Next to filing for bankruptcy protection, nothing wrecks your chances of qualifying for a home loan like a foreclosure.

And if you got out from under an oppressive mortgage through a short sale — when the bank agrees to accept less than what the homeowner owes — lenders can look upon you just as unfavorably.

It’s a reality that the former owners of the more than 4 million homes lost to foreclosure in the six years since the housing bubble burst will have to confront if they want to own again. But the passage of time makes all the difference.

That’s because mortgage-lending guidelines that most banks follow prohibit them from making loans to people with foreclosure or a short sale in their credit history, often for years. Never mind the hit that one’s credit score takes.

Still, some of the homeowners who were foreclosed upon when the market first started to skid are now looking to buy and getting loans.

“They’re probably going to pay a little higher interest rate, but with rates so low, a higher interest rate of 4 percent is not a big deal,’’ said Rosa Herwick, a broker and owner of Century 21 JR Realty in Henderson, Nev.

So how likely are banks to approve your mortgage application if you have a real estate-related blemish on your record? And can you do anything to spring yourself from the mortgage penalty box?

It depends on several factors, but largely on whether you had a foreclosure or a short sale.

FORECLOSURE

Generally, borrowers who have a foreclosure in their credit history can expect to wait between two to seven years before a lender will even accept their loan application.

The waiting periods stem from guidelines most banks must follow in order to be able to sell their home loans. That’s because potential purchasers, such as Fannie Mae and Freddie Mac, each have a different set of guidelines for the loans they will buy and criteria for whom they deem a qualified borrower.

The fact is, a person’s credit score, employment history and other factors that make up one’s creditworthiness will take a back seat to these resale guidelines.

If a buyer with a past foreclosure is seeking a government-backed mortgage, the waiting period can vary before they can qualify.

Take the Federal Housing Administration, which insures roughly 30 percent of new loans. Under its guidelines, former homeowners must wait three years from the date of their foreclosure before they can qualify for backing by the agency.

Compare the U.S. Department of Agriculture’s housing program which requires three years, while the time penalty for a VA loan is two years. Fannie Mae and Freddie Mac, which own or guarantee about half of all mortgages, require the longest stretch: seven years after a foreclosure.

In some cases, the waiting periods for a foreclosure can be reduced.

Fannie Mae, for example, allows a three-year waiting period in the event the foreclosure was due to an extenuating circumstance. The company defines this as an event that was beyond the homeowners’ control and resulted in a sudden reduction in income or catastrophic increase in financial obligations. Think job layoff, medical bills or divorce.

FHA may grant an exception to its waiting period in the event a wage-earner becomes seriously ill or dies. A divorce may qualify for an exception, but only in certain cases.

SHORT SALES

The roadblocks for having a short sale in your credit history can be less severe, and in some cases, waived altogether.

FHA requires borrowers who weren’t paying their mortgage when they sold their house to wait three years before they can qualify for a home loan. That time penalty may be waived in certain cases, including long-term job loss.

There is no FHA time penalty for homeowners who made their house payments in the 12 months before their short sale.

The size of a down payment can also shorten the waiting period.

A down payment of 20 percent or more will cut Fannie Mae’s time penalty on a borrower with a short sale down to two years from seven. Buyers who put down 10 percent can qualify after four years.

CREDIT SCORE

It’s no longer just a waiting game for homeowners caught up in the earliest stages of the foreclosure crisis in 2007 and 2008.

There’s still the impact a foreclosure or short sale has on one’s credit score — still very much a factor in qualifying for a loan.

Like most credit blemishes, foreclosures and short sales will remain in your credit history for seven years.

As a general rule, the higher your FICO score, the more it will drop as a result of a bad debt, said Barry Paperno, consumer affairs manager for MyFICO.com, the consumer website for FICO.

FICO credit scores range from 300 to 850. In simulations, a foreclosure sent a FICO score of about 720 down to as low as 570 and took about seven years to recover fully, assuming everything else being equal.

Still, there are steps one can take to burnish one’s tarnished credit rating.

— While in the foreclosure penalty box, make sure to pay all your bills on time.

— Get more credit. This may sound counterintuitive after a foreclosure, but beefing up your track record of good credit accounts can help boost one’s credit score. A car loan or a credit card will do. But if you get a credit card, pay it off every month.

— Be patient. A foreclosure’s drag on your credit score will decline over time.

— Dispute any mistakes on your credit report, which can lower your score.

— Don’t close your oldest credit accounts. Your score gets a boost from older credit lines.

— Scale back your lifestyle and pocket the savings toward a future down payment.

From Boston.Com

Short Sale Investing

Because of current economic conditions in the housing market there is a great deal of investor interest in the technique of purchasing investment property with Short Sales. So–what is a Short Sale? A Real Estate Short Sale happens when a seller’s bank allows a property to be sold for, and accepts a payment of, less than the amount owed to that bank.

A rough example would be if a home owner currently owed $170,000.00 on a mortgage and the bank holding that mortgage agreed to allow the home owner to sell the home and payoff that mortgage for $150,000.00.

