated system upfront, which specifies which account and what date causes a Refer. If the short sale shows up as a foreclosure or findings note an incorrect disbursement, contact your credit reporting agency to correct the date and repository comment.
- For an FHA mortgage, make sure the homeowner goes to a HUD Approved counselor at least 30 days before a contract is written or an application taken.
Bonus: the gratitude of these clients will remind you of why you are in the mortgage business.
Pam Marron (NMLS#246438) is senior loan originator with Innovative Mortgage Services Inc. (NMLS#250769) in Tampa Bay, Florida. She may be reached by phone at (727) 375-8986 or e-mail firstname.lastname@example.org. Websites: HousingCrisisStories.com, CloseWithPam.com, 8Problems.com.
 National Consumer Reporting Association (NCRAinc.org) is aware of the erroneous foreclosure code on short sale credit and error in dates. Go to http://www.ncrainc.org/mortgage-credit-reporting-referral-network-by-state.html to find credit reporting agencies in your state.