Randy Johnson of Newport Beach, author of “How to Save Thousands of Dollars on Your Home Mortgage” and a mortgage broker since 1983, answers questions…

Kristi in Menifee asks:

Q. (Soon we will) miss our mortgage payment. Is a short sale the way to go? Our mortgage company said they would rather go that route and sent us a packet to fill out. What will happen after that? I have heard that if the debt shows paid-in-full on your credit report that in a little over a year you can be considered for a home loan. Is this true? Also if our house doesn’t sell can we then do a deed-in-lieu-of-foreclosure? We have always paid all our bills on time but now we just can’t afford it … I am just wondering what the credit ramifications are between a short sale and foreclosure and also knowing what our credit will be like will give us an idea if we need to find a long-term rental or possibly a cheaper one to get us by until we could buy again.

A. First, let me express my condolences to you and your family, Kristi. This is a tough time for many people.

There will be a severe hit to your FICO score. For that reason alone, it would be good to arrange a deal on your rental house while the landlord will see good scores marred only by late mortgage payments.

The second issue will be down payment. Obviously, you will not be in a position to buy a smaller, more affordable home until you have saved cash for down payment, closing costs, and reserves. So that will be the priority item in your financial life.

The rules about buying the next home are not clear but I’m going to give you the following guidelines.

Whatever route you choose, whether short sale or foreclosure, your credit will get a major ding, perhaps 100 points, maybe more. It will be important to keep everything else in order so that your credit score rises as this event becomes history. Getting back to over 700 would be a good goal.

Next, it will likely be at least three years before you would get approved for a mortgage. In the harshest of situations you might have to wait five years. It will help if your inability to make the payments on this home’s loan is due to a job loss or medical issues as opposed to financial mismanagement. If all you did was to bite off more than you could chew, that’s somewhere in between.

You should also plan to put 20% down. Less and the private mortgage insurance (PMI) companies get involved and it is not clear what their guidelines will be then, certainly strict.

I hope that this is helpful and I hope you will let me know about your progress.

Waitingtobuy in Irvine asks:
Q. “If I paid cash for a house at auction, is it possible to then later take out a first mortgage for the full amount paid? I realize a HELOC can be taken out, but what about a first mortgage?”

A. You might have a harder time getting a HELOC these days because many HELOC sources have dropped out of the business. Other sources will not let you use a HELOC to fund a purchase, so check.

As to a permanent loan, there are two issues. Many lenders will only use the actual purchase price for determining loan amount even if appraised value is higher. Others, however, will let you use the appraised value and if that is higher, you may get a larger loan, so check.

Last, this will be treated as a “cash-out refinance” and is subject to a pricing hit if you want a loan that is higher than 70% loan-to-value (LTV). Hit amount depends upon LTV and FICO score, so check!

You can see that having a close relationship with a competent, experienced lender who knows the ropes is going to be very important for you in this mission. Calling around will have you talking to people who don’t even understand the problem much less have answers.

Nora in Anaheim asks:

Q. My husband and I are retired. Last year we had an income of almost $90,000 and have about $350,000 in various accounts and own our house worth about $500.000. Our son made about $31,000 last year and is in an apprenticeship program where his salary will gradually go up to about $75,000 in the next 3 years as he finishes the program. We want to give him part of his “inheritance” now and help him get a house in the next year. I know we would have to figure out what price house to look for. Question: How can/should we arrange this? Shared title and deed it to him in a few years? Each of us be part owners?

A. This can be a little tricky because there are choices. Obviously he cannot qualify for much of a loan with his recent past income. This sounds a bit silly but you cannot qualify for a loan today based on next year’s income. You see what I mean. I see two options.

First is to try to have him buy a home himself with you both as non-occupying co-borrowers. Lenders’ rules are all over the map but he must be reasonably able to make the payments. For example, if the total housing payment is $2,000 and his income is $2,600 per month before taxes, you can see that he could not make this payment by himself.

Second and easiest, you can just buy a home as an “investor” property with the three of you as owners. He can move in and make the payments as “rent.” There is a modest pricing hit on the mortgage, say an extra point, because it won’t be treated as an owner-occupied property. But that is simple and direct. You can have a separate agreement as to percentage of ownership and income. See your CPA as to how this is treated.

I hope that this works out. There certainly are excellent buys around and I think that this is a great time for a buyer with a long time horizon.

That’s it. If you want Johnson to answer a question, email it to Mathew Padilla at mapadilla@ocregister.com. Include your name or nickname and the city you live in — that information will be published with your question. Johnson will answer up to three questions each week, so keep checking back for a response. If many questions are submitted, it could take a while to get a response, or he may never get to it.  

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