An overview of a short sale technique might work like this… You the investor would start by doing a marketing campaign or sign up for program to find prospects. Having found a few names you would contact the prospects and get one of them to agree to proceed with the short sale. When you have reached an agreement with that prospect, ask for a copy of their last bank communication to verify that what they have told you is accurate.

Before going any further you must search the public records in order to uncover any additional liens that may exist. This is important so that you can decide weather to stop the process or try to work with these creditors to get the liens removed. If you choose to continue, have the seller contact their bank or mortgage companies’ short sale department and ask for a third party contact authorization and a Short Sell forms package.

After the bank’s short sale kit arrives–have the seller fill out all the forms and paper work and return it to the bank. They should also give you the third party authorization information. Now you should contact the bank using third party authorization and talk with the person assigned to the case.

The bank should give you instructions for submitting your offer. When you submit your offer be sure to reserve the right to do a full inspection of the property should your offer be accepted. When the bank replies to your offer you should be prepared and negotiate if necessary. If your offer is approved you will need to monitor and promote the project periodically.

If that sounds like a lot of work to you—you understand the program! But there a few advantages to the short sale technique. They include:

• Instant equity
• Lots of prospects
• It’s so complicated and time consuming that only a few competitors persevere
• It is a good fit for systemized process
• The seller could avoid foreclosure
• There is a lot written on subject

There are also some disadvantages and some of those are:

• You will be dealing mostly with unmotivated and unhappy sellers
• You will also have to deal with banks
• The seller may owe taxes on the unpaid balance
• This technique take longer than many other ways of finding deals
• Seller may still owe the bank the difference
• You cannot pay the seller any money if you want to stay out of jail
• There may be other liens on the property

Considering the disadvantages to the seller–why on Earth would a seller ever agree to sell you their home this way? There are three main reasons. The sellers that agree to work with you do not want to have a foreclosure on their credit record, they do not want their credit to suffer more that necessary and they have become tired of dealing with, and want to be rid of, the debt.

Why would a bank agree to take less than the full amount owed? The bank or mortgage company may be more motivated than you think for a number of reasons. The value of property may have dropped since the loan was made. The buyer is behind on their payments and they want to avoid having another bad debt on books. There are federal penalties and restrictions for banks with bad debts on their books. And the bank may just want to avoid the hassle of having to foreclose, take over the property, get it fixed up and market it just to try to break even. And break even is all a bank is allowed to do.

There are several ways to find short sale opportunities but the quickest and easiest is to sign up for one of the many short sale programs on the market. Just use any internet search engine and to locate one that meets your needs and budget. Many of these programs offer lead generation and scripts for what to say to prospects. They also provide advice on filling out the numerous forms required. If you are determined to reinvent the wheel, you can buy a list and send out letters to attract potential short sellers. Or–you could just run a campaign of ads that could include advertising:

• In newspapers & tabloids
• With flyers
• Passing out cards
• Using Birddogs

As you can see the short sale technique is not a quick and easy way to start on the road to real estate investing wealth but by devoting a good deal of study, hard work and time, it can become a profitable technique to use in your quest for investing success.

I hope this article has helped you in your quest to build wealth through real estate investor training.

This article originally apeared as:

Real Estate Investor Training—Short Sales
by Dennis Henson

In wholesaling (short term flip without rehab), you want the type of house that your buyers will want, the ones that, for them, sell the fastest, and, of course, ones they can make a profit on. Following are some tips on what you should be looking for.

In general, especially if you are just starting out, avoid houses in the high end of the market. Yes, they can look beautiful,and clean up real nice, but most retail buyers will not be able to afford to live in them. And as rentals, they are murder when investors are trying to cover the mortgage payments.

You want to work mainly with houses in working class neighborhoods. Investors will be interested in these types of homes for rental purposes. And a majority of reliable renters will want to live in these neighborhoods.

Look for houses in need of repair. Look for peeling paint, broken windows, unmowed grass, general disrepair.

Especially in the beginning of your career, deal mainly with houses that do not need structural repairs, like foundation work. You will receive your fees quicker because any needed repair work can be done relatively quickly.

In the neighborhood you are working in, you want houses that are most affordable for first-time buyers. Those are the houses your buyer will want to rent out.

Put another way, you want houses in the median price range for your area.

The ideal house investor will want to buy will have 3 bedrooms and 2 baths, although you can get away with 1 baths. This is the bread and butter rental house for your buyers. If your area has only 2 bedrooms and 1 bath, you may have to go with that. Or, go farther afield to do your hunting.

What about war zone houses? Generally, you will do better in working class neighborhoods. However, if you have buyers on your buyer’s list who want war zone types of homes, go for it.

Avoid houses with weird floor plans. For example, houses where one is required to go through a bedroom to get to a kitchen, etc. They will be harder for your buyer to rent or retail.

Avoid houses that are too small. Medium size houses are what you are after. Medium for your area, that is.

The more equity a house has in it, the better your chances of making a deal with your buyer. More equity means there is plenty of room for your buyer’s profit, not to mention your fee.

You, of course, want to be dealing with motivated sellers who are willing (or forced) to take a discount from their asking price.

You are always looking for bargain properties where there is plenty of room for profit.